BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 6 (Calderon and Vargas) Hearing Date: April 6, 2011
As Amended: March 25, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would update California's Real Estate Law, Appraisal
Law, and Civil Code, to reflect recent changes enacted at the
federal level, pursuant to the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank).
DESCRIPTION
1. Would amend the Real Estate Law to provide that:
a. No real estate licensee shall offer or provide an
opinion of value of real property, for compensation or in
expectation of compensation, if his or her compensation
is dependent on or affected by the opinion of value
reached by that licensee;
b. No real estate licensee that offers or provides an
opinion of value of real property, for compensation or in
expectation of compensation, shall knowingly or
intentionally misrepresent the value of that property.
2. Would amend the Appraisal Law to provide that:
a. No person or entity acting in the capacity of an
appraisal management company shall improperly influence
or attempt to improperly influence the development,
reporting, result, or review of any appraisal, through
coercion, extortion, inducement, collusion, bribery,
intimidation, compensation, or instruction. The bill
lists several acts that represent improper influence
pursuant to this section, and several acts which are
allowable pursuant to this section.
b. No person or entity preparing an appraisal or
performing appraisal management functions in connection
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with the origination, modification, or refinancing of a
mortgage loan may have a direct or indirect interest,
financial or otherwise, in the property or the
transaction for which the appraisal or appraisal
management functions are performed.
3. Would amend the Civil Code to provide that:
a. No person with an interest in a real estate
transaction involving a valuation shall improperly
influence or attempt to improperly influence the
development, reporting, result, or review of any
appraisal, through coercion, extortion, inducement,
collusion, bribery, intimidation, compensation, or
instruction, as specified. The bill lists several acts
that represent improper influence pursuant to this
section, and several acts which are allowable pursuant to
this section.
b. The term "valuation" means an estimate of the value
of real property in written or electronic form, other
than one produced solely by an automated valuation model
or system. As drafted, this definition includes both
appraisals and broker price opinions.
EXISTING LAW
1. Defines an appraisal as a written statement independently
and impartially prepared by a qualified appraiser setting
forth an opinion in a federally related transaction as to
the market value of an adequately described property as of a
specific date, supported by the presentation and analysis of
relevant market information (Business and Professions Code
Section 11302).
2. Provides that the term "appraisal" does not include an
opinion given by a real estate licensee or engineer or land
surveyor in the ordinary course of his or her business in
connection with a function for which they are licensed, and
states that any opinion returned by a real estate licensee,
engineer, or land surveyor may not be referred to as an
appraiser (Business and Professions Code Section 11302).
Although the real estate law does not expressly authorize
real estate licensees to provide opinions of real value of
real property, Section 11302 is commonly understood to
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authorize real estate brokers to perform so-called broker
price opinions, or BPOs.
3. Provides that it is a violation of the Real Estate Law for
a real estate licensee to provide an opinion of the value of
residential real property in connection with a short sale,
in order to manipulate the lienholder (i.e., the lender)
into rejecting the proposed short sale or to acquire a
financial or business advantage, including a listing
agreement, which directly results from the inaccurate
opinion of value (Business and Professions Code Section
10177(m))
4. Provides for the licensure and regulation of real estate
appraisers, and for the registration and regulation of
appraisal management companies (AMCs) by the California
Office of Real Estate Appraisers (OREA; Business and
Professions Code Section 11300 et seq.). Licensed
appraisers are required to comply with the federal Uniform
Standards for Professional Appraisal Practice (USPAP) and
with the Appraisal Law. Registered AMCs are required to
comply with the portions of the Appraisal Law, which were
added by SB 237 (Calderon), Chapter 173, Statutes of 2009.
Among these rules is a requirement that AMCs adhere to
appraisal independence standards patterned on the federal
Home Valuation Code of Conduct (HVCC; Business and
Professions Code Section 11345.4; see discussion of the HVCC
below).
5. Provides that no person with an interest in a real estate
transaction involving an appraisal shall improperly
influence or attempt to improperly influence, through
coercion, extortion, or bribery, the development, reporting,
result, or review of a real estate appraisal sought in
connection with a mortgage loan (Civil Code Section 1090.5).
Civil Code Section 1090.5 includes a list of several acts
that are prohibited, and several acts that are allowable,
pursuant to the section. The list of allowable and
prohibited acts was patterned on the federal HVCC (described
below).
COMMENTS
1. Background and Discussion: In recent years, California
enacted two bills intended to ensure the integrity of the
real property appraisal process. SB 223 (Machado), Chapter
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291, Statutes of 2007 prohibited any person with an interest
in a real estate transaction from inappropriately
influencing, or attempting to inappropriately influence, the
development, reporting, result, or review of a real estate
appraisal sought in connection with a mortgage loan. SB 237
(Calderon), Chapter 173, Statutes of 2009, plugged a hole in
California's appraisal regulatory scheme, by defining the
term "appraisal management company," requiring appraisal
management companies doing business in California to
register with California's Office of Real Estate Appraisers,
and enacting a set of allowable and prohibited actions by
appraisal management companies and the appraisers who work
for them.
At the same time California was changing its laws to ensure
the integrity of the real property appraisal process,
federal agencies were promulgating regulations with similar
intent. Until enactment of the Dodd-Frank in July 2010,
California's laws were more comprehensive, and more
protective of consumers, than the federal rules. Since
enactment of Dodd-Frank, however, California's rules have
fallen behind some of those recently promulgated by federal
regulators. Portions of state law are also now inconsistent
with federal regulations in certain cases.
SB 6 updates California's Real Estate Law, Appraisal Law, and
Civil Code, to reflect changes made by Dodd-Frank, and
changes contained in regulations released by the Federal
Reserve Board (FRB) on October 18, 2010, pursuant to
Dodd-Frank. The provisions of Dodd-Frank relating to
appraisals became effective on July 21, 2010. The FRB
changes became effective on December 27, 2010. They are
optional from December 27, 2010 through March 31, 2011, and
become mandatory as of April 1, 2011.
Key changes made by Dodd-Frank and the FRB, which are
reflected in SB 6 include the following:
a. Real property valuations are defined, and those who
perform them are protected from inappropriate influence.
In its recently promulgated regulations, the FRB
recognized that many types of real property valuations,
including, but not limited to appraisals, are being
utilized in the current housing environment. To address
this observation, the FRB defined the term "real property
valuation" and enacted a series of rules designed to
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ensure that no entity which prepares a real property
valuation is inappropriately influenced in connection
with their value conclusion
SB 6 adopts the FRB's definition of a real property
valuation. In doing so, it broadens California's
existing prohibition against inappropriate influence of
appraisers, to cover all types of real property
valuations and those who prepare them. This change will
have the effect of protecting real estate brokers that
perform broker price opinions from inappropriate
influence, by covering them under the same rules that
currently intended to protect appraisers from
inappropriate influence.
b. The Home Valuation Code of Conduct (HVCC) is revised
and replaced. The HVCC was an agreement reached between
Fannie Mae, Freddie Mac, and then- New York State
Attorney General Anthony Cuomo in 2008. Although never
promulgated as a regulation by any federal banking
agency, the HVCC became a de facto regulation, when
Fannie Mae and Freddie Mac announced that, on and after
May 1, 2009, they would not purchase or guarantee a
mortgage loan entered into by a lender that did not
comply with the HVCC.
One of the core elements of the HVCC was the concept of
appraiser independence. Under the HVCC, lenders and
mortgage brokers could not be directly involved in the
selection of an appraiser on a loan in which they were
involved; they had to use a third party to order their
appraisals, or use some other method intended to isolate
the process of selecting an appraiser from the persons
who are compensated based on whether a loan is approved.
In its recent regulations, the FRB enacted rules intended
to replace the HVCC. These rules have a similar intent
as the HVCC, but are written differently and accompanied
by extensive commentary never published in connection
with the HVCC.
California's existing laws pattern the HVCC. SB 6 updates
California's statutes to reflect the changes made by the
FRB to the HVCC, and remove the inconsistency between
state law and the recently promulgated federal
SB 6 (Calderon), Page 6
regulations.
c. Conflicts of interest are prohibited in connection
with mortgage loan origination. In its recent
regulations, the FRB also enacted a provision intended
ensure that no entity which prepares a real property
valuation in connection with the origination of a
residential mortgage loan has a direct or indirect
interest, as defined, in the property or the transaction
for which the valuation is sought. The FRB included
extensive commentary to describe acceptable and
prohibited interests.
In a parallel move, SB 6 amends California's Appraisal Law
to prohibit appraisers and appraisal management companies
from providing opinions of value of real property in
connection with the origination, refinancing, or
modification of a mortgage loan, if they have a direct or
indirect interest, financial or otherwise, in the
property or transaction for which the opinion of value
was sought. The authors of SB 6 are currently in
negotiations with the California Association of Realtors
to add language to the Real Estate Law, which would
parallel this provision.
d. Knowingly or intentionally misrepresenting the value
of real property is expressly prohibited. SB 6 closes a
loophole in California's Real Estate Law, by expressly
prohibiting a real estate licensee from knowingly or
intentionally misrepresenting the value of real property.
California's Real Estate Law currently contains a narrow
prohibition against knowingly or intentionally
misrepresenting the value of real property in connection
with a short sale; SB 6 broadens that prohibition to
apply to all real property valuations performed by real
estate licensees. A similar change is not necessary to
California's Appraisal Law, appraisers and appraisal
management companies are already prohibited from
knowingly or intentionally misrepresenting the value of
real property.
2. If there are federal rules in place, why do we need state
rules? Failing to update California law to reflect recent
federal changes will significantly hamper California's
ability to enforce these rules against California licensees.
Because the appraisal provisions of Dodd-Frank amended the
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Truth in Lending Act, and the FRB rule amended Regulation Z
(the regulation that implements the Truth in Lending Act),
these changes may be enforced by California's Attorney
General. However, California's Department of Real Estate
and Office of Real Estate Appraisers currently lack the
authority to enforce violations of the Truth in Lending Act
or its implementing regulations by their licensees. Because
of this, none of the appraisal independence changes made
pursuant to Dodd-Frank, nor any of the regulations
promulgated pursuant to Dodd-Frank by the FRB may be
enforced by California's regulators, absent a change in
California law. SB 6 provides that change and allows
specified portions of those federal rules to be enforced by
state regulators.
3. Summary of Arguments in Support: The California Government
Relations Subcommittee of the Appraisal Institute (AI)
supports the measure, as one intended to ensure that federal
and state rules align on important questions of
inappropriate pressure on appraisers and conflicts of
interest in rending real property value conclusions.
4. Summary of Arguments in Opposition: None received.
5. Amendments: The authors reached an agreement on amendments
with the California Association of Realtors, after this
Committee's deadline to amend bills. The amendments agreed
to by both parties are shown below. Strike-outs reflect
language that would be deleted from the bill, and bold
italics represent language that would be added to the bill.
The amendments would be made on page 5, lines 1 through 9 of
the bill.
Section 10177.3 is added to the Business and Professions Code,
to read:
10177.3. (a) No licensee shall offer or provide an opinion of
value of real property, for compensation or in expectation
of compensation, if his or her compensation is dependent on
or affected by the opinion of value of real property reached
by that licensee.
(b) No licensee that offers or provides an opinion of value of
real property, for compensation or in expectation of
compensation , shall knowingly or intentionally misrepresent
the value of real property.
(b) A real estate licensee that provides an opinion of value of
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real property, which is used as the basis for a mortgage
loan origination, refinancing, or modification, shall not
have an interest in that property, within the meaning of
Section 226.42(d) of the Code of Federal Regulations.
6. Prior and Related Legislation:
a. SB 237 (Calderon), Chapter 173, Statutes of 2009:
Defined the term "appraisal management company," required
AMCs doing business in California to register with OREA,
and enacted a series of allowable and prohibited acts by
AMCs.
b. SB 223 (Machado), Chapter 291, Statutes of 2007:
Prohibited any person with an interest in a real estate
transaction from improperly influencing, or attempting to
improperly influence an appraiser, through coercion,
extortion, or bribery.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Government Relations Subcommittee of the Appraisal
Institute (sponsor)
California Association of Realtors
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102