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)
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