Existing law, the Real Estate Appraisers Licensing and Certification Law, regulates the licensing of real estate appraisers and provides definitions of specified terms that govern the construction of that law. Existing law provides that the Uniform Standards of Professional Appraisal Practice sets forth the minimum standards of conduct and performance for real estate appraisers in any work or service performed that is addressed by those standards.

This bill would instead provide that the Uniform Standards of Professional Appraisal Practice constitutes the minimum standard of conduct and performance for federally related real estate appraisal activity, as defined. The bill would revise existing, and additionally include new, definitions for specified terms for purposes of the Real Estate Appraisers Licensing and Certification Law. The bill would also authorize, if a licensee is performing a nonfederally related appraisal activity, a standard of valuation practice, as defined, for a licensee if that practice is disclosed to, and agreed upon, by the client, and if that practice is described in an appraisal, as provided.

Existing law, the Real Estate Appraisers Licensing and Certification Law, regulates the licensing of real estate appraisers and provides definitions of specified terms that govern the construction of that law. Existing law provides that the Uniform Standards of Professional Appraisal Practice sets forth the minimum standards of conduct and performance for real estate appraisers in any work or service performed that is addressed by those standards.

This bill would instead provide that the Uniform Standards of Professional Appraisal Practice constitutes the minimum standard of conduct and performance for federally related real estate appraisal activity, as defined. The bill would revise existing, and additionally include new, definitions for specified terms for purposes of the Real Estate Appraisers Licensing and Certification Law. The bill would also authorize, if a licensee is performing a nonfederally related appraisal activity, a standard of valuation practice, as defined, for a licensee if that practice is disclosed to, and agreed upon, by the client, and if that practice is described in an appraisal, as provided.

Existing law, the Real Estate Appraisers Licensing and Certification Law, regulates the licensing of real estate appraisers. appraisers and provides definitions of specified terms that govern the construction of that law. That Existing law provides that the Uniform Standards of Professional Appraisal Practice sets forth the minimum standards of conduct and performance for real estate appraisers in any work or service performed that is addressed by those standards.

Existing law, the Real Estate Appraisers Licensing and Certification Law, regulates the licensing of real estate appraisers. That law provides that the Uniform Standards of Professional Appraisal Practice sets forth the minimum standards of conduct and performance for real estate appraisers.

This bill would make nonsubstantive changes to these provisions.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 624 (Wilk) - Real estate appraisers: standards of conduct

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 624 would authorize licensed real estate appraisers to use a standard of valuation practice approved by the Bureau of Real Estate Appraisers (BREA) for performing nonfederally related appraisal activities, as specified.

Fiscal Impact:

• The BREA estimates costs of approximately $110,000 in 2016-17 and $102,000 in 2017-18 for 1 PY of staff to develop and adopt regulations regarding the approval of nationally or internationally recognized valuation standards. (Real Estate Appraisers Regulation Fund)

• BREA indicates costs of $150,000 in 2016-17 to develop specialized investigator training related to any new valuation standards. These costs could be ongoing to the extent additional valuation standards are approved by the BREA. (Real Estate Appraisers Regulation Fund)

• Additional BREA costs of approximately $50,000 annually, beginning in 2017-18, to contract for subject matter experts to assist in training development and provide expert witness testimony for enforcement cases. (Real Estate Appraisers Regulation Fund)

Background:

Following the Savings and Loan crisis in the 1980s, the federal government enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989. Included in FIRREA was the establishment of a federal regulatory structure for oversight of real estate appraisal activity performed in conjunction with federally related transactions (FRTs: those requiring loans made, guaranteed, or insured by federally-supervised financial institution). Federal law requires real estate appraisals used in conjunction with FRTs to be performed in writing, and in accordance with uniform standards, by appraisers whose competency has been demonstrated and whose professional conduct will be subject to effective supervision. Existing federal law establishes the Uniform Standards of Professional Appraisal Practice (USPAP) as the minimum standard for appraisals used for FRTs. USPAP contains standards for appraisal services including real property, personal property, business valuation, and mass appraisal, and also contains ethics, record keeping, competency, and jurisdictional exception rules for all aspects of an appraisal assignment. These standards are updated every two years through a transparent, public process.

Existing state law, the Real Estate Appraisers Licensing and Certification Law was enacted by the California Legislature in 1990 in response to FIRREA, and establishes the BREA as the licensing and enforcement body for appraisal activity. The licensing unit of the Bureau sets the minimum requirements for education and experience according to criteria set by the federal Appraisal Subcommittee 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 BREA’s enforcement unit, which also operates under federal 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.

Proposed Law:

AB 624 would authorize licensed appraisers to use a standard of valuation practice other than USPAP when performing nonfederally related appraisal activity, if that practice is disclosed to, and agreed upon, by the client and the practice is described in the appraisal. This bill would also do the following:

• Specify that “nonfederally related real estate appraisal activity” is the performance of an appraisal on real estate or real property for any purpose other than a FRT.

• Define “standard of valuation practice” as any nationally or internationally recognized valuation standard approved by the BREA.

• Clarify that USPAP constitutes the minimum standard of conduct and performance for federally related real estate appraisal activity.

• Require a licensee that uses a standard of valuation practice other than USPAP to comply with ethics, record keeping, competency, and scope of work rules specified in the 2014-15 edition of USPAP.

Staff Comments:

This bill is intended to authorize licensed and certified appraisers to use alternate standards of valuation approved by the BREA instead of USPAP when performing appraisal activity for non-FRTs. While there are other recognized (primarily internationally recognized) valuation standards, California law related to appraisal activity has been structured around the federal USPAP standards and licensed activities related to FRTs. As such, the BREA would need to develop and adopt regulations to review and approve other valuation standards, and train its investigator and enforcement staff on any new standards that are approved by the Bureau.

BREA estimates staffing costs of $110,000 in 2016-17 and $102,000 in 2017-18 to develop and adopt regulations to establish an application and review process for approving alternate valuation standards. Due to the complexities of these valuation standards, volume of information involved in assessing standards, and expectations of significant interest among stakeholders, the BREA expects significant workload associated with these regulations.

BREA expects to incur additional costs to develop a specialized investigator training program to foster necessary expertise on any new standards that are adopted. Preliminary estimates indicate these costs would be approximately $150,000, and could be ongoing to the extent multiple valuation standards are approved. Lastly, BREA also expects to require contracts of approximately $50,000 each year for subject-matter experts to assist in the development of specialized training and to serve as expert witnesses in enforcement cases.

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SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Jerry Hill, Chair

2015 - 2016 Regular

Bill No: AB 624 Hearing Date: June 29, 2015

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)

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 § 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)

5. 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 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 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 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 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 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.

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 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 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 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 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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Date of Hearing: May 6, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 624

Author:(Wilk) – As Amended Ver:April 22, 2015

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill authorizes licensed real estate appraisers who perform non-federally related appraisal activities to use a standard of valuation practice other than the Uniform Standards of Professional Appraisal Practice (USPAP) if that practice is disclosed to, and agreed upon, by the client, and if that practice is described in the appraisal.

FISCAL EFFECT:

Unknown costs, likely minor, to the Bureau of Real Estate Appraisers (special funds) under the Department of Consumer Affairs for complaint investigations regarding the use of unknown valuation standards.

COMMENTS:

1. Purpose. According to the author, "[This bill] is designed to modernize California’s appraiser licensing law to permit licensed or certified appraisers to apply the most relevant appraisal standards for their assignments. While federal law requires compliance with the USPAP for federally related transactions [FRTs], California operates in an international business environment and foreign entities often need appraisal reports prepared in accordance with international standards. Also, entities within the [United States] often do not require USPAP-compliant appraisals for their non-federally related transactions. This bill permits the use of recognized alternative or international valuation standards for non-[FRTs], if disclosed and consented to by the client and if identified in appraisal reports. In cases where standards other than USPAP are employed, appraisal reports must still comply with foundational USPAP standards relating to ethics, competency, recordkeeping, and scope of work."

2. Background. In 1989, as a result of the savings and loan crisis, Congress adopted the Federal Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) mandating states to license and certify real estate appraisers who appraise property for FRTs. FRTs are transactions involving loans made, guaranteed or insured by federally-supervised financial institutions. The FIRREA, and rules promulgated pursuant to that act, require, at a minimum, that real estate appraisals be performed in accordance with generally accepted uniform standards as promulgated by the Appraisal Standards Board (ASB) of the Appraisal Foundation, and that such appraisals be in writing.

While federal law requires that FRT appraisals be performed in compliance with the USPAP, California law goes beyond this requirement and requires compliance with USPAP for all appraisals performed by California licensed and certified appraisers, whether federally-related or not, and thus, imposes duties beyond those needed by entities requesting appraisals in non-FRTs. Investors needing portfolio review analysis, for example, often do not need, and thus are not willing to pay for, a full USPAP-compliant appraisal.

The author contends that because California law makes USPAP the standard for all appraisals performed by California licensed or certified appraisers, California licensees are unable to accept these assignments. In this regard, California law acts as a disincentive to hire the most competent appraisers. As a result, licensed professionals in other states or unlicensed persons in California could perform those non-FRT appraisals without following USPAP, while California licensees would still be required to follow the USPAP.

This bill seeks to address this problem by authorizing licensees to comply with recognized valuation standards other than the USPAP for non-FRTs, with the consent of the client and if the standards are properly identified in the appraisal report. This bill would still require USPAP provisions relating to ethics, competency, recordkeeping and scope of work to apply if a standard other than the USPAP is used for an appraisal.

3. Prior Legislation. AB 1317 (Frazier), Chapter 352, Statutes of 2013, per the Governor’s Reorganization Plan No. 2, moved the former Office of Real Estate Appraisers from 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.

Analysis Prepared by: Jennifer Swenson / APPR. / (916) 319-2081

Date of Hearing: April 21, 2015

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Susan Bonilla, Chair

ABPCA Bill Id:AB 624

Author:(Wilk) – As Amended Ver:March 26, 2015

SUBJECT: Real estate appraisers: standards of conduct.

SUMMARY: Authorizes licensed real estate appraisers who perform non-federally related appraisal activities to use a standard of valuation practice other than the Uniform Standards of Professional Appraisal Practice if that practice is disclosed to, and agreed upon, by the client, and if that practice is described in the appraisal.

EXISTING LAW:

1. Establishes the Real Estate Appraisers’ Licensing and Certification Law (Act), administered by the Bureau of Real Estate Appraisers (BREA), which regulates the licensing of real estate appraisers and provides definitions of specified terms that govern the construction of that law. (Business and Professions Code (BPC) Section 11300 et seq.)

2. Defines an “appraisal” as a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion in a federally related transaction as to the market value of an adequately described property as of a specific date, supported by the presentation and analysis of relevant market information. (BPC Section 11302)

3. Provides that the term “appraisal” does not include an opinion given by a real estate licensee or engineer or land surveyor in the ordinary course of his or her business in connection with a function for which a license is required, as specified, and that the opinion shall not be referred to as an appraisal, as specified. (BPC Section 11302)

4. Defines a “federal financial institutions regulatory agency” as the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Federal Home Loan Bank System, National Credit Union Administration and any other agency determined by the director of the BREA to have jurisdiction over transactions subject to this part. (BPC Section 11302(h)

5. Defines a “federally related real estate appraisal activity” as the act or process of making or performing an appraisal on real estate or real property in a federally related transaction and preparing an appraisal as a result of that activity. (BPC Section 11302(i))

6. Defines a "federally related transaction" (FRT) as any real estate-related financial transaction which a federal financial institutions regulatory agency engages in, contracts for or regulates and which requires the services of a state licensed real estate appraiser regulated by these provisions, and includes any transaction identified as such by a federal financial institutions regulatory agency. (BPC Section 11302(j))

7. Defines a “state licensed real estate appraiser” as a person who is issued and holds a current valid license under these provisions. (BPC Section 11302(o))

8. Defines “Uniform Standards of Professional Appraisal Practice” (USPAP) as the standards of professional appraisal practice established by the Appraisal Foundation. (BPC Section 11302(p))

9. Requires the USPAP to constitute the minimum standard of conduct and performance for a licensee in any work or service performed that is addressed by those standards. (BPC Section 11319)

10. Prohibits a person from engaging in federally related real estate appraisal activity governed by these provisions or assuming or using the title of or any title designation or abbreviation as a licensed appraiser in this state without first obtaining a license. (BPC Section 11320)

THIS BILL:

1. Makes the following changes relating to definitions:

   1. Expands the definition of "appraisal" by no longer limiting appraisals under the Act to those relating to federally related transactions;

   2. Adds the Consumer Financial Protection Bureau to the definition of a "federal financial institutions regulatory agency";

   3. Defines the "USPAP" as the standards of professional appraisal practice established by the Appraisal Foundation for use in an FRT;

   4. Defines "non-federally related real estate appraisal activity" as the act or process of making or performing an appraisal on real estate or real property for any purpose other than an FRT; and,

   5. Defines "standard of valuation practice" as any nationally or internationally recognized valuation standard addressing the credibility of an appraisal or appraisal review;.

2. Limits the use of the USPAP as the minimum standard of conduct and performance for federally related real estate appraisal activity.

3. Authorizes a licensee performing a non-federally related appraisal activity to use a standard of valuation practice if that practice is disclosed to, and agreed upon, by the client, and described in the appraisal.

4. Requires a licensee who uses a standard of valuation practice other than the USPAP to comply with the Ethics, Record Keeping, Competency, and Scope of Work rules of the USPAP contained in the 2014-2015 edition of the USPAP.

FISCAL EFFECT: Unknown. This bill is keyed fiscal by the Legislative Counsel.

COMMENTS:

1. Purpose. This bill is sponsored by the California Governmental Relations Subcommittee of the Appraisal Institute. According to the author, "[This bill] is designed to modernize California’s appraiser licensing law to permit licensed or certified appraisers to apply the most relevant appraisal standards for their assignments. While federal law requires compliance with the [USPAP] for [FRTs], California operates in an international business environment and foreign entities often need appraisal reports prepared in accordance with international standards. Also, entities within the [United States] often do not require USPAP-compliant appraisals for their non-federally related transactions. [This bill] simply permits the use of recognized alternative or international valuation standards for non-[FRTs], if disclosed and consented to by the client and if identified in appraisal reports. In cases where standards other than USPAP are employed, appraisal reports must still comply with foundational USPAP standards relating to ethics, competency, recordkeeping, and scope of work."

2. Background. According to the BREA, in 1989, the Federal Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) was adopted by Congress mandating states to license and certify real estate appraisers who appraise property for FRTs. FRTs are defined as any real estate-related financial transaction which a federal financial institutions regulatory agency engages in, contracts for, or regulates, and which requires the services of a state licensed real estate appraiser regulated by these provisions, and includes any transaction identified as such by a federal financial institutions regulatory agency. In short, FRTs are transactions involving loans made, guaranteed or insured by federally-supervised financial institutions. The federal law was enacted as a result of the savings and loan disaster. The FIRREA, and rules promulgated pursuant to that act, require, at a minimum, that real estate appraisals be performed in accordance with generally accepted uniform standards as promulgated by the Appraisal Standards Board (ASB) of the Appraisal Foundation, and that such appraisals be in writing. The USPAP is the set of standards developed by the ASB of the Appraisal Foundation to meet this requirement. Such appraisals are to be performed by individuals whose competency has been demonstrated and whose professional conduct is subject to effective state supervision.

In response to the federal mandate, the Real Estate Appraisers Licensing and Certification Law was enacted by the California Legislature in 1990. The BREA, which administers the Act, is charged with developing and implementing a real estate appraiser licensing and certification program compliant with the federal mandate. The BREA's enforcement unit, which operates under a federal mandate, ensures adherence to the federally-required USPAP, California law and regulations.

According to policy statements issued by the Appraisal Subcommittee of the Federal Financial Institutions Examination Council, an interagency body empowered to prescribe uniform principles, standards and report forms for the federal examination of financial institutions, Title XI of the FIRREA and the federal financial institutions regulatory agencies’ regulations authorize any state or federal agency to impose additional appraisal standards if they consider such standards necessary to carry out their responsibilities, so long as additional appraisal standards do not preclude compliance with the USPAP or the federal institutions regulatory agencies' appraisal regulations for work performed for FRTs.

The federal financial institutions regulatory agencies' appraisal regulations define "appraisal" and identify which real estate-related financial transactions require the services of a state licensed appraiser. Under these regulations, only those transactions that involve appraisals for FRTs require the services of a state licensed appraiser.

California Real Estate Appraisers’ Licensing and Certification Law. According to the author, because virtually every residential loan is an FRT, approximately 90-95% of all appraisals are covered. While federal law requires that FRT appraisals be performed in compliance with the USPAP, California law goes beyond this requirement in BPC Section 11319, and requires compliance with USPAP for all appraisals performed by California licensed and certified appraisers, whether federally-related or not.

According to the author, problems arise when appraisers are sometimes asked by foreign entities to perform appraisals in compliance with appraisal standards in the foreign country, or in compliance with International Valuation Standards (IVS). For example, other major international and alternative appraisal and valuation standards may include: the Canadian Uniform Standards of Professional Appraisal Practice; Standards of Valuation Practice; European Valuation Standards; Uniform Appraisal Standards for Federal Land Acquisitions; Real Property Appraisal Standards (Japan); Australia and New Zealand Property and Valuation Standards and the Standards for Real Estate Appraisals of the People's Republic of China. California licensed and certified appraisers are not able to accept an appraisal assignment if the standard identified is other than USPAP. Even though state law does not require licensure to perform the appraisal for non-federally related transactions, licensed appraisers must still use the USPAP because California mandates the use of USPAP standards for all appraisals.

According to the author, the USPAP reporting requirements impose duties beyond those often needed by entities requesting appraisals in non-FRTs. Investors needing portfolio review analysis, for example, often do not need, and thus are not willing to pay for, a full USPAP-compliant appraisal. Because California law makes USPAP the standard for all appraisals performed by California licensed or certified appraisers, California licensees are unable to accept these assignments. In this regard, California law actually acts as a disincentive to hire the most competent appraisers. As a result, licensed professionals in other states or unlicensed persons in California could perform those non-FRT appraisals without following USPAP, while California licensees would still be required to follow the USPAP.

The BREA's website lists as one of the twelve most frequently asked questions relating to enforcement is whether a licensee may voluntarily "suspend" his or her license to perform non-USPAP appraisals. According to the 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, i.e., for non-FRT appraisals. However, there is currently no provision for permitting such a suspension of licensure prior to the license expiration, and the BREA regulations require every holder of a BREA license to conform to and observe USPAP at all times, regardless of the type of transaction.

This bill would address this problem by authorizing licensees to comply with recognized valuation standards other than the USPAP for non-FRTs, with the consent of the client and if the standards are properly identified in the appraisal report. This bill would still require USPAP provisions relating to ethics, competency, recordkeeping and scope of work to apply if a standard other than the USPAP is used for an appraisal.

3. 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.

ARGUMENTS IN SUPPORT:

According to the sponsors, the California Government Relations Subcommittee of the Appraisal Institute, "[This bill] 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. By way of brief background, Congress imposed a requirement for all states to license and certify real estate appraisals in 1990, coming out of the savings and loan crisis of the time. Federal law requires licensure, and compliance with the Uniform Standards of Appraisal Practice (USPAP) for “federally-related transactions”. These are basically transactions involving loans made, guaranteed or insured by federally-supervised financial institutions. No federal law requires licensing or compliance with “USPAP” for non-federally related transactions, however. 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 may need appraisal work done in compliance with international appraisal standards or those of their home countries, rather than USPAP-compliant appraisals. All [this bill] 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. [This bill] is narrowly crafted to respond to a simple need."

ARGUMENTS IN OPPOSITION:

None on file.

POLICY ISSUE FOR CONSIDERATION:

The author may wish to consider whether it is necessary to specify the 2014-15 edition of the USPAP a licensee must follow for purposes of adhering to specific USPAP standards for non-FRTs. Because specifying that edition would not take into account future changes relating to those standards in future iterations of the USPAP, licensees would be prohibited from following a single set of USPAP standards, and would instead be required to follow one set of standards for non-FRT appraisals, and another set standards, e.g. if there is a newer edition of the USPAP, for FRT appraisals. This may lead to confusion for licensees, who could be accountable for applying the wrong set of standards.

AMENDMENT:

This bill deletes the phrase "in a federally related transaction" from the definition of appraisal, thereby expanding the definition of appraisal to include non-FRT appraisals. Because other provisions of the Act refer to appraisals, for example, BPC Section 11321 which requires licensees to sign appraisals, it may inadvertently alter existing practice requirements. As a result, the author should consider restoring that language to existing law.

On page 2, line 9, after "opinion" insert: in a federally related transaction to restore to existing law

REGISTERED SUPPORT:

California Government Relations Subcommittee of the Appraisal Institute (sponsor)

REGISTERED OPPOSITION:

None on file.

Analysis Prepared by: Eunie Linden / B. & P. / (916) 319-3301