Proposed California SB 6: Beware of Fraudulent Real Estate Appraising

In light of the public concern that persons connected to real estate transactions produce, or influence others to produce, self-serving, specious real property appraisals – proposed new California laws will increase the liability of those persons who: (i) prepare real property valuations; (ii) opine on the value of real property; or (iii) influence appraisers.  The near collapse of the mortgage industry has directed legislators to focus on fraud and preventative measures.

This backdrop has spawned proposed amendments to existing real estate law under California Senate Bill 6 (SB6) which would expand the scope of existing regulations which seek to protect the validity of real property valuations.

Regulation of Real Estate Appraisals

Currently, it is only unlawful if a person is guilty of generating an inaccurate opinion of the value of residential real property in connection with a certain real estate transactions in order to, among other things, acquire a financial or business advantage that directly results from the inaccurate opinion of value.  SB 6 would expand this liability to include the mere providing of any opinion of value of real property if his or her compensation is dependent or affected by that opinion of value or if he or she has any interest in the property or transaction.

Thus SB 6 erects a barrier between the appraiser and the real estate transaction, removing the motive to prepare inaccurate valuations and drastically expanding those persons who may be liable under existing real estate law.  Similarly, SB 6 prohibits providing appraisal functions for certain loan transactions and having a specified interest in the property or the connected real estate transaction.

Prohibited Influence on Appraisals and Appraisers

Existing real estate law prohibits an appraisal management company from improperly influencing appraisals by use of such methods as, inter alia, coercion, bribery and extortion.  SB 6 expands this list to include such acts as:

1. Seeking to influence an appraiser to report a minimum or maximum value;
2. Implying to an appraiser that their retention depends on their estimate;
3. Excluding an appraiser from future engagement because they reported an unfavorable value; and
4. Conditioning an appraiser’s compensation on consummation of the real estate transaction.

Here, SB 6 seeks to expand prohibited activities to include subtle, less egregious methods of influence; methods which may have flown under the radar, but for which the undesirable effects are the same.

Mortgage Loans and the Expansion of the Definition of Valuation

Lastly, existing real estate law prohibits the types of improper influencing mentioned above, in regards to the development, reporting, result or review of a real estate appraisal sought in connection with a mortgage loan.  SB 6 makes that provision applicable to a valuation and defines a “valuation” as an estimate of the value of real property other than one produced solely by an automated model or system.  Thus, SB 6 will prevent improper influence and improper methods of valuation from negatively affecting the mortgage loan industry.

Conclusion

SB 6 opens the door to a variety of potential claims involving less settled areas of law.  The proposed amendments would require persons providing real estate valuations and/or persons involved in real estate transactions to evaluate their business operations as to avoid unnecessary exposure to liability under the new regulations.  Individuals facing litigation under current legislation, or particularly under the proposed new legislation should it become law, are strongly advised to seek counsel experienced in such matters.