Appraisal Management Liability
September 12, 2012
Peter T. Christensen
Attorney
and
General Counsel to
LIA Administrators & Insurance Services
800-334-0652
A Note About the Cases Discussed
All of the cases discussed today are matters of public record, and I have not deleted the parties’ names from most of the cases. Keep
in mind that lawsuits often contain allegations which the claimant cannot support either legally or factually. Also, many AMCs and
appraisers are currently affected by litigation.
The cases discussed here do not concern any parties who are currently insured by LIA Administrators & Insurance Services or
Webinar Agenda
• Overview of appraisal management claims. • Status of important AMC cases:
NY v. eAppraiseIT and FDIC cases. • A look at typical cases against AMCs:
Borrower cases and Lender cases.
• Scariest new appraisal management liability development: Borrower class action against defendant appraiser class. • Do AMCs sue appraisers?
• How small appraisal firms get dragged into AMC-type litigation. • Reducing appraisal management liability risk.
• Claims about AVMs and BPOs.
• How does Dodd-Frank affect AMC liability risk? • Questions and answers.
Webinar Materials
Full copies of the legal documents discussed today can be found
at:
On that page, you will also find: • LIA’s Risk Report
March 2012 – “AMC Special Issue.”
• A link to the State Issues section of the Appraisal Institute’s State website which provides a free listing of current and pending state AMC laws and regulations.
Recent Appraisal Management Legal Questions
• AMC: “We don’t have to register as an AMC in [XYZ states] if we farm out our orders in those states to another AMC. Right?”
• Commercial AMC: “We’re not registered as an AMC in any state because we only handle the ordering of commercial appraisals.”
• AMC: “My correspondent lending client would be happier if fewer appraisals we deliver to them came in below the number they need. Can we give appraisers the loan amount and LTV? Can we tell them what the client says the property is worth?”
Recent Appraisal Management Legal Questions
• AMC: “Will my panel appraisers’ E&O cover our liability on reps and warrants to the lender in our service agreements.”
• Appraiser: “The FDIC’s complaint against [LSI or CoreLogic] says I overvalued a property and blames an $xxx,000 loan loss on my appraisal. [ABC AMC] has used me for retrospective appraisals for the FDIC. They sent me an order for a retrospective appraisal of the same property I appraised in the FDIC’s lawsuit. Should I take the assignment?”
Overview of Appraisal Management Liability
Who are the principle parties suing AMCs?
• Borrowers
• Lender clients
• Appraisers and other AMCs
• FDIC
• But not mortgage investors, GSEs or FHFA What are they suing or threatening to sue about?
• Allegedly inflated appraisals (2003-2008)
• Appraisal quality issues/defects
• Appraiser selection
• Appraisal is “too low” (2010-2012)
• Blacklisting of appraisers
• AVMs and BPOs
Overview of Appraisal Management Liability
What are the primary legal claims pursued with respect to appraisal-related claims against AMCs?
• Negligence (duty, violation of standard of care/duty, causation and damages)
• Breach of contract
• Intentional fraud
• Conspiracy
How common and significant are appraisal-related claims against AMCs?
• 7 of the 10 largest AMCs have had significant litigation pending in 2012 (beyond the nuisance level)
• 1 case settled in 2012 for $75 million
• At least 3 presently pending cases involve alleged damages > $100 million
Both AMCS and Appraisers
Are Fortunate – that so Little
Actual and Potential Liability
Has Trickled Down to Them
What Does Trickle Down?
• In 2011, lawsuits were filed against residential appraisers and AMCs demanding an estimated $750 million in total alleged damages, almost all allegedly stemming from appraisals delivered in 2003-2008. A record claims year. • At the conclusion of these cases (most are still pending),
however, I would expect less than $150 million to be paid in damages and defense costs.
• That’s not much compared to worst the case scenario (but is significantly more than collectively paid for professional
liability insurance by AMCs and appraisers).
Why Does So “Little” Liability Trickle Down?
• With respect to AMC liability, most appraisals in the dangerous time frame were performed directly by appraisers for lenders or mortgage brokers. As a result, there are relatively few AMC targets.
• Securitizations make filing small individual claims against appraisers and AMCs difficult. Mortgage investors have a very difficult time filing small individual claims.
• Lenders have bigger and voluminous other legal problems. (And, if they can’t find the notes, they can’t find the appraisals either.)
• I would expect the claim numbers against AMCs to be much different in a similar future cycle because of the recent prevalence of AMCs in residential lending appraisals and the extensive reps/warrants now made by many AMCs to many lenders.
Update: NY Attorney General v. eAppraiseIT
On 11/22/11, NY’s highest appellate court upheld denial of the AMC’s motion to dismiss argued based on federal
preemption of appraisal functions performed for or within federally regulated lenders.
5 years after its filing, the case is now being tried to a judge – a few days at a time.
Sometimes difficult to convince court that an AMC’s liability is
different than
appraiser’s (FDIC’s law firm analogy).
Common AMC mistake: simply referring issue to appraiser.
Typical Borrower
Lawsuit Against AMC
Individual borrower typically sues the AMC as if the AMC itself performed the appraisal, or sues the AMC for negligence in appraiser selection or review of the appraisal.
Another Borrower Lawsuit – and the Scariest New
Development in Appraisal Management Liability in 2012
• Appraisal liability claims by borrowers are extremely frequent in WV.
• WV is likely the riskiest state in which to provide appraisal or AMC services. • Most claims filed by 2 sources: a
plaintiffs-oriented law firm and a “public interest” law firm.
• They have sued dozens of individual appraisers and several AMCs.
• But the case that put the WV liability train in motion was entitled: Brown v. Quicken Loans, Appraisals Unlimited and Guida (Appraiser), filed in 2008.
The Scariest New Development in Appraisal
Management Liability in 2012
• This case involved a 2006 appraisal for the borrower's $144,000 loan.
• The appraisal was supplied by appraiser Guida as a contractor to TSI Appraisal – Quicken’s affiliated AMC.
• Appraiser Guida received an assignment sheet with an estimated value of $262,500 for the subject property.
• The homeowner herself had submitted an estimate that the value was $250,000.
• Notwithstanding the high estimate on the assignment sheet,
appraiser Guida opined that the value was much lower at $181,700. • A bench trial occurred in 2009.
• In its 2010 opinion, relying on review appraiser testimony, the court concluded that Guida’s value was inflated and that the true fair
The Scariest New Development in Appraisal
Management Liability in 2012
• The court found – again relying on the review appraiser’s
testimony – 16 violations of the AMC’s own standards or USPAP. • These are some examples:
The Scariest New Development in Appraisal
Management Liability in 2012
• The judge awarded the borrower $17,500 in compensatory damages and voided the entire mortgage.
• In a later phase of the case, the judge awarded over $2.1 million in punitive damages and almost $600,000 in attorneys' fees and costs. • On top of that, appraiser Guida settled the claims against him by that
borrower (and possibly other borrowers) for an additional reported $700,000.
• In all, appraiser Guida has now been sued in at least six cases about appraisals he performed for the lender and AMC.
• The limits of his E&O insurance have been or will soon be exhausted by the cases; his policy lapsed for nonpayment; and he has filed for bankruptcy (for the second time).
Appraisal Management Nightmare in WV
The two law firms I mentioned
recently filed a class action in June.
Appraisal Management Nightmare in WV
The alleged class of plaintiff borrowers:
Appraisal Management Nightmare in WV
What do the plaintiffs demand?
Damages and, as against the lender, voiding the plaintiffs’
mortgages. The basis for the voidance of the mortgages is WV Code Section 21-12-8(m)(8):
Sidetrack – Do AMCs Sue Appraisers?
It is very rare for AMCs to do so and AMCs should not count on being able to shift liability to appraisers. This is true for several reasons: • The AMC may have joint liability with the appraiser for the AMC’s own alleged negligence and, under states’ tort laws, will be unable to shift liability to an appraiser.
• It’s expensive to pursue litigation against individual appraisers and attorneys’ fees are usually not recoverable.
• An AMC suing its own selected contractor may tacitly be admitting that it failed in appropriate appraiser selection and/or appraisal QC. • With respect to an AMC’s ability to shift liability via independent contractor agreements, some states’ AMC laws restrict that ability –
e.g., WA and AZ. One state – VT – flatly prohibits indemnification clauses. These prohibitions have ensnared several AMCs in
Do AMCs Sue Appraisers?
Do AMCs Sue Appraisers?
• In fairness, I have to point out that more appraisers sue AMCs than vice versa.
• What do appraisers sue AMCs about? Pretty much just 3 things: 1. Some variation of ‘’blacklisting” or hurting the appraiser’s
business standing (interference with contract, defamation), 2. Unpaid appraisal fees, and
3. In a few instances, for indemnification when the appraiser is being sued and contends it’s not his fault, it’s the lender or AMC’s fault (the reverse of the case I just showed).
Typical Lender Lawsuit
Against AMC: Vicarious
Liability and Breach of
Contract Claims
Typical Lender v. AMC Case
ING sues.
•
It sues the appraiser for negligence – and
the appraiser settles.
•
It sues the AMC for breach of the
warranties in the service agreement and for
negligence based on alleged vicarious
Typical Lender v. AMC Case
Recent Court Decision in Case
AMC Contractual Obligations
for Appraisal Quality
• Loosely referred to as “reps and warrants” (but AMCs may
represent and warrant matters beyond appraisal quality).
• Steadily growing list of contractual promises by AMCs
such as:
•
Panel appraisers will meet defined qualifications. • Reports will be delivered within a certain timeframe. • Appraisal will fulfill all lender and GSE requirements.• Appraisal will meet certain accuracy standards (e.g., appraisal will be within 10% of “true” market value).
• AMC will reimburse lender for any repurchases due to alleged appraisal deficiencies.
Typical Indemnification Offered by AMCs Today
“6. Indemnification. AMC shall be liable to, and indemnify and hold harmless, Lender for any damages, liabilities, claims, causes of action or other amounts (the “Liabilities”) which are related to, or the result of, any Appraisal Report submitted to Lender which is deemed to be a misrepresentation. Lender may deem an Appraisal Report a misrepresentation when: (a) Lender has reasonably
determined that the actual value of the real property that is the subject of the Appraisal is materially less than the value reported in the Appraisal; (b) other data used in the Appraisal is determined to be a
misrepresentation such as, but not limited to, misrepresenting sales dates and/or sales prices, incorrect photos (subject and/or comparables), comparables from outside subject neighborhood (without
supporting logic), not fully disclosing material facts, or violating state licensing laws; or (c) a new historic appraisal from an independent appraiser reasonably acceptable to both Lender and AMC indicates that the appraised value of the real property as reported in the subject Appraisal is 10% greater than the value reported in the retrospective appraisal.
7. Repurchases. AMC acknowledges that an Appraisal on a closed loan that does not meet the Performance Levels may cause Lender to, among other things, repurchase a loan from an investor or incur other Liabilities. AMC shall be liable to, and indemnify and hold harmless, Lender for all of the Liabilities, which are related to, or the result of any Appraisal Report or other Service submitted to Lender, which does not meet the Performance Levels.”
AMC Contractual Obligations
for Appraisal Quality
• Present clearest future liability risks for AMCs.
• The obligations greatly expand an AMC’s potential
liability.
• Breaches of the obligations easier to prove than
negligence.
• Most such
contractual
obligations are beyond the
coverage of an AMC’s professional liability insurance
or other forms of regular insurance, such as general
liability or fidelity.
Update on the FDIC’s Lawsuits Against AMCS
• Appraisals for WaMu loans
• Performed 2005-2007
• Alleged damages > $100 million in each case -- more than all AMCs and
appraisers pay for liability insurance each year
Update on the FDIC’s Lawsuits Against AMCS
FDIC pursued two basic claims: • gross negligence • breach of contract Gross negligence claims dismissed on motions to dismiss by LSI and CoreLogic based on economic loss rule
Important to
understand how FDIC sees claims
The usual defense by AMC to negligence claim by a lender
FDIC’s view: appraisers are the legal agents of AMCs
How Appraisers and Small Appraisal Firms Get
Dragged Into Appraisal Management Liability Claims
• Appraiser/firm uses a handful of independent contractors. • A lender has a problem with the appraisal and sues both the
independent contractor appraiser and the hiring appraiser/firm – even though the hiring appraiser did not sign the report.
• These claims can be more difficult to defend than a claim against a true or large AMC because:
1. The appraisal often goes out under the name of the hiring
appraiser’s firm (even a couple of large AMCs have made this mistake).
2. The hiring appraiser/firm often does not have appropriate
insurance coverage for “appraisal management” or for claims relating to work by subcontractors.
How Appraisers and Small Appraisal Firms Get
Dragged Into Appraisal Management Liability Claims
How Appraisers and Small Appraisal Firms Get
Dragged Into Appraisal Management Liability Claims
Reducing Appraisal Management Liability Risk:
Some Big Picture Items
Lender relationships
• Development of client relationships that emphasize mutual
responsibility and effort to prevent compliance and liability problems. • It’s great if a lender client views your firm as a trusted partner in
appraisal compliance, not great if they view your firm as the recipient of their risk.
• Onerous reps and warrants (or more correctly appraisal guarantees) are not the sign of a healthy client relationship.
• Spell out and limit your obligations to the lender in the service agreement and acknowledge your role as the lender’s “agent.” • In any event, lenders do bear the ultimate legal responsibility and
Reducing Appraisal Management Liability Risk:
Some Big Picture Items
Appraiser relationships
• AMCs and appraisers are generally in the same lifeboat when it comes to liability claims.
• Better qualified appraisers, better educated appraisers, more
experienced appraisers do mean less liability risk for the same kind of assignment.
• Very one-sided contractor agreements do turn away many better qualified appraisers – namely, appraisers who read and analyze. At the same time, unreasonable indemnification clauses have not
resulted in any beneficial outcome to AMCs.
• Low fees do assure loss of access to better qualified appraisers (but getting better quality appraisals certainly requires more than just
Some Specific
Suggestions for Reducing
Appraisal Management Liability Risk
Borrower relations:
• Have a specific process described in writing for borrowers to
pursue concerns about appraisals, reconsideration requests and grievances.
• Actively respond to grievances raised by borrowers. Don’t let them fester. Don’t just refer them to the appraiser.
• Review your website: what unnecessary marketing flourishes is your company making on its site?
“Our extensive QC and selection of the best appraisers result in better appraisals for the benefit of both lender and borrower.”
“We provide appraisals to lenders, government agencies, mortgage insurers, investors and consumers.”
Some Specific Suggestions for Reducing
Appraisal Management Liability Risk
Appraiser relations:
• Have a process and contact point for appraisers to report alleged violations of appraiser independence.
• Any “hint” of an estimated value given to an appraiser is a high risk activity.
• Don’t require appraisers to attach E&O insurance information to reports. It leads to more borrower claims against not only the appraisers but also the AMC, and it serves no useful purpose with respect to the insurance that may apply to a genuine claim years later.
Some Specific Suggestions for Reducing
Appraisal Management Liability Risk
• Requests made to appraisers to consider additional information or reconsider matters in submitted reports become highly suspicious when they are only made in connection with appraisals that do not meet the value needed by a lender to make a loan.
Some Specific Suggestions for Reducing
Appraisal Management Liability Risk
• A few suggestions for appraiser contractor agreements:
(a) indemnification provisions which may violate state AMC laws or which are unenforceable,
(b) appraiser’s acceptance of appraisal order should equal
acceptance of scope of work and AMC’s payment obligation should be connected to completion of that scope of work, (c) AMC should not overly exert control in the agreement, and (d) AMC should very carefully lay out that the appraiser is not an
AMC Liability Issues Beyond Pure
Appraisal Management
AVM and BPO Claims
Claims against AMCs relating to AVMs and BPOs are relatively infrequent:
• No recognizable standards, thus difficult to establish a duty of care on AMC’s part.
• Not used or relied on in the same way as appraisals. • While approximately 16 states may restrict BPOs to the property listing/sales process, there has been little
enforcement and the liability generally rests with the agent/broker.
Where serious claims have occurred, they have involved an AMC’s representations about accuracy. There is a series of litigations
involving one AMC and AVMs sold to dozens of lenders, which involves alleged damages greater than $100 million.
AVM Patent Infringement Part of a general trend to large AMCs expanding efforts to develop and control “intellectual property” rights
No direct cause of action created under these sections
for private civil claims against either AMCs (or appraisers)
Borrowers cannot directly sue an AMC for violations.
Various agencies and state attorneys general can bring actions and seek very significant penalties (see section 1472).
Only the creditor can be sued directly by borrowers for violations of the TILA appraisal provisions in Dodd-Frank.
Most liability and disciplinary issues affecting AMCs will
be indirect
Creditors will seek to shift the cost of their liability to AMCs. Standards of care are affected – i.e., the standard used to
measure whether an AMC is negligent.
Violations of appraisal requirements in Dodd-Frank by
AMCs/appraisers may be used as the basis for other civil claims (e.g., state unfair business practice claims).
Liability Risks to AMCs and Appraisers under Sections
1471-1474 of Dodd-Frank
Section 1472
Mandatory Reporting of USPAP Violations
FRB Interim Rule. “(g) Mandatory reporting—(1) Reporting required. Any covered person that reasonably believes an appraiser has not complied with the Uniform Standards of
Professional Appraisal Practice or ethical or professional requirements for appraisers under applicable state or federal statutes or regulations shall refer the matter to the appropriate state agency if the failure to comply is material. For purposes of this paragraph (g)(1), a failure to comply is material if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.”
• As of now, lenders almost uniformly only report USPAP violations when their self-interest has been affected – only after a default or other loss, usually years after the appraisal. We are just now starting to see a few lenders file complaints more frequently about current appraisals.
• As of now, AMCs almost never file any disciplinary complaints against appraisers at all. I could only locate 2 in 2011 against the 20,000
Whistleblower
Claims
Copycat whistleblower cases already filed
False claims act “bounty” cases Employment cases
Some law firms specifically are seeking appraiser
whistleblowers for new cases
The lure of a 10-30% bounty:
Claims on AMC Bonds
• About ten states now require AMCs to carry surety bonds • Ranging from $15k to $25k
• Bonds secure payment of certain defined liabilities of the AMC • Payment of fees or penalties owed to state
• Payment of liabilities adjudged for AMC law violations • In some states, bonds secure amounts owed to
appraisers
• Most frequent bond claims are by appraisers for nonpayment of fees
• AMC remains liable for amounts paid by the surety • In some situations, principals of the AMC may be personally liable as guarantors
AMC Bond Claims
674.210 Surety bond. (1) An applicant for issuance or renewal of an appraisal
management company registration shall file with the Appraiser Certification and Licensure Board a surety bond . . . in the amount of $25,000.
(2) The surety bond or letter of credit required under subsection (1) of this section must: (a) Be conditioned that the applicant pays:
(A) All amounts owing to persons who perform real estate appraisal activity for the appraisal management company; and
(B) All amounts adjudged against the appraisal management company by reason of negligent or improper real estate appraisal activity or appraisal management services or breach of contract in performing real estate appraisal activity or appraisal management services; and
(b) Require the surety company to provide written notice to the board by registered or certified mail:
(A) At least 30 days before the surety company cancels or revokes the bond; or (B) When the surety company pays for a loss under the bond.
