BILL ANALYSIS Ó
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|Hearing Date:May 2, 2011 |Bill No:SB |
| |6 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Curren D. Price, Jr., Chair
Bill No: SB 6 Author:Calderon
As Amended:April 11, 2011 Fiscal:Yes
SUBJECT: Real Estate: appraisal and valuation.
SUMMARY: Updates 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.
NOTE: This measure was heard in Banking and Financial Institutions
Committee on April 6, 2011, and passed out of Committee by a vote of
7-0.
Existing law, the Business and Professions Code:
1) Provides for the licensure and regulation of real estate brokers
and real estate salespersons by the Real Estate Commissioner
(Commissioner) and makes a willful violation of the Real Estate Act
a crime. (Business and Professions Code (BPC) § 10176)
2) Prohibits the generation of an inaccurate opinion of the value of
residential real property in connection with a certain real estate
transaction in order to, among other things, acquire a financial or
business advantage that directly results from the inaccurate
opinion of value. The Commissioner may punish a violator of this
provision by suspending or revoking the real estate license. (Id.)
3) Provides for the licensure and regulation of real estate appraisers
and appraisal management companies and makes a willful violation of
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the Real Estate Appraisers' Licensing and Certification Law a
crime. (BPC § 11345.4)
4) Prohibits an appraisal management company from improperly
influencing any appraisal by engaging in certain activities. (Id.)
Existing law, the Civil Code: Prohibits a person with an interest in
a real estate transaction involving an appraisal from improperly
influencing or attempting 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,
and specifies that a violation of this provision by a person licensed
under a state licensing law also constitutes a violation of that law.
(Civil Code § 1090.5)
This bill:
1) Prohibits a licensee that provides an opinion of value of real
property, which is used as the basis for a mortgage loan
origination, refinancing, or modification from having an interest
in the property.
2) Prohibits a licensee from knowingly or intentionally
misrepresenting the value of real property.
3) Prohibits an appraisal management company from improperly
influencing any appraisal through coercion, extortion, inducement,
collusion, bribery, intimidation, compensation, or instruction.
4) Prohibits certain acts, including, but not limited to, seeking to
influence an appraiser to report a minimum or maximum value for
specified property, implying to an appraiser that their retention
depends on their estimate of the real property value excluding an
appraiser from future engagement because they reported a value that
does not meet or exceed a certain threshold, and conditioning
compensation paid to an appraiser on consummation of the real
estate transaction.
5) Prohibits a person who prepares an appraisal or performs appraisal
management functions in connection with the origination,
modification or refinancing of a mortgage loan from having a direct
or indirect interest, including financial interest, in the property
or the transactions that the person is performing the services for.
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6) Clarifies that an appraisal management company is not hindered from
asking an appraiser to: (1) consider additional, appropriate
property information; (2) provide further detail, substantiation,
or explanation for the appraiser's value conclusion; (3) correct
errors in an appraisal report; (4) obtain multiple valuations, for
purposes of selecting the most reliable valuation; (5) withhold
compensation due to breach of contract or substandard performance
of services; and (6) provide a copy of the sales contract in
connection with a purchase transaction.
7) Revises the law to make the prohibition against improper interest
in a real estate transaction applicable to a valuation.
8) Defines valuation as an estimate of the value of real property in
written or electronic form, other than one produced solely by an
automated model or system.
9) Prohibits specific acts in conjunction with valuation including,
but not limited to, seeking to influence a valuation preparer to
report a minimum or maximum value for specified property, implying
to a valuation preparer that their retention depends on their
estimate of the real property value, excluding a valuation preparer
from future engagement because they reported a value that does not
meet or exceed a certain threshold, and conditioning compensation
paid to a valuation preparer on consummation of the real estate
transaction.
FISCAL EFFECT: Unknown. This bill has been keyed "fiscal" by
Legislative Counsel.
COMMENTS:
1. Purpose. This bill is sponsored by the California Subcommittee of
the Appraisal Institute. The Author states that California has had
more comprehensive and more protective consumer protection laws
than the federal government in the past. In July 2010, the federal
government passed the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank). This bill intends to update
California's Real Estate Law, Appraisal Law and the Civil Code in
order to reflect these changes by the federal government.
2. Residential and Commercial Real Estate Transactions. In a
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residential home transaction, the buyer may be represented by a
real estate agent or broker; and the seller may be represented by a
real estate agent or broker; or the same agent or broker may
represent both buyer and seller where there is consent from both
parties. A buyer may also use a mortgage broker, who may or may
not represent the buyer or seller in the transaction. A buyer will
almost always seek a mortgage loan from a lender and an appraiser
is used to value the home in connection with the mortgage loan.
Commercial real estate transactions involve many of the same
persons as residential real estate transactions; however, these
transactions are usually much more complex in their structure and
valuation processes.
3. Real Estate Brokers and Salespersons. Real estate brokers and real
estate salespersons, often called real estate agents, are licensed
by the Department of Real Estate under the Real Estate Law. A real
estate broker or salesperson may also act as a mortgage broker in
bringing borrowers and mortgage lenders together. Real Estate Law
prohibits deceptive practices and any conduct which constitutes
fraud or dishonest dealing. Currently, the law specifically
prohibits the generation of an inaccurate opinion of the value of
residential real property in connection with a certain real estate
transaction in order to, among other things, acquire a financial or
business advantage that directly results from the inaccurate
opinion of value.
4. Appraisal Management Companies. An increasingly common practice has
been the use of appraisal management companies (AMC). An AMC
assembles panels of appraisers who are called upon when they
receive an order for an appraisal. The AMCs, in turn, assign the
appraisals requested by lenders and brokers to appraisers on their
panels. When the appraisals are completed, the AMCs deliver them
to the lenders and brokers who ordered them.
The growth of AMCs has been driven, at least in part, by an
agreement reached between Fannie Mae, Freddie Mac, and the New York
State Attorney General Anthony Cuomo. This agreement is titled the
Home Valuation Code of Conduct (HVCC). 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 key requirements of the HVCC is appraiser independence.
Under the HVCC, lenders and mortgage brokers may not be directly
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involved in the selection of an appraiser on a loan in which they
are involved; they must 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.
The use of the AMC as a third party to order appraisals can be
beneficial by removing pressure on an appraiser by insulating the
appraiser from the person or entity who orders the appraisal.
Typically, the party who orders the appraisal has the most at stake
from the appraised value. However, in practice, the AMC itself is
able to impose pressure on the appraisers. SB 237, enacted in 2009,
was meant to ensure regulation of AMCs and clarified prohibited
acts by AMCs. This bill is meant to clarify and update those
provisions.
5. The Problem of Inflated Appraisals. In the past, this Committee has
heard other bills that were meant to combat the problem of inflated
appraisals. Although it appeared that there was no organization
that systematically documented the frequency or severity of
appraisal inflation, much anecdotal evidence was given describing
specific situations where an inflated appraisal can be requested by
one or more parties to a transaction.
Inflated appraisals also occur through the practice of predatory
appraisals. A June 2005 report titled Predatory Appraisals:
$tealing the American Dream by the National Community Reinvestment
Coalition, concluded that problematic appraisal practices are a
serious impediment to responsible lending, impede fair housing and
equal access to credit, and place homeownership and the safety and
soundness of the mortgage marketplace at risk. According to the
report, a "predatory appraisal" occurs when the value of a property
is falsely overstated during a new purchase or during the home
equity or refinancing process.
While appraisers are directly responsible for inflating the
figures, lenders, brokers and other members of the industry are the
ones pressuring appraisers to provide their desired valuation and
to close the deal. Lenders and brokers have an incentive to
inflate property values because they are paid commissions based on
the value of the loans they secure. Additionally, real estate
developers and agents are paid profits and commissions based on the
sales price of properties. However, appraisers are only paid on a
per appraisal basis.
The report also detailed the tactics that lenders and brokers use
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to obtain an inflated valuation. Some apply pressure by
withholding payment, threatening not to do business with the
appraiser, or even blacklisting him or her altogether unless the
appraiser meets the lender's requested value. They may also demand
that appraisers guarantee a predetermined value, ignore
deficiencies in the property or simply increase the appraisal if
the lender is unsatisfied with it. Lenders also "shop around"
known as value shopping by contracting several appraisers to
evaluate one property and then use the highest valuation they find.
Although SB 223 was enacted in 2007 (Machado, Chapter 291) to
combat this problem, this bill updates those provisions in order to
align California law to the new federal laws. Also, it provides
further clarification on what acts are prohibited by the law.
6. Dodd-Frank Wall Street Reform and Consumer Protection Act. The
Dodd-Frank Act is a federal statute that was signed into law by
President Obama in July 2010. The Dodd-Frank Act was a response to
the mortgage crisis in the middle of the last decade. This act
created significant changes to the American financial regulatory
environment and affects all Federal financial regulatory agencies
and almost every aspect of the nation's financial services
industry.
Specifically related to this bill are the following provisions of
the Dodd-Frank Act which reform the mortgage business.
a. Real property valuations are defined, and those who
perform them are protected from inappropriate influence. In
its recently promulgated regulations, the Federal Reserve Board
(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 ensure that no entity which
prepares a real property valuation is inappropriately
influenced in connection with their value conclusion
This measure 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.
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b. The Home Valuation Code of Conduct (HVCC) is revised and
replaced. The HVCC, as stated above, was an agreement reached
between Fannie Mae, Freddie Mac, and then- New York State
Attorney General Anthony Cuomo in 2008. One of the core
elements of the HVCC was the concept of appraiser independence.
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. This measure
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 regulations.
c. Conflicts of interest are prohibited in connection with
mortgage loan origination. In its recent regulations, the FRB
also enacted a provision intended to 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, this measure 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 this
measure 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. This measure 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
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the value of real property in connection with a short sale;
this bill 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.
7. Previous legislation. In 2007, this Committee heard SB 223
(Machado, Chapter 291, Statutes of 2007), which prohibited any
person with an interest in a real estate transaction from
inappropriately influencing, or attempting to inappropriately
influence, a real property appraiser, with the aim of convincing
the appraiser to alter his or her value conclusion.
In 2009, this Committee heard SB 237 (Chapter 173, Statues of 2009),
also by the same Author, which closed a loop hole in California's
appraisal regulatory scheme, by defining the term "appraisal
management company," and requiring 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 for appraisal management companies and the appraisers who
work for them.
8. Arguments in Support. The California Government Relations
Subcommittee of the Appraisal Institute supports this 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.
SUPPORT AND OPPOSITION:
Support:
California Government Relations Subcommittee of the Appraisal
Institute (Sponsor)
California Association of Realtors
Opposition:
None received as of April 26, 2011
Consultant: Candace Choe
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