Eminent Domain Report

Six weeks ago, I wrote about California Assembly Bill 624 and the Appraisal Institute’s effort to change California law that presently requires all licensed appraisers to comply with the Uniform Standards of Professional Appraisal Practice (USPAP).  While the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) would still mandate that USPAP be followed for federally-related transactions (i.e. appraisals for a financial institution that is federally insured), I observed that a licensed appraiser in California performing an appraisal for a non-federally-related transaction would be free to choose any nationally or internationally recognized standard of valuation.  As a real estate lawyer who works frequently with appraisers in legal disputes over real property valuation, it seemed odd to me that California would move away from a single standard and permit a multiplicity of standards.  As I noted then, it isn’t difficult to envision a parade of horribles that might result should appraisers be permitted to identify obscure international standards for an appraisal assignment in order to drive value up or down for a litigant.

To my surprise, my blog post generated a lot of attention in the appraisal world.  I received dozens of phone calls and e-mails seeking to discuss my views on AB 624.  More surprising was the general lack of awareness of the Appraisal Institute’s effort to change California law—even among its own appraiser members.  Indeed, AB 624 had already been approved by the California Assembly by the time I learned about it.  Quite a few appraisers—including MAIs—thanked me for bringing it to their attention and agreed with my views on it.  Naturally, there were others who disagreed.

Ultimately, I was asked by the Appraisal Institute to co-present on AB 624 at its Annual Summer Conference.  It was a very well-attended event with over 250 appraisers in the audience.  My co-presenter was the Manager for State & Industry Affairs with the Appraisal Institute.  He traveled to California from Washington D.C. to educate the audience on AB 624 and its purpose.  It was my sense that I would be wearing the black hat for this program and that I was walking into the proverbial lion’s den.  But it seemed like fun so I agreed to do it.  After my co-presenter finished talking about AB 624 and its purpose, I stood up and shared my views.  In particular, I noted the following points:

• AB 624 has been amended since my original blog post and now requires that the alternative national or international standards be approved by California’s Bureau of Real Estate Appraisers. I believe this added layer of regulatory oversight is a good thing, but this means the Bureau could theoretically approve a litany of other standards without guidance on when they should be used. To me, this would result in a similar problem of permitting appraisers to select from available standards to achieve a desired outcome for a litigant. In addition,  opposing appraisal experts could easily use different valuation standards. It’s difficult enough for a jury to figure out value without having to analyze what may be tantamount to an apples-to-oranges comparison between two appraisals. Finally, I question whether the Bureau has the resources to evaluate the appropriateness of alternative standards, and who will pay for the added administrative burden on the Bureau?
• There are a number of arguments in support of AB 624 that are stated within the report to the California Senate committee considering the bill. Notably, all of the arguments in support of the bill were provided by the Appraisal Institute itself. In a nutshell, the arguments in support state that USPAP imposes a level of work that is unnecessary in some cases that causes consumers to hire non-licensed appraisers to value their property. Thus, licensed appraisers are losing business. In addition, USPAP causes licensed appraisers to lose business from international lenders who require compliance with international standards. The one example provided by my co-presenter involved Volkswagen seeking a valuation under German standards.  Rather than hire a licensed appraiser, Volkswagen elected to fly a German appraiser to the U.S. to do the appraisal.  This example admittedly would impact a minuscule percentage of appraisal assignments in California.  Thus, I question whether it would be more appropriate to use a scalpel to address the claimed ills caused by USPAP instead of the ax represented by AB 624. Even the most well-intentioned goals often have unintended and undesirable consequences.
• AB 624’s opponents' views are set forth in the same report to the California Senate committee considering the bill. These views came from the American Society of Appraisers, the Royal Institute of Chartered Surveyors, and the Appraisal Foundation. Examples of their views include: USPAP already provides a range of service options depending on a client’s needs and the nature of the assignment; USPAP affords malleability through a jurisdictional exception; multiple sets of standards could cause confusion; the public interest calls for the valuation profession to provide its expertise in a cohesive manner, rather than a fragmented manner; and the rationale for AB 624 lacks substance and opens the door for the creation of legal standards that have no public input. Interestingly, the Appraisal Foundation stated that out of a survey of 175 state regulators from over 30 states, not one thought it was a good idea to enforce multiple sets of appraisal standards.
• I discussed some of the comments I received in response to my blog post. For example, one MAI appraiser suggested to me that AB 624 still mandates compliance with USPAP’s ethical, record keeping, competency, and scope of work rules, and that they provide the enforcement tools the Bureau needs to protect the public from unethical or incompetent appraisers in the same manner they do under USPAP. In response, I reviewed USPAP’s ethical, record keeping, competency, and scope of work rules and observed that they are very broad and general. Regardless, under AB 624, there would likely be nothing unethical for an appraiser to rely on other standards even if they would generate a higher or lower value for a litigant. More importantly, I identified a number of USPAP provisions that would cease to apply. In particular, Standards Rule 1-2(f) (requiring an appraiser to identify extraordinary assumptions); Standards Rule 1-2(g) (requiring an appraiser to identify hypothetical conditions); Standards Rule 1-3 (requiring an appraiser to identify and analyze the effect on use and value of existing land use regulations and probable modification of them); and Standard 2-2(x) (requiring an appraiser to summarize the support and rationale for a highest-and-best use opinion). All of these rules are crucial for understanding an appraisal opinion and their omission could cause massive differences in value. In other words, there could be serious mischief with litigation appraisals.

Ultimately, I concluded my presentation to the Appraisal Institute by sharing my view that USPAP works very well for litigation appraisals and there was no reason to permit a multiplicity of alternative standards.  While some appraisers may believe that USPAP causes them to lose business, there should be a more discrete way to address specific concerns.  After I concluded my remarks, I was prepared to dodge the food that I assumed the audience would hurl at me.  I jest.  But the audience did have many questions.  One audience member asked why California couldn’t simply harmonize conflicting standards and operate under a single standard instead of permitting many different standards.  Another audience member asked who was paying for AB 624.  My co-presenter responded you are.  Once again, the lack of information seemingly shared with the Appraisal Institute’s membership is surprising.  Another audience member explained that she taught USPAP and that many of the concerns with USPAP derive from a lack of understanding of it.  One audience member informed me after the program that the elimination of USPAP Standards Rules 1-2(f), 1-2(g), 1-3, and 2-2(x) were precisely the concerns he would have in the litigation arena.  Finally, one audience member informed me after the program that he was embarrassed that the Appraisal Institute was promoting AB 624.  Nobody in the audience openly supported the bill.

A few days after my presentation to the Appraisal Institute, I had a telephone conversation with an appraiser who supports AB 624. After discussing my concerns surrounding the removal of the above USPAP standards, he suggested to me that USPAP won’t stop appraisers from behaving unethically or incompetently. By that logic, there is no point in applying USPAP to federally-related transactions. As one of the lead trial lawyers who represented the Federal Deposit Insurance Corporation in a U.S. District Court action against four former bank executives of the recently failed IndyMac Bank, F.S.B., I can unequivocally reject that notion. The case involved unsafe and unsound banking tied to inappropriate approvals of huge developer loans. One loan transaction in particular involved a $40 million loan that had an appraisal with a flawed extraordinary assumption tied to assessments from a to-be-created community facilities district (CFD). The appraiser assumed these assessments would not burden the project being developed. But the loan’s primary source of repayment was proceeds from a CFD. Thus, the IndyMac executives approved a loan with insufficient collateral in violation of loan-to-value limitations. If Standards Rule 1-2(f) didn’t require the appraiser to identify his assumptions, there would have been no way for the bank executives to identify the error. That the executives negligently approved the loan despite the obvious error in this instance enabled the FDIC to more easily establish a case against them. And most responsible bank executives would undoubtedly catch the error and restructure the loan to better safeguard our federally insured deposits. It is precisely these types of USPAP protections that we should preserve in California. And the notion that USPAP doesn’t stop an appraiser from being unethical certainly doesn’t mean that we should put a gun in a criminal’s hand by dismantling USPAP’s applicability in non-federally-related transactions.

AB 624 remains pending before the California Senate.  Having now had more time to consider AB 624, the information available on it, and following an open forum where it was discussed among hundreds of appraisers who are members of the Appraisal Institute, I remain convinced that it is too broad, could significantly and negatively impact litigation appraisals and, thus, is a bad idea for California.  Hopefully, our elected officials will agree.