BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON
          BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
                              Senator Jerry Hill, Chair
                                2015 - 2016  Regular 

          Bill No:            AB 624          Hearing Date:    June 29,  
          2015
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          |Author:   |Wilk                                                  |
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          |Version:  |June 22, 2015    Amended                              |
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          |Urgency:  |No                     |Fiscal:    |Yes              |
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          |Consultant|Janelle Miyashiro                                     |
          |:         |                                                      |
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               Subject:  Real estate appraisers: standards of conduct.


          SUMMARY:  Authorizes appraisers to use any standard of valuation  
          practice, as defined, for use in conducting any non-federally  
          related transaction if that practice is disclosed to and agreed  
          upon by the client.  Defines "standard of valuation practice" to  
          include any nationally or internationally recognized valuation  
          standard that is approved by the Bureau of Real Estate  
          Appraisers (Bureau).  Defines "non-federally related  
          transactions" (non-FRTs) to mean the act or process of making or  
          performing an appraisal on real estate or real property for any  
          purpose other than a federally related transaction.

          Existing law:
          
          1) Establishes the Financial Institutions Reform, Recovery, and  
             Enforcement Act (FIRREA) to reform, recapitalize, and  
             consolidate the Federal deposit insurance system, to enhance  
             the regulatory and enforcement powers of the Federal  
             financial institutions regulatory agencies.  (12 U.S.C. §  
             3339)

          2) Establishes the Appraisal Subcommittee (ASC) to monitor  
             appraiser licensing and certification requirements  
             established by the States and to establish appraisal  
             standards and requirements for state appraisers in federally  
             related transactions (FRTs).  (11 U.S.C. § 3350)








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          3) Provides protection for federal financial and public policy  
             interests in real estate-related transactions by requiring  
             real estate appraisals used in connection with FRTs to be  
             performed in writing, in accordance with uniform standards,  
             by appraisers whose competency has been demonstrated and  
             whose professional conduct will be subject to effective  
             supervision.  (11 U.S.C. § 34.85)

          4) Establishes the Uniform Standards of Professional Appraisal  
             Practice (USPAP) as the minimum standard for appraisals used  
             for FRTs.  (11 U.S.C § 28400)

          Existing California law:
          
          1) Provides for the licensure and regulation of real estate  
             appraisers by the Bureau of Real Estate Appraisers (Bureau)  
             in the Department of Consumer Affairs (DCA) under the Real  
             Estate Appraisers' Licensing and Certification Law.   
             (Business and Professions Code (BPC) § 11301 et. seq.) 

          2) Defines an "appraisal" to mean a written statement  
             independently and impartially prepared by a qualified  
             appraiser setting forth an opinion in a FRT 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.  (BPC § 11302(b))

          3) Defines a FRT as any real estate-related financial  
             transaction which a federal financial institution regulatory  
             agency engages in, contracts for, or regulates.  
          (BPC § 11302(j))

          4) Defines USPAP as the standards of professional appraisal  
             practice established by the Appraisal Foundation.  (BPC §  
             11302(p))

          5) Authorizes the chief of the Bureau to adopt and enforce the  
             rules and regulations of this chapter.  (BPC § 11313)

          6) Requires that the Bureau comply in all respects with Title XI  
             of FIRREA and any subsequent amendment in order to ensure  
             protection of the public interest.  Requires that each  
             licensee meet a minimum criteria established by the Appraiser  
             Qualification Board of the Appraisal Foundation (TAF).  (BPC  








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             § 11314)

          7) Establishes USPAP as the minimum standard of conduct and  
             performance for a licensee performing all real estate  
             appraisal services.  (BPC § 11319)

          8) Prohibits persons not licensed by the Bureau from engaging in  
             any FRT appraisal activity.  (BPC §§ 11320, 11321)

          9) Authorizes the chief of the Bureau to adopt regulations which  
             determine the parameters of appraisal work which can be  
             performed by licensed appraisers and that meet a minimum  
             standard established by FIRREA.  (BPC § 11325)

          1) Prohibits a licensed real estate appraiser from engaging in  
             any appraisal activity in connection with the purchase, sale,  
             transfer, financing, or development of real property if his  
             or her compensation is dependent or affected by the value  
             generated by the appraisal.  (BPC § 11323)

          This bill:

          1) Dictates that USPAP constitutes the minimum standard of  
             conduct and performance for FRT related real estate appraisal  
             activity.

          2) Adds the definition of standard of valuation practice to  
             include any nationally or internationally recognized  
             valuation standard that is approved by the Bureau.  

          3) Adds the definition of non-FRTs to mean the act or process of  
             making or performing an appraisal on real estate or real  
             property for any purpose other than a federally related  
             transaction.  

          4) Authorizes licensed real estate appraisers to use any  
             standard of valuation practice, as defined, for use in  
             conducting any non-FRTs if that practice is disclosed to and  
             agreed upon by the client and if that practice is described  
             in an appraisal.

          FISCAL  
          EFFECT:  This bill is keyed "fiscal" by Legislative Counsel.   
          According to the Assembly Appropriations Committee analysis  








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          dated May 6, 2015, this bill will result in unknown costs,  
          likely minor, to the Bureau (special funds) under the DCA for  
          complaint investigations regarding the use of unknown valuation  
          standards.

          COMMENTS:
          
          1. Purpose.  This bill is sponsored by the  Appraisal Institute  
             California Government Relations Committee (AI)  .  According to  
             the Author, "AB 624 would permit licensed and certified  
             appraisers to complete appraisals for non-federally related  
             transaction in compliance with recognized valuation standards  
             other than USPAP, with the consent of the client and if the  
             standards are properly identified in the appraisal report.   
             If a standard other than USPAP is used for an appraisal, the  
             provisions of USPAP relating to ethics, competency,  
             recordkeeping, and scope of work must still be complied  
             with."

          2. Background.  There are four levels of real estate appraiser  
             licensing: a trainee license (AT), residential license (AL),  
             certified residential license (AR), and certified general  
             license (AG).  Under current law, real estate appraisers in  
             each license level are required to complete specified college  
             level education hours specific to each licensure level.   
             These licenses are valid for a two-year period.  Appraisers  
             that wish to upgrade their license must meet the education  
             requirements of the new licensure level.  All four licensure  
             levels must complete the 15-hour National USPAP Course.  

          3. Savings & Loan Crisis, FIRREA, and Appraisal Subcommittee.   
             The licensure and regulation of real estate appraisers today  
             is in direct response to the Savings and Loans (S&L) Crisis  
             of the 1980s.  Following the S&L Crisis, the federal  
             government passed the Financial Institutions Reform, Recovery  
             and Enforcement Act (FIRREA) in 1989, in order to address the  
             massive failure of thousands of savings and loans  
             institutions.  Title XI of FIRREA, among other federal  
             regulatory changes, established the Appraisal Subcommittee  
             (ASC) of the Federal Financial Institutions Examination  
             Council (FFIEC) in order to create stricter standards for  
             appraisers.  The FFIEC was established pursuant to Title X of  
             the Financial Institutions Regulatory and Interest Rate  
             Control Act of 1978. The FFIEC is an interagency body  








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             empowered to set uniform principles for the examination of  
             federally regulated financial institutions.
             
             The ASC does not regulate appraisers themselves, but rather  
             oversees that federal financial and public policy interests  
             in real estate transactions will be protected by requiring  
             real estate appraisals, performed in connection with FRTs,  
             are done so in writing and in accordance with uniform  
             standards by individuals whose competency has been  
             demonstrated and whose professional conduct is subject to  
             effective supervision.  The ASC monitors the individual state  
             requirements for the certification and licensing of  
             appraisers by reviewing each state's compliance with the  
             requirements of Title XI and maintains a national registry of  
             state licensed and certified appraisers who are allowed to  
             perform appraisals in connection with FRTs.  The ASC is also  
             authorized to take action against non-complying states or  
             states with weak enforcement programs by disapproving a  
             state's appraiser regulatory program.  Disapproval by the ASC  
             disqualifies the appraisers in that state from conducting  
             appraisals for federally insured institutions.

             In response to FIRREA, the Real Estate Appraisers Licensing  
             and Certification Law was enacted by the California  
             Legislature in 1990.  The Bureau has two functions in  
             administering this law: licensing and enforcement. The  
             licensing unit of the Bureau sets the minimum requirements  
             for education and experience according to criteria set by the  
             ASC and California law to ensure that only qualified persons  
             are licensed to conduct appraisals in federally related real  
             estate transactions.  Applicants must meet the minimum  
             education and experience requirements and successfully  
             complete a nationally approved examination.  The Bureau's  
             enforcement unit, which also operates under the ASC  
             enforcement mandates, ensures adherence to the  
             federally-required USPAP, California laws, and other  
             regulations by investigating complaints of violations of  
             national appraisal standards filed against licensed  
             appraisers.

          4. The Appraisal Foundation & USPAP.  The Appraisal Foundation  
             (TAF) is a not-for-profit organization established in 1987  
             and overseen by the ASC.  TAF is composed of three  
             independent boards: the Appraisal Practices Board (APB) which  








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             offers voluntary guidance to appraisers, regulators and users  
             of appraisal services on recognized valuation methods and  
             techniques for all valuation disciplines; the Appraisal  
             Standards Board (ASB) which develops, interprets and amends  
             USPAP; and the Appraiser Qualifications Board (AQB) which  
             establishes the minimum education, experience and examination  
             requirements for real property appraisers to obtain a state  
             license or certification through the Real Property Appraiser  
             Qualification Criteria.  Title XI of FIRREA mandates that all  
             state certified appraisers must meet the minimum education,  
             experience, and examination requirements promulgated by the  
             AQB.  In addition, the AQB must also approve all examinations  
             for appraiser certification and licensure used by the states.
             
             The ASB sets forth the rules for developing an appraisal and  
             reporting the results of the appraisal through USPAP.  USPAP  
             contains the recognized standards of practice for real  
             estate, personal property and business appraisal.  Title XI  
             of FIRREA requires that real estate appraisals used in  
             conjunction with FRTs are performed in accordance with USPAP.  
              State certified and licensed real property appraisers are  
             currently required to adhere to USPAP by their respective  
             state appraiser regulatory agencies.  Many appraisers are  
             also bound to comply with USPAP through affiliations with  
             professional appraisal organizations.

             USPAP is recognized by Title XI as the national standard for  
             professional appraisal practice in the United States that is  
             enforceable by states' real estate appraiser regulatory  
             agencies.  USPAP contains standards for appraisal services  
             including real property, personal property, business  
             valuation, and mass appraisal.  These standards are updated  
             every two years through a transparent, public process in  
             which appraisers and various stakeholders are able to  
             contribute throughout the progression as exposure drafts of  
             all proposed revisions to USPAP are released.

             According to the USPAP 2014-2015 Guidance, in order to comply  
             with USPAP, an appraiser must comply with the ethics, record  
             keeping, competency, and jurisdictional exception rules for  
             all aspects of an appraisal assignment.  These rules also  
             include a code of conduct and confidentiality provision to  
             highlight and encourage impartiality and objectivity in  
             conducting appraisal services.   Additionally, an appraiser  








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             must comply with the scope of work rule and other specific  
             standards when providing an opinion about the quality of  
             another appraiser's work.  

          5. Other Valuation Standards.  There are several international  
             valuation standards currently promulgated by other leading  
             appraiser institutions around the world that have also been  
             recognized by USPAP.  The Royal Institute of Chartered  
             Surveyors (RICS) produces the "Red Book" of appraisal  
             standards; that institution's mandatory rules and best  
             practice guidance for those performing asset valuations.   
             Canada also has a version of standards modeled after USPAP,  
             which is called the Canadian Uniform Standards of  
             Professional Appraisal Practice (CUSPAP).  The other major  
             valuation standard utilized today is the International  
             Valuation Standard (IVS), created by the International  
             Valuation Standards Committee (IVSC).  The IVSC includes  
             diverse members in 51 countries and appraisal organizations  
             (including TAF and RICS) that work to develop international  
             technical and ethical standards for valuation practices.  

             Currently, there is no single set of global standards for  
             conducting appraisal services.  However, a recent press  
             release by the IVSC and TAF this past June announced, "the  
             two organizations are working together to harmonize any  
             remaining differences between the IVS and USPAP."  The press  
             release further stated that the two organizations will  
             produce a "bridge document" to reconcile the two standards;  
             appraisers using this "bridge document" will be able to  
             develop appraisals that are compliant with both IVS and  
             USPAP.  Although this is an important first step in creating  
             a global appraisal standard, the timeline for this "bridge  
             document's" release is unknown.  This new memorandum is the  
             follow up to the "Madison Agreement" by the IVSC and TAF in  
             2006, in which both organizations had also agreed to work  
             toward reconciliation of IVS and USPAP standards.
             
          6. Jurisdictional Exception Rule.  Within USPAP, there is a  
             jurisdictional exception rule (JER) to address appraisal  
             assignment conditions in which there is a conflict between  
             USPAP requirements and the requirements of federal, state, or  
             local jurisdictions.  The JER is defined by USPAP as "an  
             assignment condition established by applicable law or  
             regulation, which precludes an appraiser from complying with  








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             a part of USPAP".  USPAP states that the JER "provides a  
             saving or severability clause intended to preserve the  
             balance of USPAP if compliance with one or more of its parts  
             is precluded by the law or regulation of a jurisdiction.   
             When an appraiser properly follows this rule in disregarding  
             a part of USPAP, there is no violation of USPAP.  If any  
             applicable law or regulation precludes compliance with any  
             part of USPAP, only that part of USPAP becomes void for that  
             assignment."  According to the 2010-2011 USPAP revisions, in  
             order to apply the jurisdictional exception rule, an  
             appraiser must follow four steps: 1) identify the law or  
             regulation that precludes compliance with USPAP, 2) comply  
             with that law or regulation, 
          3) clearly and conspicuously disclose in the report the part of  
             USPAP that is voided by that law or regulation, and 4) cite  
             in the report the law or regulation requiring this exception  
             to USPAP compliance.  Instructions from a client or attorney  
             do not establish a JER.
             
             Although USPAP allows appraisers to apply the JER in certain  
             instances, it has been argued that USPAP is too restrictive  
             in its other mandated reporting requirements.  The Author  
             states that California law goes beyond the requirement in  
             Business and Professions Code Section 11319 to require  
             compliance with USPAP for all appraisals performed by  
             California licensed and certified appraisers, whether  
             federally-related or not.  One of the twelve most frequently  
             asked questions involving enforcement on the Bureau's website  
             is whether a licensee may voluntarily "suspend" his or her  
             license to perform non-USPAP appraisals.  

             According to the Bureau's website, one of the most common  
             reasons for a licensee to wish to suspend or terminate their  
             license is the desire to produce non-USPAP appraisals for  
             real estate brokers or for tax appeal purposes, which are  
             considered non-FRT appraisal services.  However, there is  
             currently no provision for permitting such a suspension of  
             licensure prior to the license expiration, and the Bureau  
             regulations require every holder of an appraiser license to  
             conform to and observe USPAP at all times, regardless of the  
             type of transaction.  According to the Author, the USPAP  
             reporting requirements impose duties beyond those often  
             needed by entities requesting appraisals in non-FRTs.









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             This bill will allow licensed appraisers to use other  
             valuation standards besides USPAP that are approved by the  
             Bureau for non-FRT appraisals.  The bill also defines what  
             these non-FRT appraisals are.  The Author asserts that this  
             is a narrowly crafted response to a simple need by appraisers  
             and those wishing to use appraisal services.  The Author  
             states that FRTs, simplified, are loans made, insured, or  
             guaranteed by federally-supervised financial institutions.   
             The Author further states that because virtually every  
             residential loan is an FRT, approximately 90-95% of all  
             appraisals are covered.  No license or certification is  
             required in California to perform appraisals for non-FRTs.
          
          7. Prior Related Legislation.   AB 1317  (Frazier, Chapter 352,  
             Statutes of 2013) enacted the statutory changes necessary to  
             reflect the changes in law made by the Governor's  
             Reorganization Plan No. 2, including moving the former Office  
             of Real Estate Appraisers from under the jurisdiction of the  
             former Business, Transportation, and Housing Agency to the  
             Bureau of Real Estate Appraisers under the Department of  
             Consumer Affairs, within the Business, Consumer Services, and  
             Housing Agency.
             
              SB 237  (Calderon, Chapter 173, Statutes of 2009) required  
             appraisal management companies, as defined, to register with  
             the Office of Real Estate Appraisers, and would subject those  
             entities to the provisions of the Real Estate Appraisers'  
             Licensing and Certification Law, and set forth standards with  
             which an appraisal management company would need to comply.

          8. Arguments in Support.  Writing in support of the bill, the  
              Appraisal Institute California Government Relations Committee  
             (AI)  states, "AB 624 is designed to modernize California's  
             appraisal licensing law to permit licensed and certified  
             appraisers to utilize international and other alternative  
             appraisal standards when those standards are more relevant to  
             particular transactions.  This will permit lower-cost, more  
             appropriate appraisals which respond to market and consumer  
             demand?.No federal law requires licensing or compliance with  
             "USPAP" for non-federally related transactions?Since the  
             enactment of licensing in 1990, other appraisal standards  
             have developed which may be more appropriate in certain  
             transactions, and USPAP may impose a level of work  
             unnecessary in some cases.  Further, international lenders  








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             may need appraisal work done in compliance with international  
             appraisal standards or those of their home countries, rather  
             than USPAP-compliant appraisals.  All AB 624 does is permit  
             the use of nationally or internationally-recognized appraisal  
             standards for non-federally related transactions, if properly  
             disclosed and consented to by the client, and if identified  
             in the appraisal report.  The Committee is also recommending  
             that any alternative standards be approved by the Bureau of  
             Real Estate Appraisers, and we have agreed to accept this  
             Amendment."

          9. Arguments in Opposition.  Writing in opposition to the bill,  
             the  American Society of Appraisers (ASA)  states, "The primary  
             argument that USPAP is somehow not modern or hamstrings an  
             appraiser's ability to perform valuation services to meet any  
             client's needs - is simply false.  USPAP provides appraisers  
             with a range of service options depending on the client's  
             needs and the nature of the assignment.  Further, USPAP  
             affords appraisers malleability as to its application where a  
             jurisdictional exception exists, so that conflicts between it  
             and state or local requirements can be avoided.  Moreover,  
             USPAP is reviewed and updated biannually to capture recent  
             developments in the appraisal profession and in various  
             federal and state regulations, ensuring that the standards  
             never lag too far behind current realities?The process by  
             which USPAP is updated is entirely transparent, and takes  
             into serious consideration the comments and feedback of  
             stakeholders over several rounds of exposure drafts.  This,  
             however, may not be the case with the alternative standards  
             contemplated under AB 624?This is especially concerning where  
             a promulgating entity has a profit motive in the use or  
             adoption of its standards - something completely absent in  
             the case of USPAP and its progenitor, the Appraiser  
             Foundation."
             
             The  Appraisal Subcommittee (ASC)  states, "The proposed  
             legislation, if adopted, could pose negative implications for  
             the California's State program, particularly in the  
             investigation of complaints against appraisers and the  
             necessity to apply varying standards rather than the  
             universally-recognized USPAP.  The State program would be  
             required to effectively ensure that USPAP is applied when  
             required by federal law, and to effectively evaluate when, on  
             the other hand, it is permissible for an appraiser to apply a  








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             different "standard of valuation practice."  Personnel  
             conducting investigations for complaints filed would be  
             required to possess varying levels of expertise dependent on  
             the set of standards permitted.  This could well require  
             allocation of additional resources to support effective  
             supervision of appraisers eligible to perform appraisals for  
             federally related transactions, as required by federal law.   
             Additionally, multiple sets of standards could further result  
             in confusion for appraisers, users of appraisal services,  
             regulators, as well as the courts and general public."

             The  National Association of Independent Fee Appraisers   
             states, "AB 624's stated goal of affording choice in the  
             standards used would do substantial harm to purchasing and  
             lending activities in California while providing little, if  
             any, real benefits to Californians?There is no guarantee that  
             lenders or secondary market participants would be willing to  
             accept non-USPAP appraisals for their purposes, and may  
             require the ordering of a second, USPAP-compliant report to  
             ensure the loan can be consummated.  This adds additional  
             cost and time to the lending process, and can impact numerous  
             aspects of the transaction including the rate at which a  
             borrower obtains the money."

             The  Royal Institute of Chartered Surveyors (RICS)  states, "As  
             a sponsor of both the Appraisal Foundation (TAF) and the  
             International Valuation Standards Council (IVSC), RICS is  
             committed to the harmonization of standards to provide  
             consistency, transparency and alignment of valuation  
             methodologies.  This provides the confidence and assurance in  
             property transactions that national and international  
             regulators, investors and lenders want.  It is imperative for  
             the public interest that the valuation profession provides  
             its expertise in a cohesive manner, rather than a fragmented  
             and opaque 'product' reflecting the interests of individual  
             sector organizations."

              The Appraisal Foundation (TAF)  states, "The rationale for the  
             change in law lacks substance, the proposal opens the door  
             for creation of legal standards that have no public input,  
             and it creates additional burdens for California's appraisers  
             and the state regulators who will be charged with enforcing  
             it?Via our advisory councils, [TAF] interacts with over 100  
             governmental agencies, users of appraisal services, and  








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             private appraisal firms national and abroad that serve as  
             members.  All of the input we have received indicates that it  
             is "very rare" for an appraiser to be required to perform as  
             assignment according to a foreign set of standards.  If this  
             were in fact a problem, we believe that you would have  
             already heard from the major international real estate firms  
             as well as global corporations doing business in California  
             that could not easily obtain needed valuation services?From a  
             regulatory perspective, what entity would be deemed qualified  
             to "recognize" valuation standards?  In addition, how would  
             regulatory personnel stay abreast of multiple sets of  
             national or international standards that change  
             periodically??State regulatory personnel are subject to  
             administrative changes and turnover that often result in a  
             lack of complete understanding of a single set of standards,  
             let alone multiple standards.  At a recent meeting of the  
             Association of Appraiser Regulatory Officials (AARO), a poll  
             of approximately 175 state regulators from over 30 states  
             found that not one of them thought that enforcing multiple  
             sets of standards was a good idea?If appraisals are performed  
             under differing sets of valuation standards, there would be a  
             significant administrative burden establishing which  
             standards were followed for each appraisal claimed by an  
             applicant? This may also hamper consumers who wish to file a  
             complaint, as they may not know whether an act under a newer  
             standard is a violation or not?Of all valuation standards,  
             only USPAP has been proven to be enforceable in federal  
             courts, state courts and administrative law proceedings for  
             the past quarter century."

          10.Policy Issue.  Since USPAP has been the single standard used  
             by appraisers in California for all appraisal services, there  
             is a specified curriculum that is required for complete  
             competency in using this appraisal standard.  Currently, all  
             four appraiser license levels are required to complete 15  
             hours of USPAP training.  In addition, licensees are required  
             to take 14 hours of continuing education (CE) courses every  
             two years to renew a license.  Seven of these CE courses must  
             be devoted to USPAP training. This bill will allow appraisers  
             to use other valuation standards approved by the Bureau.   
             However, it should be noted that the Bureau currently does  
             not have other qualified education requirements for other  
             valuation standard practices to ensure competency and  
             compliance by appraiser licensees to the same extent that it  








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             does for USPAP.  Licensees are able to take elective courses  
             to learn about other valuation standards, but these courses  
             are not part of the required curriculum by the Bureau and  
             licensees are not tested to show any level of competence in  
             their use.


          
          SUPPORT AND OPPOSITION:
          
           Support:  

          Appraisal Institute California Government Relations Committee  
          (Sponsor)
          Numerous individuals

           Opposition:  

          American Society of Appraisers (ASA)
          Appraisal Subcommittee (ASC)
          National Association of Independent Fee Appraisers
          Royal Institute of Chartered Surveyors (RICS)
          The Appraisal Foundation (TAF)


                                      -- END --