California has become the sixth state to regulate appraisal management companies after Gov. Arnold Schwarzenegger signed into law legislation establishing compliance standards for the firms and requiring them to register with the Office of Real Estate Appraisers.

The Appraisal Institute, an industry group representing appraisers, issued a press release lauding California’s law, saying it will protect consumers and appraisers while providing "positive effects" to the state’s real estate market.

Arkansas, Louisiana, Nevada, New Mexico and Utah passed similar bills earlier this year, the group said, and as many as 20 other states are expected to consider such legislation when lawmakers reconvene in January.

New rules for appraisals adopted May 1 by Fannie Mae and Freddie Mac have led to an increased use of appraisal management companies, which critics say often don’t give appraisers adequate time to complete their work, and assign them to neighborhoods where they lack experience.

The appraisal rules, called the Home Valuation Code of Conduct, were adopted after New York Attorney General Andrew Cuomo launched an investigation of mortgage origination and securitization practices during the housing boom.

The rules were designed to protect appraisers from coercion by lenders, but critics say they’ve derailed many home sales — often because inexperienced appraisers have allegedly used distressed properties as comparable sales without making the necessary adjustments.

Some appraisers say the rules aren’t perfect, but that market conditions are often to blame when a valuation doesn’t support a proposed sale price. …CONTINUED

The National Association of Realtors is calling for an 18-month moratorium on enforcement of the Home Valuation Code of Conduct, to address its alleged shortcomings and to allow states to enact their own laws regulating appraisal management companies (see story).

Beginning Jan. 1, California’s law, SB 237, will require appraisal management companies to ensure independent contractors it hires as appraisers have all required licenses and certificates by the state Office of Real Estate Appraisers, and that they review their work to ensure that it’s performed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).

Managers, officers and directors of appraisal management companies will be fingerprinted and required to pass criminal background checks, as is already the case for appraisers, and cannot have had their licenses or certifications as appraisers or as real estate agents or brokers revoked in any state.

The bill will also prohibit appraisal management companies from withholding or threatening to withhold timely payment for an appraisal, or threatening to withhold future business for an independent appraiser or removing them from approved panels of appraisers.

SB 237 does not prohibit those with an interest in a transaction from asking appraisers to consider additional information about a property, correct errors in their report, or to provide further detail, substantiation, or explanation of a valuation.

The Appraisal Institute said California’s new law drew heavily from model legislation the group developed in conjunction with the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers.

California’s law includes a clause that revokes provisions related to appraisal management companies within 60 days if Congress passes a federal law mandating a national licensing system.

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