Equal opportunity
Are AMCs as vulnerable to liability as appraisers?
The business of appraisal management
has matured enough in the past 10 years
that we can see clear patterns of liability
risk for appraisal management companies.
Those patterns show us that appraisers and
AMC operators are in the same position when
it comes to defending themselves against
lawsuits, and I tell them they need to put
aside their other differences when facing a
legal quagmire.
It may come as a surprise to appraisers —
and even to some AMC operators — that
AMCs get sued. AMCs don't escape liability
simply because the appraisals are performed
by independent contractors; AMCs have their
own legal responsibilities and "standards of
care." In a few cases, the courts have viewed
an AMC's liability just like that of a true
appraisal firm, meaning the AMC was viewed
as an appraisal firm that uses contractors rather
than employees and therefore was fully liable
for the appraisal work product.
More often, however, parties suing an AMC
persuasively point to state appraisal management
laws and industry practices as creating a
standard of care for the AMC — the violation
of which can serve as the basis for a negligence
claim. Plaintiffs, in particular, point to the
common language in many state laws obligating
AMCs to ensure, or at least have a process
in place designed to ensure, that appraisals are
performed in compliance with the Uniform Standards of Professional Appraisal Practice.
Accordingly, AMCs are sued by lenders, borrowers,
sellers and myriad other parties, and
sometimes sued right alongside the appraiser.
An AMC's biggest
liability risk — by a
wide margin — is its
exposure to claims by
lending clients that
seek to hold AMCs
responsible for loan
losses attributed to
deficient appraisals.
An AMC's biggest liability risk — by a wide
margin — is its exposure to claims by lending
clients that seek to hold AMCs responsible
for loan losses attributed to deficient appraisals.
A growing trend involves lenders making
claims not just over losses relating to loans in
default, but also in relation to mortgage repurchases
on performing loans. The trend is
attributed to increased auditing by Fannie Mae
of appraisals on current loans. When Fannie
Mae observes an appraisal deficiency in violation
of its loan-selling guidelines, it may force
the originating lender to repurchase that loan.
Some lenders then look to the AMC to be
made whole for any loss connected with the
mortgage repurchase.
Two common elements have popped up in
larger claims that are more difficult to defend.
The first is a failure of some defendant AMCs
to appreciate that when a professional appraisal
service such as a desktop review is commoditized
into an inexpensive "product" with a
quick turnaround, the same level of liability
still attaches to the service as if it were performed
on a non-commoditized basis. In other
words, the conclusions and certifications in the
report aren't diminished, and the AMC's representations,
warranties and indemnification
responsibilities don't disappear just because the
service is a $75 check-a-box review.
Another common element that's been
observed across multiple claims is the selection
of appraisers who clearly are not competent
to handle certain assignments. In those situations,
the biggest competency problems are
related to commercial appraisals and properties
outside of the experience of the panel appraiser, such as vacant development land or
agricultural properties.
Lender claims present a bigger risk to
AMCs, in general, than do claims from other
sources because of the potential severity in the
amount of a claimed loss. A single claim by
a lender may involve losses on dozens of
problem loans for which an AMC managed
appraisals, resulting in a multimillion-dollar
claim against the AMC.
Prudent risk management for AMCs involves
consistently executing an appraisal quality control
and review program that’s designed to ensure clients
receive compliant and credible valuations.
Prudent risk management for AMCs
involves consistently executing an appraisal
quality control and review program that’s
designed to ensure clients receive compliant
and credible valuations. Even then, however,
some appraisals will be submitted that lenders
will later claim to be deficient in the event
of a mortgage default or a repurchase. For
these essentially uncontrollable risks, an AMC
needs to be prudent with its lender service
agreement because many legal duties owed
by an AMC to its clients remain contractual.
In its service agreements, an AMC should pay
special attention to:
- Representations and warranties with respect
to compliance of appraisals with USPAP or
GSE guidelines.
- Overly broad indemnification obligations in
favor of the lender that go beyond the
defense of third-party claims.
Some lenders — especially several of the
largest — seek to push AMCs to accept financial
responsibility "for any and all losses in
any way related to" the managed appraisals,
regardless of whether the issues are within the
AMC’s control. There are not many AMCs
that have the financial wherewithal to back up
promises like those.
This article originally appeared in, and is reprinted from, the Appraisal Institute's Valuation (2nd Quarter, 2016). © 2016 by the Appraisal Institute, Chicago, Illinois. Archives of Valuation magazine, including Peter's past columns, are available at http://www.appraisalinstitute.org/publications/valuation-magazine/