BILL ANALYSIS
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|Hearing Date:April 13, 2009 |Bill No:SB |
| |237 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC
DEVELOPMENT
Senator Gloria Negrete McLeod, Chair
Bill No: SB 237Author:Calderon
As Amended: April 13, 2009 Fiscal: Yes
SUBJECT: Real estate appraisers.
SUMMARY: Creates a registration program for "appraisal
management companies" (AMCs), as defined, within the Office
of Real Estate Appraisers, and would require AMCs to meet
similar existing licensing program requirements for
independent appraisers. Would also specify and clarify
prohibited acts by AMCs as well as others who have an
interest in a real estate transaction involving an
appraisal.
Existing federal law:
1)Requires under the Federal Financial Institution Reform,
Recovery and Enforcement Act of 1989 (FIRRE Act) that all
appraisals prepared for "federally related transactions"
be conducted by "state licensed or certified appraiser"
in accordance with the "Uniform Standards of Professional
Appraisal Practice" (USPAP).
2)Designates the Appraisal Foundation as the entity with
the authority and responsibility to establish
qualification criteria for state licensing, certification
and recertification of appraisers, and the authority to
establish and enforce rules for developing an appraisal,
and reporting its results in conformance with the USPAP.
3)Establishes the Appraisal Subcommittee within the
Appraisal Foundation to monitor individual states in the
licensing and certification of real estate appraisers to
assure they are sufficiently trained and tested to assure
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competency and independent judgment according to the
USPAP.
4)Specifies that Regulation Z, is issued by the Board of
Governors of the Federal Reserve System to implement the
federal Truth in Lending Act, which is contained in title
I of the Consumer Credit Protection Act. This regulation
also implements title XII, section 1204 of the
Competitive Equality Banking Act of 1987. Changes to
Regulation Z, which become effective October 1, 2009,
prohibit creditors and mortgage brokers from coercing,
influencing, or otherwise encouraging an appraiser to
misstate the value of a dwelling, and prohibit creditors
from extending credit when they know or have reason to
know, at or before loan consummation, that an appraiser
has misstated a dwelling's value.
Existing law, the California Real Estate Appraisers'
Licensing and Certification Law (REALC Law):
1)Provides for the licensure and regulation of real estate
appraisers by the Office of Real Estate Appraisers (REA
Office) and vests the duty of enforcing and administering
the REALC Law in the Director of the REA Office and
provides that the REA Office is under the supervision and
control of the Secretary of the Business, Transportation
and Housing Agency (BT&H).
2)Defines "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.
3)Specifies that no person may assume or use the title of a
"state licensed or certified real estate appraiser," or
perform, make, or approve and sign an appraisal unless
they hold a current valid license issued by the REA
Office.
4)Provides that the Director shall adopt regulations
governing the process and procedure of the licensing and
certification of real estate appraisers and that this
shall include, among other things, background checks
including fingerprinting with DOJ, necessary experience,
education, continuing education, equivalency, and minimum
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requirements of the Appraisal Foundation and federal law.
5)Provides that the Director may issue citations and assess
fines, or take other administrative or disciplinary
actions as necessary to enforce the REALC Law.
6)Authorizes the Director, by regulation, to prescribe fees
lower than the maximum fees specified to offset the cost
incurred for administration.
7)Requires the REA Office to transmit annually to the
Appraiser Subcommittee a roster of persons licensed or
certified within California.
8)Specifies that a licensee shall report to the REA Office
within 30 days if they have been convicted of a crime, or
the revocation or suspension of a license or any other
authority to practice granted by another agency.
9)Specifies that the USPAP constitutes the minimum standard
of conduct and performance for a licensee in any work or
service performed that is addressed by those standards
and that if a licensee is also certified by the Board of
Equalization, that he or she shall follow the standards
established by the Board of Equalization when fulfilling
his or her responsibilities for assessment purposes.
Existing law, the Civil Code, 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, and also specifies permissible acts which can be
requested of an appraiser by a person with an interest in a
real estate transaction.
This bill:
1)Requires that no person or entity shall act in the
capacity of an "appraisal management company" without
first obtaining a certificate for registration from the
REA Office.
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2)Defines "appraisal management company" (AMC) as any
person or entity that administers networks of independent
contractor appraisers to perform appraisals for clients;
receives requests for appraisals from one or more clients
and, for a fee paid by a client, enters into an agreement
with one or more independent appraisers to complete the
appraisals contained in the request; otherwise serves as
a third-party broker of appraisals between clients and
appraisers.
3)Specifies under what circumstances or conditions a person
or entity would not be an AMC when they contract with an
independent appraiser. This would include a bank, credit
union, trust company, savings and loan association, etc.,
or a licensed finance lender or residential mortgage
lender, or a licensed real estate broker, or any person
licensed to practice law in this state who orders an
appraisal in connection with a bona fide client
relationship.
4)Specifies that an AMC also does not include a person or
entity that does one or more of the following: (a)
exclusively delegates appraisal assignments to appraisers
or trainees as employees rather than independent
contractors, and is responsible for ensuring that
employees complete appraisal assignments in accordance
with the USPAP; (b) contracts with independent appraisers
as independent contractors for the completion of
appraisal assignments that the person or entity cannot
complete for any reason, including competency, workload,
scheduling, or geographic location; (c) contracts with
independent appraisers acting as independent contractors
for the completion of real estate appraisal assignments
and, upon the completion of those assignments, consigns
the appraisal reports with the independent contractor.
5)Defines a "controlling person" as one or more of the
following: (a) is an owner, officer, or director of an
AMC; (b) is an individual employed, appointed, or
authorized by an AMC that has the authority to enter into
a contractual relationship with clients for the
performance of appraisal services and that has the
authority to enter into agreements with independent
appraisers for the completion of appraisals; (c) is an
individual who possesses, directly or indirectly, the
power to direct or cause the direction of the management
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or policies of an AMC.
6)Requires that all of the aforementioned licensure
procedures, requirements and standards that are
applicable to state licensed real estate appraisers shall
also be similarly applicable to AMCs.
7)Requires AMCs to identify their "controlling persons," as
defined, and prohibits certain persons from serving as
controlling persons (generally persons who have been
convicted of specified crimes or had their appraisal
licenses revoked).
8)Provides that the Director shall adopt regulations
governing the process and procedure of applying for
registration as an AMC and to provide information as
specified.
9)Specifies that an AMC applicant, prior to receiving
registration, must demonstrate to the satisfaction of the
Director that it has established systems to ensure the
independent contractor appraisers contracted by the
applicant possesses all required licenses and
certificates from the REA office; review the work of all
independent contractor appraisers contracted by the
applicant to ensure that appraisal services are performed
in accordance with the USPAP; maintain a detailed record
of each service request and the independent appraiser
selected for the assignment.
10)Requires that no person or entity acting in the capacity
of an AMC shall improperly influence or attempt to
improperly influence the development, reporting, result,
or review of any appraisal and specifies prohibited acts.
11)Provides that a person or entity may not structure an
appraisal assignment or a contract with an independent
appraiser for the purpose of evading this law relating to
AMCs.
12)Specifies that no AMC may alter, modify, or otherwise
change a completed appraisal report submitted by an
independent appraiser.
13)Provides that the Director shall, by regulation,
establish the fees to be imposed on AMCs and that they
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shall be sufficient to cover the costs incurred by the
REA Office in administering this law.
14)Specifies within the Civil Code pertaining to the
unlawful influence of appraisers what would be considered
as prohibited acts.
FISCAL EFFECT: Unknown. This measure has been keyed
"fiscal" by Legislative Counsel.
COMMENTS:
1.Purpose. This measure is sponsored by the California
Government Relations Subcommittee of the Appraisal
Institute (AI). According to the Author, the key problem
this bill tries to address is the complete lack of
federal or state oversight over the activities of AMCs.
No one regulates them. The lenders and brokers who use
their services are regulated, and the appraisers whose
services are used by AMCs are regulated, but no one - not
at the federal level, nor at the state level, directly
regulates, or even tracks AMCs. The Author argues that
we don't know who they are, nor do we have any way of
knowing how they operate, except through anecdotal
reports.
The Author also points out that while AMCs may help to
ensure appraiser independence, nothing presently prevents
AMCs from engaging in the very same attempts to
improperly influence appraisers that are prohibited by
lenders. Further, as stated by the Author, nothing in
state law requires AMCs to identify themselves and their
controlling persons to the REA Office. The Author
indicates that in California, there is at least one case
of an appraiser whose license was revoked for misconduct
simply going back into business as an AMC. Independent
appraisers also report attempts by AMCs to demand
kickbacks in exchange for moving them up on "the list"
for appraisal assignments, and attempts to change the
value conclusion reached by independent appraisers
subcontracted by AMCs.
Finally, the Author also indicates that while Section
1090.05 of the Civil Code was added by SB 223 (Chapter
291, Statutes of 2007) to prohibit coercion, extortion or
bribery of appraisers by anyone with an interest in a
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real estate transaction, it is not clear that AMCs have
an "interest" in transaction that would make them subject
to the statute, and therefore prohibited acts should be
specified.
2.Background. During the past two years, both California
law and federal regulation were changed to help prevent
the improper influence of appraisers, and reduce the
chances that appraisers would be pressured to "hit"
certain target property values or otherwise return
pre-determined property values when appraising real
property. SB 223, as indicated above, was enacted in
2007, and changes to Regulation Z are also to become
effective on October 1, 2009. These recent changes were
enacted in direct response to evidence that significant
appraiser fraud had occurred during the housing price
run-up of the early 2000s. In the pre-housing downturn
real estate market, virtually all market participants
expected property values to continue increasing
indefinitely. For that reason, appraisers were
frequently pressured to return property values that would
seal a property deal. Those fraudulent values, in turn,
helped cause the rapid and dramatic increase in housing
prices across California earlier this decade.
However, the relationship between real estate brokers,
lenders, and appraisers has evolved since enactment of SB
223, and issuance of changes to Regulation Z.
Specifically, lenders, real estate brokers, mortgage
brokers, and others seeking real property appraisals are
relying on AMCs to serve as middle-men in the appraisal
process. Under a practice that is becoming increasingly
common, lenders and others seeking real property
appraisals are contracting with AMCs. The AMCs assemble
panels of appraisers on whom they can call 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, titled the Home Valuation Code of Conduct
(HVCC), must be followed by any lender who wishes to sell
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a mortgage loan to Fannie Mae or Freddie Mac on or after
May 1, 2009. One of the key requirements of the HVCC is
appraiser independence. Under the HVCC, lenders and
mortgage brokers may not be directly 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.
When the use of third parties to order appraisals works
well, an AMC can remove pressure on an appraiser, by
insulating the appraiser from the person or entity who
orders the appraisal (typically the party with the most
to gain or lose from the appraised value). When the
process breaks down, as is happening in more and more
cases, the AMC imposes pressure on appraisers, and the
problems that SB 223 and Regulation Z were intended to
stop are perpetrated by an entity that was not envisioned
by either the law or the regulation.
3.Related or Similar Legislation this Session. AB 33
(Nava) would abolish the DOC, the DFI, the DRE and the
Office of Real Estate Appraisers and transfer all powers,
duties, purposes, jurisdiction, responsibilities and
functions of these agencies to a newly created Department
of Financial Services (DFS) and designate the chief
officer of the DFS as the Commissioner of Financial
Services. This measure has been referred to the
Assembly Banking & Finance Committee and the Assembly
Business and Professions Committee.
SB 633 (Wright) would require a person making an appraisal
in connection with a mortgage loan to make at least one
personal visit to the property that he or she is
appraising and that this duty may not be assigned or
delegated to any other person or employee of the
appraiser. This measure has been referred to this
Committee and is scheduled for hearing on April 20, 2009.
4.Related or Similar Prior Legislation. SB 223 (Machado,
Chapter 281, Statutes of 2007) 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
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bribery, the development, reporting, result, or review of
a real estate appraisal sought in connection with a
mortgage loan, and also specifies permissible acts which
can be requested of an appraiser by a person with an
interest in a real estate transaction.
AB 709 (Keene, 2007) and AB 1867 (Keene, 2008) would
require public agencies to accept bids for appraisal
projects from any appraiser who is a designated member of
any appraisal organization that is a member of the
Appraisal Foundation, and provides that an appraiser who
was not allowed to submit a bid to a public agency may
sue that agency for equitable relief. Both of these
measures were vetoed by the Governor.
SB 1866 (Figueroa, 2002) would have moved the Office of
Real Estate Appraisers under the Department of
Corporations. This measure was vetoed by the Governor.
5.Arguments in Support. According to the Sponsor, the
Appraisal Institute , this bill is designed to respond to
the growth of AMCs in real estate transactions. As
federal regulators have required greater separation of
real estate lenders and brokers from those who order
appraisals, more lenders have engaged the services of
third-party AMCs to manage the process of ordering and
receiving appraisals. The problem, as stated by AI, is
that while lenders, brokers and appraisers are all
regulated entities, no entity has any enforcement
authority whatever over the activities of AMCs. No
regulator has any authority to make sure that AMCs do not
engage in activities that would be prohibited by lenders
or brokers, including pressuring appraisers to inflate
the values of real estate; the exact activity that has
been identified as one component of the subprime lending
crisis.
The Sponsor indicates that this measure is narrowly
tailored to fill this regulatory gap within the existing
structure of California's appraiser licensing and
certification law and simply requires AMCs to register
with REA Office, identify owners and controlling persons
within the companies, and refrain from specified acts
designed to pressure appraisers into achieving
pre-determined values. The Sponsor states that this
measure is actually narrower than bills enacted recently
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in other states, creates no new licensing scheme and has
nothing to do with limiting competition or regulating
fees.
6.Oppose Unless Amended. The Title Appraisal Vendor
Management Association (TAVMA) is opposed to this measure
unless it is amended to provide some type of
registration-only process for AMCs with operations in
California. TAVMA believes that AMCs should not be
micromanaged by a state administrative agency. As
explained by TAVMA, AMC's administer networks of
certified and licensed appraisers to fulfill real estate
appraisal assignments on behalf of mortgage lending
institutions. Appraisal management involves recruiting,
qualifying, and verifying licensure of appraisers and
negotiating fee and service level expectations with
lenders and appraisers. AMCs perform additional
administrative duties like order entry and assignment,
order tracking and statusing, pre-delivery quality
control and preliminary and hard copy appraisal report
delivery. In addition, appraisal management involves
ongoing quality control, payment accounting, market value
dispute resolution, warranty administration, and record
retention. As argued by TAVMA, contrary to the views of
some who support this bill, AMCs are subject to
significant regulation at the federal and state level and
must comply with a variety of laws that apply to their
clients and with federal and state laws that specifically
regulate appraisals. An example given is the HVCC and
other state and federal lending laws, and recent laws
that specifically prohibit improper influence of
appraisers. TAVMA asserts that AMCs protect appraisers
and absorb some of their overhead. Lenders us AMCs as a
"buffer" between loan production staff and appraisers to
avoid improper pressure. Further, an independent
appraiser survey in 2007, confirmed that AMCs were the
least likely industry participants to pressure
appraisers. TAVMA also notes that AMCs do not control
appraiser fees and facilitates lower costs to
homeownership.
Fidelity National Financial (FNF) has an oppose unless
amended position and is concerned with several of the
provisions in this measure including: (1) the
requirement that AMCs adhere to the USPAP, (2) that they
adopt operational systems, including date review and
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retention, (3) participate in continuing education
courses, (4) the failure to require large appraiser
operations to register with the state, and (5) the high
fees that may be charged to operate the registration
program since there are few AMCs. However, FNF continues
to work with the Author and Sponsor and believes that
many if not all of the above-referenced items may be able
to be resolved.
7.Definition of "Appraisal Management Company" May Need
Some Clarification. As defined, an AMC does not include
contracts with independent appraisers acting as
independent contractors for the completion of appraisal
assignments that the person or entity cannot complete for
any reason, including competency, workload, scheduling,
or geographic location. This exclusion is meant to cover
the circumstances in which there may be an occasional or
incidental use of an independent appraiser without a
continuing relationship such that an AMC is created.
This language may need to be clarified so that it is
clear that there is not an ongoing relationship
anticipated between the independent appraiser and another
person or entity for purposes of completing an appraisal
(or several appraisals).
SUPPORT AND OPPOSITION:
Support:
California Government Relations Subcommittee of the
Appraisal Institute
Oppose Unless Amended:
Fidelity National Financial
Title Appraisal Vendor Management Association
Opposition : None Received as of April 8, 2009.
Consultant: Bill Gage
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