New Appraisal Act Omits State Licensing Proposal

A new California law establishing guidelines for certain types of real estate appraisals goes into effect next Jan. 1, but the legislation will not include a provision calling for the licensing of appraisers.

The measure is a result of months of discussions among lawmakers, appraisers, realtors, lenders and the California Department of Real Estate.

However, the department’s proposal to license appraisers--a step it felt could greatly improve the quality and consistency of appraisals as well as cut down on fraud--was dropped in the final compromise.

The legislation, authored by Assemblyman Bill Lancaster (R-Covina) and Sen. Joseph Montoya (D-El Monte), essentially divides real estate appraisals into two categories--so-called “certified appraisals” and those that are not certified.

Under the Lancaster-Montoya Appraisal Act, if an appraisal is to qualify as a certified appraisal, it must follow certain guidelines designed to provide an accurate assessment of the property’s value.

Appraisals that are not certified can be prepared by whatever method the appraiser chooses to use--just as they are today.

To Improve Quality

The law is designed not only to improve the quality of some appraisals, but also as a first step toward providing uniform guidelines appraisers must follow. Individuals who prepare “certified” appraisals can be sued if they don’t follow the new guidelines.

Efforts to beef-up appraisal standards--or at least make them more uniform--would seem to affect only a handful of real estate professionals. But home buyers and sellers have a huge stake in the outcome of the appraisal debate, as do investors in commercial and business properties.

An appraisal that undervalues a home can result in the seller getting far less than the property is worth, or banks may refuse to lend money to would-be buyers or refinancers. Conversely, an inflated appraisal could result in a buyer paying thousands of dollars more than the property is worth and then having to sell it at a loss years later.

Faulty and fraudulent appraisals also cost lenders billions of dollars and have “led to the insolvency of hundreds of the nation’s financial institutions,” a congressional study determined last year.

Banks Have Lost Money

Many banks have made loans based on inflated appraisals, the study said, and later lost money because the property went into foreclosure and could not be sold for a price high enough to cover the bank’s losses.

Most large appraisal societies already have guidelines their members must follow, but those standards vary from group to group.

Many appraisers don’t belong to any society, so they follow guidelines they set for themselves. Several appraisal trade groups are calling for uniform procedures, but working out a plan acceptable to everyone has been a difficult task.

Although supporters of the new legislation hope it will improve the quality of appraisals, others say the scope of the new law is too limited. No one predicts that certified appraisals will soon become the industry standard, so most appraisals will continue to be compiled as they are today--with no uniform guidelines.

Appraisers Unlicensed

Critics point out that appraisers in California will remain unlicensed and largely unregulated under the new law. Like financial planners and certain other types of professions, virtually anyone can go into the appraisal business without qualifications.

The lack of a licensing program is also seen creating problems when it comes to enforcing the new law.

“If there was a licensing program, and an appraiser didn’t do his job, you could go the (licensing) board and try to have him disciplined or you could even get his license suspended or revoked,” admits Bill Nunes, a Lancaster aide who worked on the bill.

But since the law doesn’t create such a board, he says, people or firms that are unhappy with a certified report “will have to seek recourse through the courts . . . which is cumbersome and difficult.”

The California Department of Real Estate had hoped to establish a licensing program for appraisers, and so did some appraiser trade groups, Nunes added. But Lancaster “didn’t like the idea of creating another government bureaucracy” to oversee the licensing process, he said.

Perhaps more importantly, Nunes acknowledged, the California Assn. of Realtors--a politically powerful trade group--opposed licensing because many of its 120,000 members also perform appraisals.

A licensing program would likely force many realtors to spend several hours in classrooms and could cost them hundreds of dollars in fees.

In addition, says Venice broker Richard J. Rosenthal, Congress and the real estate industry are more concerned about fraudulent appraisals than they are about about inaccurate ones.

“A licensing program wouldn’t stop the appraisers who are out there committing fraud,” says Rosenthal, who served as CAR’s president when the Lancaster-Montoya legislation was passed last year. “If someone is going to break the law or bend the rules he’s going to do it regardless of whether he has a license.”

Hope for Certification

The impact of the new law will depend largely on how well the lending community accepts the concept of a “certified appraisal.” Optimists hope lenders will begin insisting that all appraisals be certified. But naysayers assert that most lenders are slow to change their habits, and predict that the certification concept will be tough to sell.

Montoya, who had pushed for an even stronger standards bill, has called the new legislation “a building block.” Among other things, he has suggested developing “some sort of arbitration program” before disputes must go to court.

The new law is already being studied by other states, many of which are struggling to come up with their own appraisal guidelines.

Donald Connelly, an attorney for the American Institute of Real Estate Appraisers, has predicted that lawmakers in other states will likely adopt laws similar to the Lancaster-Montoya Appraisal Act. “And if it is adopted by all the states, it would certainly raise the level of appraisal practices throughout the nation,” Connelly said.

Even though the California Department of Real Estate’s efforts to license appraisers failed, regulators say the new law is an important first step toward better appraisal practices.

“It’s no panacea, and some problems will remain” even after the law goes into effect, says Eileen Parker, a legislative coordinator for the department. “But this is the first time that standards even related to appraisals have been put into law, and that’s a very big step in the right direction.”