by Steve Henry, MAI, Managing Director, Valuation & Advisory
As a result of the S&L crisis in the 1980s, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) spawned the Appraisal Foundation (TAF), which publishes the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP provides guidance and rules for developing and reporting appraisals. FIRREA requires full adherence to USPAP for all appraisals performed for Federally Related Transactions (FRTs). FRTs are transactions that involve federally insured financial institutions. However, most states have extended that requirement to all appraisals. Every two years, TAF revises USPAP. The latest revisions presented by TAF will apply to the 2020-2021 version of USPAP.
There are currently two reporting options under USPAP; Appraisal Report and Restricted Appraisal Report. Currently, Restricted Appraisal Reports may only be relied upon by the client who engages an appraiser. Conversely, the intended users for an Appraisal Report may include the client and any other party identified, by name or by type. Restricted Appraisal Reports are often used in assignments where an abbreviated report is sufficient to meet client needs.
One exception to this is in California, where legislation (SB-70) was enacted for 2019 allowing Restricted Appraisal reports to be issued to more than one intended user, as long as the subject property is a commercial property, and the appraisal is for a non-FRT assignment. The benefits of providing a Restricted Appraisal Report can include lower fees and shorter turnaround times due to the time saved in writing an Appraisal Report.
Similar Changes to USPAP
The most recent round of revisions by TAF would include an allowance for Restricted Appraisal Reports to identify more than one intended user. This would expand the option for appraisers, where appropriate, to provide abbreviated reports to multiple users. Unlike California’s SB-70, the changes to USPAP will also apply to FRT assignments, which make up the majority of appraisal assignments.
What’s the Catch?
Not everyone views this change as a good one. One argument against issuing Restricted Appraisal Reports to more than one intended user points out the potential inability of the intended user(s) to fully understand the subject property and/or the appraisal problem to be solved because of limited information presented in the reports.
What is not understood by many who oppose the change is that the development of an appraisal assignment is the same for a Restricted Appraisal Report as it is for an Appraisal Report. This means that the level of research and analysis is the same for both reporting options. In fact, USPAP requires that the appraiser’s workfile be complete enough to produce an Appraisal Report, even when the Restricted Appraisal Report option is selected. Restricted Appraisal Reports must also be presented in a way that is not misleading and contain sufficient information for the reader(s) to understand the subject property, the appraisal problem, and the analysis.
As previously stated, this change to USPAP comes at a time where there have been efforts in some states to allow Restricted Appraisal Reports to name more than one intended user. In a webinar presented by TAF regarding the changes for 2020-2021, presenters suggested a future move toward a single reporting option, which could mean the elimination of an option for providing an abbreviated reporting option. This is also great news for appraisers… as long as the requirements for an Appraisal Report in a single-report-option scenario do not exceed the current requirements for a Restricted Appraisal Report. If, however, TAF decides to impose current requirements for an Appraisal Report under a single reporting option, appraisers in many states who are performing non-FRT work could find themselves competing against non-appraisers (attorneys, accountants, etc.) who are less qualified than appraisers to perform valuation work but are not obligated to comply with USPAP, creating an un-level playing field for appraisers.
The current proposed changes to USPAP give consumers more flexibility when choosing an appraisal product, while still ensuring that the work product complies with USPAP. This means that Restricted Appraisal Reports still need to contain sufficient information for the client and intended users to be able to identify and understand the appraisal problem and not be misleading while allowing greater flexibility on who may rely on the report, while the elimination of the Restricted Appraisal Report has the potential to limit options for consumers and appraisers.
If you have additional questions regarding USPAP changes and what they mean for your business, please contact me.
Steve Henry, MAI, is a Managing Director of our Valuation & Advisory practice in Irvine, CA. He is also the Client Relationship and Quality Assurance Manager for the Southwestern United States. His management experience includes business development, developing complex valuation models, identifying proper valuation methodology, and establishing appropriate reporting standards.