Second Exposure Draft of proposed changes for the edition of the Uniform Standards of Professional Appraisal Practice

TO: FROM: RE: All Interested Parties Barry J. Shea, Chair Appraisal Standards Board Second Exposure Draft of proposed changes for the 2016-17 edition of the Uniform Standards of Professional Appraisal Practice DATE: April 30, 2014 The goal of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers. With this goal in mind, the Appraisal Standards Board (ASB) regularly solicits and receives comments and suggestions for improving USPAP. Proposed changes are intended to improve USPAP understanding and enforcement, and thereby achieve the goal of promoting and maintaining public trust in appraisal practice. The ASB is currently considering changes for the 2016-17 edition of USPAP. All interested parties are encouraged to comment in writing to the ASB before the deadline of June 2, 2014. Respondents should be assured that each member of the ASB will thoroughly read and consider all comments. Comments are also invited at the ASB public meeting on June 6, 2014, in Sacramento, California. Written comments on this exposure draft can be submitted by mail, email and facsimile. Mail: Email: Appraisal Standards Board The Appraisal Foundation 1155 15 th Street, NW, Suite 1111 Washington, DC 20005 asbcomments@appraisalfoundation.org Facsimile: (202) 347-7727 Second Exposure Draft of Changes for the 2016-17 USPAP 1

IMPORTANT NOTE: All written comments will be posted for public viewing, exactly as submitted, on the website of The Appraisal Foundation. Names may be redacted upon request. The Appraisal Foundation reserves the right not to post written comments that contain offensive or inappropriate statements. If you have any questions regarding the attached exposure draft, please contact Aida Dedajic, Standards Administrator at The Appraisal Foundation, via e-mail at aida@appraisalfoundation.org or by calling (202) 624-3058. Background The ASB s plan for the 2016-17 edition of USPAP includes reviewing and revising as needed the following areas of USPAP: Definition of Report Edits to eliminate confusion regarding report drafts Revisions to STANDARD 3 to enhance consistency with other Standards and to clarify the dates identified and reported Edits to eliminate confusion regarding confidentiality Other edits to improve clarity and enforceability of USPAP The ASB believes it is fulfilling its work plan and addressing the needs of appraisers and users of appraisal services by proposing the revisions contained in this Second Exposure Draft of proposed changes for the 2016-17 edition of USPAP. Of paramount importance to the Board when considering any potential revisions to USPAP is the issue of public trust in the appraisal profession. This umbrella of public trust, therefore, remains the primary consideration of the ASB in putting forth the concepts contained in this document. Each member of the Board will review each and every comment submitted in response to this exposure draft. Based on the feedback received, the Board will likely issue a Third Exposure Draft sometime after its public meeting in Sacramento in June. If that occurs, the Board will again solicit comments leading up to its third public meeting of the year which will be held in in October 2014 in Washington. And if necessary, the Board may elect to issue a Fourth Exposure Draft after that meeting, again soliciting feedback. The Board currently intends to adopt any revisions for the 2016-17 edition of USPAP at its public meeting in early 2015. Any such revisions to USPAP would become effective on January 1, 2016, and any updates related to USPAP course material should be available by fall 2015. Second Exposure Draft of Changes for the 2016-17 USPAP 2

Second Exposure Draft of Proposed Changes for the 2016-17 edition of the Uniform Standards of Professional Appraisal Practice Issued: April 30, 2014 Comment Deadline: June 2, 2014 Each section of this exposure draft begins with a rationale for the proposed changes to USPAP. The rationale is identified as such and does not have line numbering. Where proposed changes to USPAP are noted, the exposure draft contains line numbers. This difference is intended to distinguish for the reader those parts that explain the changes to USPAP from the proposed changes themselves. When commenting on various aspects of the exposure draft, it is very helpful to reference the line numbers, fully explain the reasons for concern or support, provide examples or illustrations, and suggest any alternatives or additional issues that the ASB should consider. Unless otherwise noted, where text is proposed to be deleted from USPAP, that text is shown as strikeout. For example: This is strikeout text proposed for deletion. Text that is proposed to be added to USPAP is underlined. For example: This is text proposed for insertion. For ease in identifying the various issues being addressed, the exposure draft is presented in sections. TABLE OF CONTENTS Section Issue Page 1 Proposed Revision to the Definition of Report 4 2 Proposed Revision Related to the Communication of Assignment Results 6 3 RECORD KEEPING RULE (Alternative approach) 13 4 Proposed Revisions to STANDARD 3 16 5 Consideration of Retirement of all STATEMENTS ON APPRAISAL STANDARDS 6 Proposed Revisions to the Confidentiality section of the ETHICS RULE 30 7 Other Confidentiality-related Revisions Under Consideration 33 8 Other USPAP Edits 34 26 Second Exposure Draft of Changes for the 2016-17 USPAP 3

Section 1: Proposed Revision to the Definition of Report RATIONALE In the First Exposure Draft, the ASB proposed revising the current definition of Report in the DEFINITIONS section of USPAP. Changes to the definition included the removal of linking a report to the completion of an assignment, the removal of the phrase written or oral and the addition of the phrase or other intended user, to account for parties beyond the client. As a result of the comments received, the ASB is continuing to propose changes to the current definition of Report. These changes include replacing the language that links a report to the completion of the assignment and the addition of language that indicates a report includes the communication of an appraisal or appraisal review to parties other than the client. Language in the Comment is also proposed for replacement with a reminder that oral reports must include a signed and dated certification in the workfile. The ASB is considering two options or proposals to address these issues. Each of the proposed revisions to the definition of report ultimately removes the linking of a report to the completion of an assignment. Alternative 1 represents minor refinements to the proposed revision in the First Exposure Draft. Based on comments received, language stating or party authorized by the client, is included in addition to the client, as part of the definition of Report. This is because there are situations where reports may be transmitted to an authorized party other than the client (such as another intended user, the client s attorney, or the client s financial advisor). With such cases in mind, the ASB believes this edit provides further clarification. Comments also indicated the need to add the phrase in lieu of, or in addition to, a written report to better reflect the intent of oral communications. Lastly, the separation of the types of written and oral communication through a numbered list is believed to improve clarity and understanding. Alternative 2 represents an alternative definition based on written and oral comments received. Under the Confidentiality section of the ETHICS RULE, an appraiser may not disclose confidential information or assignment results to anyone other than the client; persons specifically authorized by the client; state appraiser regulatory agencies; or authorized parties. Accordingly, this proposal simplifies the definition of Report and relies on the ETHICS RULE for disclosure requirements. This proposal also highlights that regardless of to whom an appraisal or appraisal review is communicated, the communication is subject to the reporting Standards when it includes a signed certification under this proposal. As stated in the First Exposure Draft, under the proposed definitions the communication of a portion of an appraiser s opinions or analyses performed as part of an appraisal or appraisal review assignment is not a report and not subject to reporting Standards unless it includes a signed certification. The ASB received many comments that emphasized the importance of such communications in complex assignments. These comments came from appraisers of all Second Exposure Draft of Changes for the 2016-17 USPAP 4

disciplines. When communicating portions of their opinions or analyses performed as part of an assignment, the appraiser must still comply with the ETHICS RULE, the COMPETENCY RULE and the JURISDICTIONAL EXCEPTION RULE. Each of the proposals in Section 2 of this exposure draft assumes the adoption of one of the following revisions to the definition of Report: Alternative 1 1 2 3 4 5 6 7 8 REPORT: 1) any written communication, written or oral, of an appraisal or appraisal review that is transmitted with a signed certification to the client or to a party authorized by the client; 2) any oral communication of an appraisal or appraisal review that is transmitted to the client or to a party authorized by the client in lieu of, or in addition to, a written report. Comment: Most reports are written and most clients mandate written reports. Oral report requirements (see the RECORD KEEPING RULE) specify that a signed and dated certification be included in the workfile. are included to cover court testimony and other oral communications of an appraisal or appraisal review. Alternative 2 9 10 11 12 13 14 REPORT: any communication, written or oral, of an appraisal or appraisal review with a signed certification. Comment: Most reports are written and most clients mandate written reports. Oral report requirements (see the RECORD KEEPING RULE) specify that a signed and dated certification be included in the workfile. are included to cover court testimony and other oral communications of an appraisal or appraisal review. Second Exposure Draft of Changes for the 2016-17 USPAP 5

Section 2: Proposed Revision Related to the Communication of Assignment Results GENERAL RATIONALE Over the last two USPAP revision cycles, the ASB has considered addressing the topics of draft reports, revised reports, and the various communications of assignment results that occur in many assignments. There are different perceptions among appraisers and users of appraisal services as to what is currently required in cases where these types of communications occur in an assignment. There are also very different opinions as to what the USPAP requirements should be regarding these communications. There is confusion and disagreement on issues such as: Draft reports, including USPAP permissibility and labeling Communications of assignment results during an assignment Record keeping requirements It is the intent of the ASB to eliminate the confusion and provide clear, enforceable requirements that will not restrict common practice. The ASB is considering two options or proposals to address these issues. These options are revised from the First Exposure Draft. Proposal 1 includes two new definitions, Report Draft and Interim Communication. Proposal 2 includes a new definition of Draft (one that differs from that of Report Draft). Proposal 1 and 2 also include proposed changes to the RECORD KEEPING RULE. All of the proposals discussed in this section assume that the definition of report will be revised as discussed in Section 1 of this exposure draft. Although not specified as an option, changing only the definition of Report and making no other changes related to the communication of assignment results is a possible scenario for the 2016-17 edition of USPAP. It is important for the readers to understand that whenever a word or term that is defined in USPAP is used within a proposed change to USPAP or within a discussion about a proposed change, its meaning is the specific USPAP definition. For example a reference to assignment results is not solely the value conclusion but an appraiser s opinions or conclusions developed specific to an assignment. Proposal 1 RATIONALE The ASB proposes new definitions for Report Draft and Interim Communication and revisions to the RECORD KEEPING RULE. Second Exposure Draft of Changes for the 2016-17 USPAP 6

Some stakeholders believe that the use of what is commonly referred to as drafts, draft reports, report drafts, and other such terms are not allowed by USPAP and that any communication of assignment results constitutes a report. Further, they believe that when assignment results are transmitted to a client or intended user(s) they must meet the USPAP requirements for a report, regardless of whether or not it is identified as a draft or similar preliminary work product. Others believe that the use of drafts, etc. or other interim communication of opinions or conclusions in an assignment is allowed, and because it is allowed as something other than a report, there are no USPAP requirements to comply with. Given the current USPAP definition of Report, a draft or interim communication is not a report because it is not delivered upon completion of an assignment. Some segments of the appraisal profession are strongly opposed to the use of drafts, while others frequently use them, particularly in complex appraisal assignments and some litigation matters. Some fear that recognizing drafts in USPAP might encourage some clients to shop for the appraiser who provides the most favorable results, while others fear prohibition of their use will inappropriately restrict client input into complex valuation issues until after a signed report is delivered, resulting in revisions of reports after they have been signed and transmitted to the client. The ASB has been reviewing this matter for several years and believes that report drafts and other interim communications of assignment opinions and conclusions may need to be addressed in USPAP, especially since appraiser regulatory agencies appear to be interpreting USPAP differently regarding what an appraiser s responsibilities are when issuing such communications. Some appraisers, when issuing a draft, clearly and conspicuously identify the report as a draft or use a similar label. Others simply send a signed or unsigned report, or a portion thereof, without any such label or notation. Must these drafts be retained in the workfile, or may they be disposed of? For enhancement of public trust, should USPAP include requirements for these types of communications that are currently being used by appraisers? The ASB is exposing a solution in which USPAP would define Report Draft and Interim Communication and detail how they may be utilized, transmitted to the client or intended users, and clarify the record keeping requirements. This requires the proposed change to the definition of Report, new definitions for Report Draft and Interim Communication, and revisions to the RECORD KEEPING RULE. The following new DEFINITION has been proposed for Report Draft: 15 16 17 REPORT DRAFT: any preliminary communication of an appraisal or appraisal review that does not include a signed certification, transmitted to the client or other parties authorized by the client. Second Exposure Draft of Changes for the 2016-17 USPAP 7

18 19 20 Comment: A report draft would comply with all USPAP requirements, except that it would not include a signed certification. A report draft must not be used by the appraiser for any purpose which would place the appraiser in violation of the ETHICS RULE. The following new DEFINITION has been proposed for Interim Communication: 21 22 23 24 INTERIM COMMUNICATION: any communication of some, but not all, of the assignment results in an appraisal or appraisal review assignment. Comment: An interim communication must not be used by the appraiser for any purpose which would place the appraiser in violation of the ETHICS RULE. The following edits to the RECORD KEEPING RULE are proposed as part of this solution: 25 26 27 28 29 30 RECORD KEEPING RULE An appraiser must prepare a workfile for each appraisal or appraisal review assignment. A workfile must be in existence prior to the issuance of any report. A written summary of an oral report must be added to the workfile within a reasonable time after the issuance of the oral report. The workfile must include: 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 the name of the client and the identity, by name or type, of any other intended users; true copies of any all written reports, documented on any type of media. (A true copy is a replica of the report transmitted to the client. A photocopy or an electronic copy of the entire report transmitted to the client satisfies the requirement of a true copy.); true copies of all written report drafts and interim communications, documented on any type of media, unless and until such communication is superseded by a report, report draft, or interim communication; Comment: Any report draft or interim communication must be prominently labeled as a report draft or interim communication respectively, and must include a clear and conspicuous notice that the results are not final and are subject to change. summaries of all oral reports or testimony, or a transcript of testimony, including the appraiser s signed and dated certification; summaries of all oral communications of assignment results transmitted to clients or other intended users, unless and until such communication is superseded by a report (written or oral), draft report, or interim communication; Second Exposure Draft of Changes for the 2016-17 USPAP 8

47 48 49 50 51 all other data, information, and documentation necessary to support the appraiser s opinions and conclusions and to show compliance with USPAP, or references to the location(s) of such other data, information, or documentation; and a workfile in support of a Restricted Appraisal Report must be sufficient for the appraiser to produce an Appraisal Report. 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 An appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last. An appraiser must have custody of the workfile, or make appropriate workfile retention, access, and retrieval arrangements with the party having custody of the workfile. This includes ensuring that a workfile is stored in a medium that is retrievable by the appraiser throughout the prescribed record retention period. An appraiser having custody of a workfile must allow other appraisers with workfile obligations related to an assignment appropriate access and retrieval for the purpose of: submission to state appraiser regulatory agencies; compliance with due process of law; submission to a duly authorized professional peer review committee; or compliance with retrieval arrangements. Comment: A workfile must be made available by the appraiser when required by a state appraiser regulatory agency or due process of law. An appraiser who willfully or knowingly fails to comply with the obligations of this RECORD KEEPING RULE is in violation of the ETHICS RULE. Proposal 2 RATIONALE Concern from stakeholders was apparent from the many comments received both prior to and after exposure drafts issued in advance of the 2014-15 edition of USPAP. The major comments included the need to provide a more definitive means of determining when an assignment is complete (and from whose standpoint), and the ongoing concern in the areas of appraisal practice where interim communications (aka, preliminary reports, draft reports, report drafts, etc.) are issued to the client. In response to the concerns raised, the ASB is proposing the revised definition of Report, as well as a new definition of Draft. The following is the proposed DEFINITION of Draft: Second Exposure Draft of Changes for the 2016-17 USPAP 9

69 70 71 DRAFT: any preliminary communication of assignment results in an appraisal or appraisal review assignment that does not include a signed certification, made to the client or other parties authorized by the client. Comment: A draft may include all or part of the assignment results. A draft might not comply with all USPAP requirements and must not include a signed certification. A draft must not be used by the appraiser for any purpose which would place the appraiser in violation of the ETHICS RULE. The RECORD KEEPING RULE presently requires true copies of any written reports, documented on any type of media. (A true copy is a replica of the report transmitted to the client. A photocopy or an electronic copy of the entire report transmitted to the client satisfies the requirement of a true copy.) Since the RECORD KEEPING RULE is linked closely to the report, corresponding revisions are proposed to the Rule to address both the revisions to the definition of report and the addition of draft. The RECORD KEEPING RULE lacks specificity with regard to revisions to assignment results communicated to intended users. For example, there have been instances where there were two appraisal reports on the same property completed by the same appraiser and submitted to the client, with the same effective and report dates, but different value conclusions. It is not unusual for the appraiser to claim that one of the reports did not represent the end of the assignment, and was not the final report, although it included a signed and dated certification. This type of communication has been referred to as a draft, an interim report, etc. This type of scenario has raised, for example, issues from an enforcement standpoint, as well as questions as to the validity of such products In other instances, a portion of an appraiser s work (an opinion which may or may not include a value indication) has been submitted to a client in an ongoing assignment for confirmation of information, preliminary analysis to help the client/intended user in decision making, etc. Depending upon the intended use and intended users, there has been support for requiring appraisers to retain copies of all such communications. In other instances, such as litigation, retention of such communication has proven problematic. Appraiser independence is of the utmost importance in an assignment. The ASB feels that independence will be enhanced by putting workfile retention requirements on written communications of assignment results transmitted to the clients or other intended users, as well as written drafts transmitted to clients or other intended users, unless and until such communication or draft is superseded by a report or other subsequent communication, or a draft or report. The retention requirement, as proposed in this exposure draft, does not prohibit the appraiser from retaining all copies of reports and subsequent communication, or drafts. While there are advantages of short-term retention of earlier communications that are superseded by subsequent reports, drafts, or communications, there are also some potential problems. These problems, again, are dependent upon the intended use and intended users of the assignment. The ASB is Second Exposure Draft of Changes for the 2016-17 USPAP 10

further proposing appropriate disclosure of any draft that is transmitted to a client. Any such draft must be prominently labeled as such and must include a clear and conspicuous notice that the results are not final and are subject to change. Proposed revisions to the RECORD KEEPING RULE under Proposal 2 are as follows: 72 73 74 75 76 77 RECORD KEEPING RULE An appraiser must prepare a workfile for each appraisal or appraisal review assignment. A workfile must be in existence prior to the issuance of any report. A written summary of an oral report must be added to the workfile within a reasonable time after the issuance of the oral report. The workfile must include: 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 the name of the client and the identity, by name or type, of any other intended users; true copies of any all written reports, documented on any type of media. (A true copy is a replica of the report transmitted to the client. A photocopy or an electronic copy of the entire report transmitted to the client satisfies the requirement of a true copy.); true copies of all written drafts transmitted to clients or other intended users, documented on any type of media, unless and until such draft is superseded by a subsequent draft or report; Comment: Any draft transmitted to a client must be prominently labeled as such and must include a clear and conspicuous notice that the results are not final and are subject to change. summaries of all oral reports or testimony, or a transcript of testimony, including the appraiser s signed and dated certification; summaries of all oral communications of assignment results transmitted to clients or other intended users, unless and until such communication is superseded by a report (written or oral) or other subsequent communication; all other data, information, and documentation necessary to support the appraiser s opinions and conclusions and to show compliance with USPAP, or references to the location(s) of such other data, information, or documentation; and a workfile in support of a Restricted Appraisal Report must be sufficient for the appraiser to produce an Appraisal Report. 98 99 100 An appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last. Second Exposure Draft of Changes for the 2016-17 USPAP 11

101 102 103 104 105 106 107 108 109 110 111 112 113 114 An appraiser must have custody of the workfile, or make appropriate workfile retention, access, and retrieval arrangements with the party having custody of the workfile. This includes ensuring that a workfile is stored in a medium that is retrievable by the appraiser throughout the prescribed record retention period. An appraiser having custody of a workfile must allow other appraisers with workfile obligations related to an assignment appropriate access and retrieval for the purpose of: submission to state appraiser regulatory agencies; compliance with due process of law; submission to a duly authorized professional peer review committee; or compliance with retrieval arrangements. Comment: A workfile must be made available by the appraiser when required by a state appraiser regulatory agency or due process of law. An appraiser who willfully or knowingly fails to comply with the obligations of this RECORD KEEPING RULE is in violation of the ETHICS RULE. Second Exposure Draft of Changes for the 2016-17 USPAP 12

Section 3: RECORD KEEPING RULE (Alternative Approach) RATIONALE The ASB is proposing changes to the RECORD KEEPING RULE that require retention of all communications of assignment results, in whatever form or format, for assignments that involve Real Estate Related Financial Transactions. These changes could be implemented whether or not changes are made to the definition of Report as proposed in Section 1, or whether or not either of the proposals in Section 2 are adopted. Many appraisers have expressed concerns about the use of draft reports, report drafts, and other communications of assignment results, however they may be defined. Residential appraisers have expressed specific concerns about the potential for abuse of drafts. Regulators have expressed concerns about the absence of a recordkeeping requirement for drafts and other communications. Retention of these communications is not currently required if they are made prior to the completion of the assignment as they are not reports per the current USPAP definition. This proposal attempts to address these issues by creating different USPAP recordkeeping requirements for Real Estate Related Financial Transactions, as compared to other assignments. The difference in requirements would be to require copies of all communications of assignment results in the workfile. Assignment results in this context would also include any of the proposed new definitions of report draft, interim communications, and draft as all three entail a communication of assignment results. The proposed changes to the RECORDKEEPING RULE follow. Depending on the possible adoption of Proposal 1 or 2, additional edits to what is proposed below would be required to include the terms Report Draft and Interim Communication. If Proposal 2 were adopted, the wording would be changed to include drafts. In order to put the changes in context, a Real Estate Related Financial Transaction is defined as: any transaction involving: The sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof; The refinancing of real property or interests in real property; or The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities. While it is cited in numerous regulations, one of the more recent citations of this definition is in the Federal Register / Vol. 75, No. 237 / December 10, 2010 which pertains to the Interagency Appraisal and Evaluation Guidelines. It also appears in Title XI of FIRREA as amended by Second Exposure Draft of Changes for the 2016-17 USPAP 13

Dodd-Frank at 12 U.S.C. 3350, a source most appraisers, regulators, and users of appraisal services likely recognize. The definition of Real Estate Related Financial Transaction will either be incorporated within USPAP by reference and footnote or as a new definition. The proposed changes to the RECORDKEEPING RULE follow. 115 116 117 118 119 120 RECORD KEEPING RULE An appraiser must prepare a workfile for each appraisal or appraisal review assignment. A workfile must be in existence prior to the issuance of any report. A written summary of an oral report must be added to the workfile within a reasonable time after the issuance of the oral report. The workfile must include: 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 the name of the client and the identity, by name or type, of any other intended users; true copies of any all written reports, documented on any type of media. (A true copy is a replica of the report transmitted to the client. A photocopy or an electronic copy of the entire report transmitted to the client satisfies the requirement of a true copy.); for appraisal or appraisal review assignments prepared for Real Estate Related Financial Transactions, true copies of all written communications of assignment results transmitted to clients or other parties authorized by the client, without exception; for appraisal or appraisal review assignments not prepared for Real Estate Related Financial Transactions, true copies of all written communications of assignment results transmitted to clients or other parties authorized by the client, documented on any type of media, unless and until such communication is superseded by a report or other subsequent communication; summaries of all oral reports or testimony, or a transcript of testimony, including the appraiser s signed and dated certification; summaries of all oral communications of assignment results transmitted to clients or other parties authorized by the client, unless and until such communication is superseded by a report (written or oral) or other subsequent communication, except for appraisal or appraisal review assignments prepared for Real Estate Related Financial Transactions; for appraisal or appraisal review assignments prepared for Real Estate Related Financial Transactions, summaries of all oral communications of assignment results transmitted to clients or other parties authorized by the client, without exception; all other data, information, and documentation necessary to support the appraiser s opinions and conclusions and to show compliance with USPAP, or references to the location(s) of such other data, information, or documentation; and Second Exposure Draft of Changes for the 2016-17 USPAP 14

145 146 a workfile in support of a Restricted Appraisal Report must be sufficient for the appraiser to produce an Appraisal Report. 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 An appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last. An appraiser must have custody of the workfile, or make appropriate workfile retention, access, and retrieval arrangements with the party having custody of the workfile. This includes ensuring that a workfile is stored in a medium that is retrievable by the appraiser throughout the prescribed record retention period. An appraiser having custody of a workfile must allow other appraisers with workfile obligations related to an assignment appropriate access and retrieval for the purpose of: submission to state appraiser regulatory agencies; compliance with due process of law; submission to a duly authorized professional peer review committee; or compliance with retrieval arrangements. Comment: A workfile must be made available by the appraiser when required by a state appraiser regulatory agency or due process of law. An appraiser who willfully or knowingly fails to comply with the obligations of this RECORD KEEPING RULE is in violation of the ETHICS RULE. Second Exposure Draft of Changes for the 2016-17 USPAP 15

Section 4: Proposed Revisions to STANDARD 3 RATIONALE In its First Exposure Draft, the ASB addressed three issues in STANDARD 3. The Board continues to propose changes to address those issues. First, it has been brought to the attention of the ASB that several items are addressed differently in STANDARD 3 then they are in other Standards. In the First Exposure Draft, the differences for a certification in an oral Appraisal Review Report were discussed, as well as the fact that although Standards Rules 2-2 (a)(xii), 8-2 (a)(xii), and 10-2 (a)(xii) require that the Appraisal Report include a signed certification in accordance with Standards Rules 2-3, 8-3, and 10-3 respectively, there is no corresponding certification requirement in Standard 3-5. Second, the Comment to Standards Rules 2-2 and 8-2 both address report forms; however, there is no equivalent language in STANDARD 3, although report forms are quite commmonly used in appraisal review assignments. The third change that was proposed is to Standards Rule 3-2(d) to bring both the context and requirements parallel to STANDARD 1 (or STANDARDS 7 or 9) by requiring that the property rights appraised (if any) in the work under review be identified by the review appraiser. In addition to those issues, this Second Exposure Draft addresses concerns and questions raised relating to the effective date of an appraisal review. STANDARD 3 requires that the reviewer identify and report the date of the work under review; the effective date of the opinions or conclusions in the work under review; and the effective date of the appraisal review; and disclose the date of the appraisal review report. The ASB has received numerous questions about the various dates and has taken a closer look at the rationale for requiring the dates. Most of these questions have related to identifying the appropriate effective date for the appraisal review. The ASB is now asking several questions including: Why must the appraiser performing the review identify and report these dates? Is the effective date of the appraisal review needed if the other three dates are stated? A. Date of the work under review establishes the context in which the work under review should be judged including the edition of USPAP that was in effect at the time the work was completed B. Effective date of the opinions or conclusions in the work under review establishes the date that the opinions or conclusions apply. The effective date of the work under review and the date of the work under review establish the perspective from which the work under review was performed (i.e., contemporaneous, respective, or prospective). C. Date of the appraisal review report establishes the date that the results of the appraisal review are communicated to the client. This establishes the context in which the appraisal review should be judged and determines the edition of USPAP that applies to the appraisal review assignment. Second Exposure Draft of Changes for the 2016-17 USPAP 16

It has become apparent that the date of the work under review and the effective date of the work under review are the dates needed. The date of the appraisal review report is necessary to establish the review s perspective. The effective date of the appraisal review has added confusion and does not appear to be necessary in an appraisal review assignment. Therefore, the ASB is proposing deletion of the requirement to identify and report the effective date of an appraisal review. These proposed changes to STANDARD 3 appear in the following: 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 STANDARD 3: APPRAISAL REVIEW, DEVELOPMENT AND REPORTING In developing an appraisal review assignment, an appraiser acting as a reviewer must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analyses necessary to produce a credible appraisal review. In reporting the results of an appraisal review assignment, an appraiser acting as a reviewer must communicate each analysis, opinion, and conclusion in a manner that is not misleading. Comment: STANDARD 3 is directed toward the substantive aspects of developing a credible opinion of the quality of another appraiser s work that was performed as part of an appraisal or appraisal review assignment. STANDARD 3 also addresses the content and level of information required in a report that communicates the results of an appraisal review assignment. STANDARD 3 does not dictate the form, format, or style of Appraisal Review Reports. The substantive content of a report determines its compliance. In this Standard, the term reviewer is used to refer to an appraiser performing an appraisal review. Standards Rule 3-1 In developing an appraisal review, the reviewer must: 182 183 184 185 186 187 188 189 190 191 192 193 194 195 (a) be aware of, understand, and correctly employ those methods and techniques that are necessary to produce a credible appraisal review; Comment: Changes and developments in economics, finance, law, technology, and society can have a substantial impact on the appraisal profession. To keep abreast of these changes and developments, the appraisal profession is constantly reviewing and revising appraisal methods and techniques and devising new methods and techniques to meet new circumstances. Each appraiser must continuously improve his or her skills to remain proficient in appraisal review. The reviewer must have the knowledge and experience needed to identify and perform the scope of work necessary to produce credible assignment results. Aspects of competency for an appraisal review, depending on the review assignment s scope of work, may include, without limitation, familiarity with the specific type of property or asset, market, geographic area, analytic method, and applicable laws, regulations and guidelines. Second Exposure Draft of Changes for the 2016-17 USPAP 17

196 197 198 199 200 201 202 203 204 205 206 207 208 209 (b) (c) not commit a substantial error of omission or commission that significantly affects an appraisal review; and Comment: A reviewer must use sufficient care to avoid errors that would significantly affect his or her opinions and conclusions. Diligence is required to identify and analyze the factors, conditions, data, and other information that would have a significant effect on the credibility of the assignment results. not render appraisal review services in a careless or negligent manner, such as making a series of errors that, although individually might not significantly affect the results of an appraisal review, in the aggregate affects the credibility of those results. Comment: Perfection is impossible to attain, and competence does not require perfection. However, an appraiser must not render appraisal review services in a careless or negligent manner. This Standards Rule requires a reviewer to use due diligence and due care. 210 211 Standards Rule 3-2 In developing an appraisal review, the reviewer must: 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 (a) (b) (c) (d) identify the client and other intended users; identify the intended use of the reviewer s opinions and conclusions; Comment: A reviewer must not allow the intended use of an assignment or a client s objectives to cause the assignment results to be biased. A reviewer must not advocate for a client s objectives. The intended use refers to the use of the reviewer s opinions and conclusions by the client and other intended users; examples include, without limitation, quality control, audit, qualification, or confirmation. identify the purpose of the appraisal review, including whether the assignment includes the development of the reviewer s own opinion of value or review opinion related to the work under review; Comment: The purpose of an appraisal review assignment relates to the reviewer s objective; examples include, without limitation, to determine if the results of the work under review are credible for the intended user s intended use, or to evaluate compliance with relevant USPAP requirements, client requirements, or applicable regulations. In the review of an appraisal assignment, the reviewer may provide an opinion of value for the property that is the subject of the work under review. In the review of an appraisal review assignment, the reviewer may provide an opinion of quality of the work that is the subject of the appraisal review assignment. identify the work under review and the characteristics of that work which are relevant to the intended use and purpose of the appraisal review, including: Second Exposure Draft of Changes for the 2016-17 USPAP 18

233 234 235 236 237 238 239 240 (i) (ii) (iii) (iv) the any ownership interest appraised, if any, in the property that is the subject of the work under review; the date of the work under review and the effective date of the opinions or conclusions in the work under review; the appraiser(s) who completed the work under review, unless the identity is withheld by the client; and the physical, legal, and economic characteristics of the property, properties, property type(s), or market area in the work under review. 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 (e) (fe) (gf) (hg) Comment: The subject of an appraisal review assignment may be all or part of a report, a workfile, or a combination of these, and may be related to an appraisal or appraisal review assignment. identify the effective date of the reviewer s opinions and conclusions; identify any extraordinary assumptions necessary in the review assignment; Comment: An extraordinary assumption may be used in a review assignment only if: it is required to properly develop credible opinions and conclusions; the reviewer has a reasonable basis for the extraordinary assumption; use of the extraordinary assumption results in a credible analysis; and the reviewer complies with the disclosure requirements set forth in USPAP for extraordinary assumptions. identify any hypothetical conditions necessary in the review assignment; and Comment: A hypothetical condition may be used in a review assignment only if: use of the hypothetical condition is clearly required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison; use of the hypothetical condition results in a credible analysis; and the reviewer complies with the disclosure requirements set forth in USPAP for hypothetical conditions. determine the scope of work necessary to produce credible assignment results in accordance with the SCOPE OF WORK RULE. Comment: Reviewers have broad flexibility and significant responsibility in determining the appropriate scope of work in an appraisal review assignment. Information that should have been considered by the original appraiser can be used by the reviewer in developing an opinion as to the quality of the work under review. Information that was not available to the original appraiser in the normal course of business may also be used by the reviewer; however, the reviewer must not use such Second Exposure Draft of Changes for the 2016-17 USPAP 19

267 268 269 270 271 information in the reviewer s development of an opinion as to the quality of the work under review. Standards Rule 3-3 In developing an appraisal review, a reviewer must apply the appraisal review methods and techniques that are necessary for credible assignment results. 272 273 (a) When necessary for credible assignment results in the review of analyses, opinions, and conclusions, the reviewer must: 274 275 276 277 278 (i) (ii) (iii) develop an opinion as to whether the analyses are appropriate within the context of the requirements applicable to that work; develop an opinion as to whether the opinions and conclusions are credible within the context of the requirements applicable to that work; and develop the reasons for any disagreement. 279 280 281 282 283 284 (b) Comment: Consistent with the reviewer s scope of work, the reviewer is required to develop an opinion as to the completeness, accuracy, adequacy, relevance, and reasonableness of the analysis in the work under review, given law, regulations, or intended user requirements applicable to the work under review. When necessary for credible assignment results in the review of a report, the reviewer must: 285 286 287 288 (i) (ii) develop an opinion as to whether the report is appropriate and not misleading within the context of the requirements applicable to that work; and develop the reasons for any disagreement. 289 290 291 292 293 294 295 296 297 (c) Comment: Consistent with the reviewer s scope of work, the reviewer is required to develop an opinion as to the completeness, accuracy, adequacy, relevance, and reasonableness of the report, given law, regulations, or intended user requirements applicable to that work. When the scope of work includes the reviewer developing his or her own opinion of value or review opinion, the reviewer must comply with the Standard applicable to the development of that opinion appraisal review scope of work includes the reviewer developing his or her own opinion of value or review opinion, the following apply; 298 299 300 301 The reviewer s scope of work in developing his or her own opinion of value or review opinion may be different from that of the work under review. The effective date of the reviewer s appraisal may be the same or different from the effective date of the work under review. Second Exposure Draft of Changes for the 2016-17 USPAP 20

302 303 304 305 306 (i) (ii) The requirements of STANDARDS 1, 6, 7, and 9 apply to the reviewer s opinion of value for the property that is the subject of the appraisal review assignment. The requirements of STANDARD 3 apply to the reviewer s opinion of quality for the work that is the subject of the appraisal review assignment. 307 308 309 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 Comment: These requirements apply to: The reviewer s own opinion of value when the subject of the review is the product of an appraisal assignment; or The reviewer s own opinion regarding the work reviewed by another when the subject of the review is the product of an appraisal review assignment. These requirements apply whether the reviewer s own opinion: concurs with the opinions and conclusions in the work under review; or differs from the opinion and conclusions in the work under review. When the appraisal review scope of work includes the reviewer developing his or her own opinion of value or review opinion, the following apply: The reviewer s scope of work in developing his or her own opinion of value or review opinion may be different from that of the work under review. The effective date of the appraisal or appraisal review may be the same or different from the effective date of the work under review. The reviewer is not required to replicate the steps completed by the original appraiser. Those items in the work under review that the reviewer concludes are credible can be extended to the reviewer s development process on the basis of an extraordinary assumption. Those items not deemed to be credible must be replaced with information or analysis developed in conformance with STANDARD 1, 3, 6, 7, or 9, as applicable, to produce credible assignment results. Standards Rule 3-4 Each written or oral Appraisal Review Report must be separate from the work under review and must: 331 332 333 334 335 336 (a) (b) (c) clearly and accurately set forth the appraisal review in a manner that will not be misleading; contain sufficient information to enable the intended users of the appraisal review to understand the report properly; and clearly and accurately disclose all assumptions, extraordinary assumptions, and hypothetical conditions used in the assignment. Second Exposure Draft of Changes for the 2016-17 USPAP 21