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Managing Exposure in the Face of HUD Reforms

The Department of Housing and Urban Development ("HUD") indicates that its newly implemented Homebuyer Protection Plan is designed to increase consumer confidence by re-vamping the FHA appraisal process. Moreover, HUD claims the reforms do not impose additional responsibilities upon the appraiser, but simply clarify what the appraiser should have been doing all along. Appraisers across the nation would disagree. Not only do the new requirements increase accountability, but they also ask the appraiser to make judgments for which he may not be trained.

Such requirements certainly cause concern from a liability standpoint, particularly regarding the completion of the Valuation Conditions ("VC") form. At this point, it would be premature to state that the HUD reforms will result in increased claims against appraisers; it can take as long as three years to determine the effects of changes in the industry on appraiser litigation. However, given the scope of the changes, it would be prudent to practice the following basic tenants of loss prevention:

Educate Yourself

In order to complete a FHA appraisal properly, you will need to be well versed in the new requirements. Secure a copy of the Appraisal Handbook 4150.2 - Valuation Analysis for Home mortgage insurance for Single Family One-to-Four-Unit Dwellings. The Handbook provides step-by-step instructions for completing the Uniform Residential Appraisal Report (URAR), VC form, and Homebuyers Summary. The Handbook and applicable forms may be downloaded from the HUD Website at

Numerous seminars providing instruction in the use of the forms are being conducted across the country. If you have not already attended such a seminar, prepare to do so. Contact the Appraisal Institute for information on their seminar "The FHA`s Homebuyer Protection Plan and the Appraisal Process". Check with other professional associations to which you belong for similar programs.

It's also important to stay current. Inevitably, some of the requirements will change or be updated.

Verify Information

The new VC form will undoubtedly take more time to complete. Although it will be tempting to cut corners and rely on information provided by others, resist this temptation! In order to limit your liability exposure, it is important to verify such information, despite how reliable it may seem.

For example, VC-4 Well, Individual Water Supply and Septic requires the appraiser to indicate if the property is equipped with a well. If so, the appraiser must determine whether connection to a public system is feasible. The appraiser should never rely upon the information provided by the property owner in this situation, but should seek proper verification from the City or County records.

Know Your Limitations

Do not undertake an assignment that is beyond your level of expertise. This may be the case if you do not fully understand the new forms and Handbook. The new requirements are designed to ensure greater accountability associated with FHA appraisals, and getting in over your head could have disastrous consequences.

Make sure you are familiar with the area where the property is located. VC-2 Soil Contamination asks the appraisers to note the proximity of the subject property to dumps, landfills, industrial sites, or other sites that could contain hazardous waste. It is difficult to make an accurate determination if you are not familiar with the area.

As part of the reform process, the FHA requires the homebuyer to sign a consumer protection notice entitled "For Your Protection: Get a Home Inspection". Although this notice may help clear up public confusion about the difference between an appraisal and a home inspection, do not rely on this! If, during the course of the appraisal, you determine you are not competent to provide the information requested in the VC form, recommend a professional trained in that arena, such as a home inspector or environmental assessor. Be sure to make your recommendation in writing.

"Scope of Work Clarification"

Consider adding additional language to qualify the information provided, and clarify intent, in the comments section, or under a "Scope of Work" section in the appraisal report addendum. Always try to discuss these issues personally with your client before completing the appraisal. If this is not possible, send the addendum to the client with a cover letter indicating the additional language will be attached to the appraisal, and advise the client to contact you with any questions or concerns. If the client, at some later date, tries to argue that the additional language are merely "boilerplate" language, you will be able to point to the letter in file and ask why he did not question the language earlier if they were problematic.

The verbiage of the addendum should mirror that used by the FHA in the new guidelines. Some sample additional language to consider would include:

This appraisal is not a home inspection and the appraiser is not acting as a home inspector when preparing the report. The borrower has the right to have the home inspected by a professional home inspector;

When performing the inspection of this property, the appraiser visually observed areas that were readily accessible. The appraiser is not required to disturb or move anything that obstructs access or visibility;

When completing the appraisal, a visual inspection was done in accordance with FHA guidelines. The inspection is not technically exhaustive. The inspection does not offer warranties or guarantees of any kind.

Document Your File

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Page 4 of the VC form allows for Comments - USE IT! The new form has several "gray" areas that demand further explanation. For example, VC-7 Structural Conditions asks the appraiser to indicate "significant" water damage. What is "significant" as opposed to "insignificant"?

If you feel uncomfortable about simply answering "yes" or "no" to any questions, you should also use the Comments section to further clarify and substantiate your findings. Such documentation can aid in your defense should you be served with a lawsuit.

As mentioned earlier, liability claims against appraisers typically arise 18 to 36 months after the appraisal was completed. As such, we won`t understand the impact of the FHA reforms for quite some time. Nevertheless, we are able to foresee areas of potential exposure. By practicing a few basic loss control techniques, you may be able to avoid costly litigation.

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