AMC and appraiser liability

16 Pages·2012·0.08 MB·English

VOLUME 20 • ISSUE 10 • October 2012
www.appraisaltoday.com
AMC and appraiser liability -
claims, blacklisting, lawsuits, etc.
Editor's comment: below are notes AMCs shut down each year due to Are AMCs liable formistakes made
and quotes from a Webinar, liability issues. by appraisers?
Appraisal Management Liability, by This article focuses on appraiser- Yes.
Peter Christensen, September 12, related issues, such as suing AMCs,
What about AMC staff appraisers?
2011, www.liability.com appraisers getting dragged into AMC
Suing an employee, in any type of
Peter Christensen is an attorney claims, blacklisting, etc.
business, is difficult. In most states
with Liability Insurance
the employer indemnifies the
Administrators, who insure apprais- What about small appraisal firm
ers and AMCs, www.liability.com risk? employee. Peter only knows of a cou-
They are most commonly involved ple of instances where a staff apprais-
The Webinar had 36 pages of slides.
when they use independent contrac- er was sued.
The parts relating to appraisers are
tors.
included in this article, plus some of
Where can you report alledged
The claims are more difficult to
the info on AMC liability. You can
lenderorAMC violations?
defend as the appraisal often goes out
purchase the seminar audio, which
State appraisal boards that regulate
under the firm's name.
also includes the 36-page handout. It
AMCs, in the future, will be the pri-
does not include the results of the Often they don't have the correct
mary. However, not all states have
opinion surveys from the attendees. E&O insurance, such as not includ-
implemented AMC regs and some
ing independent contractors.
Items with a “o” in front are direct
states have limited resources to
quotes from the Webinar material.
enforce AMC regs.
Which AMCs have the worst
The other discussions are written by
appraisercontracts?
me.
Per Peter, only the top 15 have, or
Although the webinar title only ref-
may have, inhouse legal staff.
erences AMCs, much of the material
The worst contracts are the middle
relates to fee appraisers.
segment, maybe the 10-50th largest
Why should appraisers care about
AMCs. They also do a very poor job
AMC liability? Most residential
on lender reps and warranties.
appraisals are done by AMCs.
This will help you understand the
INTHISISSUE
issues that your clients are concerned
about. The vast majority of AMCs
USPAPsince 1987 - where did it come from, where is is going, and who pays forit? . .Page 5
are small "mom and pop" businesses.
Is it jUSt PAP? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 9
Alawsuit could put them out of busi- Two good, practial books foresidential appraisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 12
ness. Per Peter, maybe 10-15 small How waterrights affect value - review of the Appraisal of WaterRights book . . . . . .Page 15
October 2012–©Appraisal Today–PAGE 1
What about the statue of appraisals handled by the large any beneficial outcome to AMCs.
limitations? AMCs. o Low fees do assure loss of access
The clock starts ticking when the to better qualified appraisers (but get-
problem has been discovered, not What is the definition of AMCs per ting better quality appraisals certainly
from when the appraisal was done. state regs? requires more than just paying more
States vary on how long you have This is a difficult question to for the appraisal).
to file a claim after the “bad” answer as appraisal firms with
appraisal. California, for example, is employees may be required to regis- Some Specific Suggestions for
two years from discovery or when it ter with some states. Reducing Appraisal Management
should have been discovered. Liability Risk - Appraiserrelations:
How Appraisers and Small o Have a process and contact point
Per Peter, the earliest claims now
Appraisal Firms Get Dragged Into for appraisers to report alleged viola-
are back to 2001 and 2002, so don’t
Appraisal Management Liability
tions of appraiser independence.
ever let your E&O lapse as old
Claims
claims will not be covered. o Any "hint" of an estimated value
o Appraiser/firm uses a handful of
given to an appraiser is a high risk
independent contractors.
Are AMCs and appraisers being activity.
o Alender has a problem with the
sued forcurrent appraisals? o Don't require appraisers to attach
appraisal and sues both the
Per Peter, there are lots of com- E&O insurance information to
independent contractor appraiser and
plaints being filed from 2010-2012, reports. It leads to more borrower
the hiring appraiser/firm - even
mostly about appraisals being too claims against not only the
though the hiring appraiser did not
low.
appraisers, but also the AMC, It
sign the report.
serves no useful purpose with respect
What about blacklisting? o These claims can be more difficult
to the insurance that may apply to a
Per Peter, there are at least 10 law- to defend than a claim against a true
genuine claim
suits against AMCs. Generally, they or large AMC because:
years later.
have not gone very far. In some cases 1. The appraisal often goes out under
o Requests made to appraisers to con-
the AMCs settled for modest settle- the name of the hiring
sider additional information or recon-
ments. appraiser's firm (even a couple of
sider matters in submitted reports
None have gone to trial. There are large AMCs have made this
become highly suspicious when they
a few alledged class action lawsuits. mistake).
are only made in connection with
2. The hiring appraiser/firm often
appraisals that do not meet the value
What AMCs will be most affected? does not have appropriate
needed by a lender to make a loan.
AMCs affiliated with large lenders,
insurance coverage for "appraisal
such as Wells Fargo and JP
management" or for claims Afew suggestions forappraiser
Morgan/Chase have the resources to
relating to work by subcontractors. contractoragreements:
handle lawsuits and the money for
(a) indemnification provisions which
attorneys and paying judgements.
Reducing Appraisal Management may violate state AMC laws or which
But most AMCs are small, "mom Liability Risk: Some Big Picture are unenforceable,
and pop" companies without the Items - Appraiserrelationships
(b) appraiser's acceptance of appraisal
financial resources to handle claims. o AMCs and appraisers are generally
order should equal acceptance of
Another reason for appraisers to in the same lifeboat when it
scope of work and AMC's payment
carefully monitor their AMC clients. comes to liability claims.
obligation should be connected to
Big AMCs tend to offer lower fees. o Better qualified appraisers, better
completion of that scope of work,
But, they have a very low probability educated appraisers, more
(c) AMC should not overly exert con-
of going out of business because of a experienced appraisers do mean less
trol in the agreement, and
lawsuit and not paying their appraiser liability risk for the same kind of
(d) AMC should very carefully lay
billings. They will be less affected. assignment.
out that the appraiser is not an agent
o Very one-sided contractor agree-
of the AMC or lender.
Who is requiring E&O insurance
ments do turn away many better
from AMCs?
qualified appraisers - namely,
JPMorgan/Chase requires AMCs
appraisers who read and analyze. At
to have $10 million in E&O cover-
the same time, unreasonable indemni-
age. However, this amount is small,
fication clauses have not resulted in
compared with the large volume of
PAGE 2–©Appraisal Today–October 2012
What do appraisers sue AMCs vicarious liability for the o I would expect the claim numbers
about? appraiser/contractor. against AMCs to be much different in
Pretty much just 3 things: a similar future cycle because of the
1. Some variation of ''blacklisting" or What can "trickle down" from the recent prevalence of AMCs in resi-
hurting the appraiser's business big lawsuits? dential lending appraisals and the
standing (interference with contract, o In 2011, lawsuits were filed against extensive reps/warrants now made by
defamation), residential appraisers and AMCs many AMCs to many lenders.
2. Unpaid appraisal fees, and demanding an estimated $750 million
3. In a few instances, for indemnifi- in total alleged damages, almost all AMC Contractual Obligations for
cation when the appraiser is allegedly stemming from appraisals Appraisal Quality
delivered in 2003-2008. Arecord o Loosely referred to as "reps and
being sued and contends it's not his
claims year. warrants" (but AMCs may
fault, it's the lender or AMC's fault.
o At the conclusion of these cases represent and warrant matters beyond
Mandatory Reporting of USPAP (most are still pending) however, I appraisal quality).
Violations - Dodd Frank would expect less than $150 million o Steadily growing list of contractual
requirement to be paid in damages and defense promises by AMCs
FRB Interim Rule. "(g) Mandatory costs. such as:
reporting-(1) Reporting required. Any o That's not much compared to the o Panel appraisers will meet defined
covered person that reasonably worst case scenario (but is signifi- qualifications.
believes an appraiser has not com- cantly more than collectively paid for o Reports will be delivered within a
plied with the Uniform Standards of professional liability insurance by certain timeframe.
Professional Appraisal Practice or AMCs and appraisers). o Appraisal will fulfill all lender and
ethical or professional requirements
GSE requirements.
for appraisers under applicable state Why Does So "Little" Liability
o Appraisal will meet certain accura-
or federal statutes or regulations shall Trickle Down?
cy standards (e.g., appraisal will be
refer the matter to the appropriate Although there have been billions
within 10% of "true" market value).
state agency if the failure to comply of dollars in damages against lenders,
o AMC will reimburse lender for any
is material. For purposes of this para- very little has "tricked down" to
repurchases due to alleged
graph (g)(1), a failure to comply is AMCs and appraisers.
appraisal deficiencies.
material if it is likely to significantly Even FHFAidentified AMCs, but
affect the value assigned to the chose not to file against them. For
Present clearest future liability
consumer's principal dwelling." example, Syncore was referred to in
risks forAMCs.
o As of now, lenders almost uniform- documents about Landsafe appraisers
o The obligations greatly expand an
ly only report USPAPviolations being too high.
AMC's potential liability.
when their self-interest has been For investors in secondary market
o Breaches of the obligations easier
affected - only after a default or other securities, getting copies of
to prove than negligence.
loss, usually years after the appraisal. appraisals can be very difficult, such
We are just now starting to see a few as the "robosigning" issue. o Most such contractual obligations
are beyond the coverage of an AMC's
lenders file complaints more fre- o With respect to AMC liability, most
professional liability insurance or
quently about current appraisals. appraisals in the dangerous time
other forms of regular insurance,
o As of now, AMCs almost never file frame were performed directly by
such as general liability or fidelity.
any disciplinary complaints against appraisers for lenders or mortgage
appraisers at all. I could only locate 2 brokers. As a result, there are rela-
in 2011 against the 20,000 appraisers tively few AMC targets.
we insure. o Securitizations make filing small
individual claims against appraisers
Typical Lenderv. AMC Case and AMCs difficult. Mortgage
ING sues. investors have a very difficult time
o It sues the appraiser for negligence filing small individual claims.
- and the appraiser settles. o Lenders have bigger and volumi-
o It sues the AMC for breach of the nous other legal problems. (And, if
warranties in the service agreement they can't find the notes, they can't
and for negligence based on alleged find the appraisals either.)
October 2012–©Appraisal Today–PAGE 3
When do AMCs sue appraisers? What are the parties above suing or
The next issue of Valuation
It is hard shifting AMC liability threatening to sue about?
Magazine, Q4 2012, will have more
down to appraisers. Per Peter, patent infringement
information on this topic.
There are only 8-10 instances when (AMC vs. AMC) is a big issue such
an AMC has sued one of their panel as AVMs. Another issue is trade
About the Webinarpresenter
appraisers. Many appraisers have left secrets - "theft" of customer or ven-
Peter Christensen is an attorney.
the business or don't have E&O dor lists.
His legal practice focuses on liability,
insurance. WAand AZ AMC regs o Allegedly inflated appraisals (2003-
regulatory andinsurance issues relat-
limit the liability and indemnifica- 2008)
ing to valuation and his clients
tions in independent contractor o Appraisal quality issues/defects
include appraisal firms, management
agreements. Afew have sued apprais- o Appraiser selection
companies and technology providers.
ers when the AMC was sued. o Appraisal is "too low" (2010-2012)
Peter also serves as the general
It is very rare for AMCs to do so o Blacklisting of appraisers
counsel of LI Administrators and
and AMCs should not count on being o AVMs and BPOs Insurance Services in Santa Barbara,
able to shift liability to appraisers. o Patent infringement, trade secrets, California.
This is true for several reasons: proprietary information Peter has degrees in business
o The AMC may have joint liability
administration and law - both from
with the appraiser for the AMC's own What are the primary legal claims
U.C. Berkeley. Prior to starting his
alleged negligence and, under states' pursued with respect to appraisal-
own firm and working for LIA, Peter
tort laws, will be unable to shift lia- related claims against AMCs?
was employed in Orange County,
bility to an appraiser. o Negligence (duty, violation of stan-
California at the law firms Irell &
dard of care/duty,
o It's expensive to pursue litigation
Manella LLPand Latham & Watkins
against individual appraisers and causation and damages)
LLP.
attorneys' fees are usually not recov- o Breach of contract - most common
Peter frequently speaks and writes
erable. o Intentional fraud
about valuation-related legal topics.
o An AMC suing its own selected o Conspiracy - less common - con-
He is an affiliate member of the
contractor may tacitly be admitting spire with lender to get higher loans
Appraisal Institute.
that it failed in appropriate appraiser
selection and/or appraisal QC. How common and significant are Where can you get a recording of
appraisal-related claims
o With respect to an AMC's ability to the Webinar?
against AMCs?
shift liability via independent con- The seminar handouts are available
o 7 of the 10 largest AMCs have had
tractor agreements, some states' at
significant litigation pending in 2012
AMC laws restrict that ability - e.g., http://www.appraiserlaw.com/Pages/
(beyond the nuisance level)
WAand AZ. One state - VT- flatly WebinarMaterials.aspx.
o 1 case settled in 2012 for $75 mil-
prohibits indemnification clauses. Recorded Webinars are available
lion
These prohibitions have ensnared from the Appraisal Institute in the
o At least 3 presently pending cases
several AMCs in disciplinary investi- Publications & Stores pages.
involve alleged damages > $100 mil-
gations in a few states. In fairness, I Typical prices are $75.00 Member
lion
have to point out that more apprais- Price: $30.00, the price for this
ers sue AMCs than vice versa. Webinar.
What is the best form of ownership
Direct link -
foran appraisal firm to reduce
Who are the principal parties suing
http://www.appraisalinstitute.org/store
liability?
AMCs?
As a professional, each appraiser is /c-23-webinar-recordings.aspx
o Borrowers
liable for his or her appraisals.
o Lender clients
If you use independent contractors,
o Appraisers and other AMCs
an LLC probably makes sense to
o FDIC
insulate the firm from liability.
o But NOTmortgage investors,
For a one-person firm, Peter
GSEs or FHFA
strongly advises LLC or incorporat-
ing.
PAGE 4–©Appraisal Today–October 2012
USPAP since 1987 - Where did it come from,
where is it going, and who pays for it?
What is the "bottom line" for ed for a little over 20 years. The first What about appraiserinput to the
appraiserethics? USPAPwas issued in 1987. ASB
There are only two: Accounting standards tend to be black One or more members of the ASB
1. Tell the truth. and white. Appraisal standards are reads every letter, fax, or email that is
2. Give an honest opinion of value. very gray. sent. Unfortunately, there is relatively
What does this mean? You, as an Also, USPAPis influenced by little communication from appraisers.
appraiser, have these basic duties to lender requirements, which change.
What were appraisal standards prior
your clients. All the rest is just These are the reasons why USPAP
to USPAP?
details. keeps changing.
Before 1987, when the first Edition
I started appraising in 1977 at an
of USPAPwas published, appraisal
assessor's office. There was no Who decides what is in USPAP?
associations had requirements for their
USPAP. Most appraisers worked as The Appraisal Standards Board,
members. If members did not comply,
staff appraisers for lenders or asses- with input from appraisers and indus-
they could be removed from member-
sors. We learned on the job about try participants, such as lenders,
ship.
what we were supposed to do. decides what is in USPAP. There are
There was no licensing of apprais-
Now, there are very few staff six members in the ASB, up from five
ers and no "official" appraisal stan-
appraisers at lenders. USPAPclasses when a business valuation appraiser
dards.
teach appraiser ethics. USPAPhas was added.
become more complicated and some- For many years only real estate
How has the size of USPAPgrown
times these basic rules are forgotten appraisers were on the ASB. In 1998,
overtime?
or less emphasized. a business valuation professional was
The first edition of USPAPwas
added.
developed from the standards of the
Who cares about USPAP? Unfortunately, there have been few
nine professional appraisal associa-
When I used to teach USPAP practicing, on-the-street residential
tions at that time.
classes in the 1990s, some students appraisers on the ASB, even though
The current edition of USPAPhas
said that USPAPwas a joke and they the vast majority of appraisers are res-
98 pages. The first edition, in 1987,
didn't pay much attention to it. They idential. Some of the members did
had 31 pages. The second edition, in
said: "USPAPis way too technical residential appraisals for litigation,
1990, had approximately 36 pages.
and restricts what I can do. How can but that is very different from doing
Standards 1, 2, and 3 were in all
I do my appraisals?" For many residential form reports.
editions (appraisal, reporting, review-
appraisers, USPAPwas just a hassle. Many of the significant changes in
ing). Ethics, competency, departure,
I don't hear that much anymore, USPAPrelated to commercial
jurisdictional exception, supplemental
even if appraisers are thinking like appraisals.
standards, and definitions were in all
that. We have all learned that USPAP Danny Wiley, a practicing residen-
editions. All the editions included
is very important, if only to avoid tial appraiser, was on the ASB from
standards for consulting, mass
losing an appraisal license. 2001 to 2006. Prior to 2001, I don't
appraisal, personal property appraisal,
When USPAPfirst started it think there were any practicing resi-
and business appraisal.
changed every year. Recently, new dential appraisers on the ASB. Dawn
What was added since 1987? Scope
editions were changed to every 2 Molitor-Gennrich, a practicing resi-
of Work and Record Keeping were
years. dential appraiser, was added in 2004
added. The original standards were
and served until 2007. William H.
divided into two each, such as
Why does USPAPkeep changing? Riley III served in 2008. Since 2008,
Standard 1 - Real Property
Appraising is a relatively new reg-
there do not appear to have been any
Development and Real Property
ulated profession. For example,
practicing residential appraisers on
Reporting. Statements providing addi-
CPAs spent many, many years devel-
the ASB.
tional requirements on appraisal stan-
oping their professional standards,
Most of the members had profes-
dards were also added.
which are voluminous.
sional designations from the Appraisal
Most of the changes added more
Appraising has only been regulat-
Institute or the ASA.
October 2012–©Appraisal Today–PAGE 5
detail, interpretation, and comments. eral grant to assist in the operations states. The AF is independent of the
Some were significant, such as limit- of these Boards. federal government and all appraisal
ed/complete appraisals and restrict- Each State certified or licensed organizations. However, it does
ed/summary/self contained reports. appraiser pays $40 each year to sup- receive a significant part of its fund-
Others were not major, but did affect port the ASC National Registry. This ing from the Appraisal Subcommittee
appraisals, such as reporting whether fee funds the ASC's operations and and Sponsoring Organizations.
or not there were services provided provides a grant to the Appraisal The Appraisal Foundation was cre-
in the past three years. Foundation to be used for Title XI- ated because of the S&Lfinancial
related activities, such as updating crisis in the late 1980s. Seeing that
Where does the money come from? the USPAP. federal regulation was coming (FIR-
The ASC grant is optional and REA), the appraisal profession decid-
does not have to be awarded to the What about Advisory Opinions and ed to set up the Appraisal
Appraisal Foundation. Q&As Foundation.
In 1990, most of the income was Although Advisory Opinions are The Appraisal Foundation, a pri-
from sponsorship fees (82%), with not part of USPAP, and are strictly vate non-profit organization, is gov-
11% from publications and 5% from for advising, some states incorporated erned by a Board of Trustees, which
the federal grant. them into their appraisal regulations. is charged with the following:
In 1995 major sources of the $1.5 Keeping track of the Advisory - providing financial support for the
million income were a grant from the Opinions were difficult. The work of the AQB, APB and ASB,
Appraisal Subcommittee (funded by Advisory Opinions and Q&As are
- appointing members to the AQB,
your license fees) (34%), sponsor- not in the printed USPAP.
APB and the ASB, and
ship fees (18%), and publications
- oversight of the activities of the
sales (46%). Sales of USPAPare the Who teaches USPAPclasses and
Foundation Boards & Advisory
what materials are used?
major source of publication income.
Councils.
For many years, there were no spe-
(The Appraisal Foundation owns the
The Board of Trustees is currently
cific requirements of what had to be
copyright to USPAP.)
composed of 26 individuals, ten of
covered in USPAPclasses, except
In 1995 the AF decided to focus on
which are At-Large Trustees, elected
certain mantatory topics. For many
becoming financially self-sufficient
by the Board itself. Individuals need
years I taught USPAPclasses and
by generating enough income-pro-
not be appraisers to serve on the
emphasized practical topics, impor-
ducing products and services "to
Board of Trustees. The Board of
tant to attendees.
remain independent from political
Trustees holds meetings, which are
The Appraisal Foundation set up a
and industry pressures in regard to
open to the public, in the Spring and
National USPAPinstruction book and
the decision-making functions of the
Fall of each year.
later only instructors approved by the
ASB and the AQB."
In 1986, the instability in the real
Appraisal Foundation could teach
In 2010, the most recent financial
estate and mortgage lending profes-
USPAPclasses.
statement available, showed that the
sions led nine leading professional
Overall, this was probably a good
AF has been diversifying. Income
appraisal organizations in North
idea.
was $4,562,473. The major sources
America to form the Ad Hoc
Before the changes, I walked out
were: ASC grant (31%) and publica-
Committee on Uniform Standards of
on several USPAPclasses where the
tion revenue (52%), sponsorship fees
Professional Appraisal Practice.
instructors were presenting incorrect
(3%), and Course approval program
These groups agreed upon a general-
information. But I quit teaching
fees (3.5%).
ly accepted set of standards that were
USPAPas I did not like someone else
then adopted by the eight American
What is the Appraisal telling me what I could teach.
appraisal organizations.
Subcommittee?
With the adoption of the Standards,
The Appraisal Subcommittee is the What is the Appraisal Foundation?
federal agency charged with over- The Appraisal Foundation is an The Appraisal Foundation was estab-
sight of the state appraisal regulatory organization composed of other orga- lished in 1987 to implement the
programs. nizations. There are no individual Uniform Standards of Professional
memberships. Appraisal Practice (USPAP). The
In addition, the ASC is responsible
Appraiser Qualifications Board
for monitoring the activities of The The Appraisal Foundation (AF)
(AQB) was later incorporated in the
Appraisal Foundation and the ASB does not enforce USPAPor appraiser
Foundation structure in order to facil-
and AQB as well as providing a fed- qualifications. That is done by the
PAGE 6–©Appraisal Today–October 2012
itate the development of meaningful What public charge does the - 1986/87: an Ad Hoc Committee is
qualification criteria for appraisers. Foundation have and how was it set up and develops the original
obtained? USPAP.
Appraisal standards and the In 1989 Congress enacted Title XI - Late 1987: the Appraisal Foundation
Appraisal Foundation of the Financial Institutions Reform
is organized as a non-profit corpora-
Who makes the decisions on Recovery and Enforcement Act (FIR-
tion.
appraisal standards (USPAP)? REA), which established the current
- 1988: Appraisal Qualifications
How can appraisers have input? appraisal regulatory mechanism.
Board (AQB) and Appraisal
What does the Appraisal Foundation As a result of the legislation, the
Standards Board (ASB) are created.
really do? Who pays the bills? Foundation has the following respon-
- January, 1989: ASB formally adopts
Lending has always played a big sibilities: all certified appraisers must
USPAP
role in the appraisal industry. The meet the qualification criteria estab-
- August, 1989: FIRREApassed by
impetus for creating the Appraisal lished by the AQB; all state appraisal
Congress, which formally and offi-
Foundation was the severe losses in examinations must be reviewed and
cially recognizes the Appraisal
the Savings and Loan industry in the approved by the AQB; all appraisals
Foundation as the source for stan-
1980's. for federally related transactions
dards.
Senator Bernard's investigation must conform to the Uniform
The Appraisal Foundation (AF) was
showed that no organization was in Standards of Professional Appraisal
modeled on the Financial Accounting
charge of enforcing appraiser ethics Practice (USPAP) promulgated by
Standards Board (FASB). However,
and standards. Either appraisal orga- the ASB.
the AF has always included users of
nizations got together to do it, or a
appraisal services. FASB did not until
government agency would be set up. Abrief history of appraisal
very recently.
standards
Fortunately, the appraisal organiza-
Appraisal standards developed by
tions joined together to form the
Lending and USPAP
appraisal organizations have been
Appraisal Foundation. Lending has always influenced
around since the 1930's, but they
However, even if there were no USPAP. USPAPand the Appraisal
only applied to members of the orga-
FIRREA, there would still be an Foundation were set up as a result of
nizations.
Appraisal Foundation, which sets the S&Lscandals in the late 1980s.
- Starting in the 1930's: appraisal
standards for all appraisers (USPAP), Personally, I would prefer USPAP
organizations adopt and publish for-
not just those who work for lenders. to not be influenced by lender desires,
mal codes of ethics and standards.
If there were no appraisers licens- but that is not very likely. I don't
- 1970's: the real estate appraisal
ing, the Appraisal Foundation would think appraisal standards should be
industry expands, the number of
still exist because of USPAP, which influenced by lender demands.
organizations increases, with similar,
has become the "standard of care" for Avery good example from the past
but sometimes conflicting, standards.
all real estate appraisers. was set up in the early 1990s - three
- Mid-1980's: eight national appraisal
The Appraisal Foundation is a non- report types (self contained, summary,
organizations and the Appraisal
profit educational organization which restricted and complete vs. limited
Institute of Canada meet to develop
establishes USPAPthrough the appraisals).
minimum appraisal standards.
Appraisal Standards Board (ASB). It Many appraisers were concerned
also establishes the national criteria that they would not be able to do
for becoming a licensed or certifed lender work and conform to USPAP,
appraiser and recertification through so the requirements were changed.
the AQB (Appraiser Qualifications
At that time, USPAPdid not allow
Board). The Appraisal Foundation is
limited reports, such as only using the
the parent of the two independent
Sales Comparison Approach.
boards, ASB and AQB.
Fortunately, complete vs. limited has
been removed.
This was done so appraisers could
continue to work with lenders, as
lender demand changed.
October 2012–©Appraisal Today–PAGE 7
Agood example is the recent require- respond to their request for input.
ment to report "services" provided in They do read letters and faxes on
the past three years. This came from such topics as Proposed Opinions
commercial lenders who wanted this and Statements.
information. The AQB and the ASB are inde-
pendent of the Board of Trustees.
Appraisal Standards Board - However, the Board does appoint the
USPAP
members of the ASB and AQB and
The ASB has five professional
approves their compensation. So they
appraiser members, which are
could exert some influence by their
appointed by the Board of Trustees
appointments. But it would take
for three-year staggered terms. The
some time.
Chair and the Vice Chair are also
Prior to May 1996, there were two
appointed by the Board of Trustees.
advisory councils, the Appraisal
Per the 1995 Appraisal Foundation
Standards Advisory Council (users of
Annual Report, "The role of the ASB
appraisal services) and The Appraisal
is to amend, clarify, and explain the
Foundation Advisory Council
requirements of USPAPto appraisers,
(appraisal organizations). There were
users of appraisal services, regula-
some complaints that the users had
tors, and others. Inquiries considered
more influence than the appraisers,
by the ASB in large part originate
as the user council had a direct con-
because of inquiries from the public
nection to the ASB per the bylaws.
served by USPAP. These inquiries are
The appraisal organization council
often the result of changing market
was not in the bylaws.
conditions."
In May 1996, the two advisory
The ASB has semi-monthly meet-
councils were merged to form
ings in Washington, DC, which are
TAFAC, which provides input to the
open to the public.
ASB, AQB, and Board of Trustees.
The members of the ASB are inde-
The bylaws were changed to reflect
pendent contractor consultants paid at
the changes.
the standard government rate per
hour plus travel expenses. They are Where to get more information
paid for their time at the meetings, The current edition of USPAPis
giving speeches, or working at home. available free online, but you can't
print or cut and paste from this edi-
Who influences the ASB? tion.
Many, both inside and outside the
The Appraisal Foundation web site
appraisal profession, would like to
has more information on the ASB,
change appraisal standards by influ-
AQB, exposure drafts, etc.
encing the ASB.
Go to
The ASB solicits input from both
www.appraisalfoundation.org to get
appraisers and users of appraisal ser-
downloadable (PDF) copies of all the
vices.
editions of USPAPand more infor-
The ASB does listen to individual
mation on the Appraisal Foundation
appraisers. Unfortunately, very few
activities and 2010 financial state-
ment.
PAGE 8–©Appraisal Today–October 2012
Is it jUSt PAP?
by Barry Bates pose I can, if I have the patience of appraisals are written simultaneously
Job. I have to go back to the Table with the opinion-forming process.
of Contents after reading each page, Separating the two in a set of rules
Editor's note: This is a humorous
and I can't copy and paste the text simply allows obfuscation of essen-
"take" on USPAPby a long time
anywhere. tial criteria and avoidance of the steps
appraiser, writer, and speaker. It
This writer would argue that a fun- necessary to achieve a semblance of
was originally published by Live
damental right of law-abiding citi- objectivity.
Valuation Magazine, which is no
zens is to read the law at no cost in - The appraisal client is always the
longer in publication.
its unbroken entirety (otherwise intended user. Alovely concept out
Lincoln could never have become a in the ether somewhere, but hardly
Well, that's how my 38-year-old
lawyer) and in a reasonably portable ever the case in practice. The client
son refers to it. On the advice
fashion so that the law can be fol- (who engages the appraiser) is a lend-
of his father, he has long since aban-
lowed, enforced and respected. Any ing technician or AMC drone; the
doned the art of appraisal, opting for
civil rights attorneys awake out intended user is an underwriter, ser-
architecture and engineering instead.
there? vicer or portfolio manager. (This
His dad, an appraiser for 40 years,
The only amusing thing about this assumes the fact that only 5% of
told him in his diaper days (the son's
issue is that you could sell the appraisals are ever done for anybody
diaper days, not the father's), "Son,
USPAPFAQs and Advisory other than a mortgage company.)
an appraiser is just someone who
Opinions without providing a free Pretending that they're the same
didn't have enough personality to
public source because they don't person (based on the legal concept of
become an accountant." (So the kid
carry the force of law; but then, of a corporation as a person, which
goes for engineering? Hello?
course, no one would read them. facilitates all kinds of evil) allows the
Pocket protectors?)
My central thesis today, children, left hand, which is handing out cash,
is that a bunch of crusty old MAIs to avoid confronting the fact that the
The "just pap"1 he was referring 2 right hand is playing the piano.
and soulless bank appraisers saw
to 15 years ago is more unpopularly - The Competency Rule says: "an
an opportunity in 1986 to create a
known as the Uniform Standards of appraiser preparing an appraisal in
bureaucracy that funds free trips to
Professional Appraisal Practice, an unfamiliar location must spend
meetings where crusty old MAIs and
which came into being after the last sufficient time to understand the
soulless bank appraisers can assem-
big residential mortgage greeding nuances of the local market and the
ble to get pleasantly drunk.
frenzy (the failure of S&Ls in a supply and demand factors relating to
This entity became The Appraisal
17%-mortgage-rate environment dur- the specific property type and the
Foundation, an organization designed
ing the late 1980s). location involved".
to foster high appraisal standards that
Before your friendly author pro- This turf battle is the biggest single
are written in weasel words even
ceeds violently to eviscerate this not- boondoggle in the appraisal profes-
Gerald Ford could circumvent.
even-very-well-meaning document, sion today; the statement was true 30
It's hard to know where to start;
let's get a minor but nonetheless irri- years ago, but it hasn't been true
there are so many things wrong with
tating question off the table: Where since. I routinely challenge apprais-
USPAP. As an overview, suffice it
does The Appraisal Standards Board ers who drape themselves in "geo-
to say that its structure appears to be
get off, charging sixty bucks for an graphic competency" to list-in 30 sec-
designed so that over the long haul,
updated version of USPAP? onds-"nuances" and supply/demand
most responsibility for bad loans can
Do the Standards have the force of factors in their local markets that I
be offloaded to appraisers making
public law? Yes. could not find out online in a half
3
less than $100K per year.
Do I have to pay money to read hour for free or for only a few bucks.
the Code of Federal Regulations? I haven't found one appraiser who
Afew of the more obvious false
No. Then why must I pay to down- could do it without spitting pablum
assumptions in USPAP:
load the Standards? all over himself. About 80% of real
- Certain Standards are paired
The ASB would say, "but you don't because appraisers develop their property transactions and business
have to: you can read the Standards opinions before reporting them. occur in the major metro areas these
for free at uspap.org". Yes, I sup- Wrongamundo, Buckwheat. Most days; I no longer have to sit next to
October 2012–©Appraisal Today–PAGE 9
the cracker barrel with Clem to find a fourplex she appraised. It appears 8
allocation or residual analysis.
out that the old Clampett place just that whether there is malfeasance on
5.Thou shalt always comp an over- or
sold to a chicken farmer from the part of the appraiser or not is
under-improvement within the neigh-
Porterville. Who do we think we're determined by whomever is asking
borhood in which it is located.
kidding? If we don't give up our 50- the question or by whomever is mak-
6.Thou shalt apply, when applicable,
year-old habit of assuming the ostrich ing the complaint.
capitalization rates supported by veri-
position to face every threat, our pro-
fied comparable sales or recognized
4 Appraisers are being singled out for
fession will not survive. formulae, showing all calculations in
punishment because:
Finally, the argument in support of detail. Likewise, thou shalt not esti-
1.They're vulnerable. They work in a
USPAPthat its lack of specificity is mate rent or rent multipliers without
kind of vacuum that keeps them bare-
only the result of trying to avoid citation of verifiable data source.
foot and pregnant. And naïve.
"micro-management " of the appraisal 7.Thou shalt comp to the subject
2.I'll say it again: they're vulnerable.
process is just what we former wire- property's STATED buyer profile and
Their comparative isolation and state
tappers used to call "cover noise"; it its highest and best use as constructed
of overwork as professionals prevents
screens from hearing the fact that as it or proposed (i.e., thou shalt not refer
them from keeping adequate tabs on
stands, USPAPcan be used either to to a 9-paddock horse boarding opera-
organizations that are supposed to be
exonerate or execute an appraiser on tion as an "equestrian home").
6
acting in their best interest.
political motives regardless of the 8.Thou shalt disclose and describe
issue at hand. 3.On the front lines (definitely not in ALLsubject property physical, func-
the general's tent), the profession
Some questions from a recent tional and economic defects in the
attracts rebels, renegades, weirdos and
online USPAPcontinuing education body of the report and not merely in
geeks (I stand with my comrades),
course (which attempted unsuccess- addenda, certifications, limiting con-
who tend to simply ignore rules any-
fully to clarify what USPAPmeans by ditions or photographs.
way.
due diligence in the "normal course of 9.Thou shalt get over the notion of
business") illustrate this point: 4.They deserve it. The honest "geographical competence". There is
According to the "correct" answer appraiser thinks s/he's a brain surgeon no longer any such thing. Read The
to the first question in a series, working for $350 per operation, the Emperor's New Clothes. The only
appraiser Judy would be skewered by dishonest one makes a lot of money way for the appraisal profession to
her state board if she failed to find a during a short career "in the normal save itself is to reinvent itself, not
very recent prior sale that was shown course of business".7 hang its tattered hat on old precepts
in MLS but not yet in public records; that have been eliminated by technol-
the reason offered is that her refusal Farbe it from yourcurmudgeonly ogy. (Additional rant on this subject
to subscribe to an expensive regional authorto rant about USPAPwithout above.)
MLS system was negligent if most offering an alternative set of rules. 10. Thou shalt try not to form an
Here they are:
other appraisers in her market sub- opinion of value based on a precon-
scribed "in the normal course of busi- 1.Thou shalt use only comps that are ceived notion or on anticipated future
ness". 5 the most recent, proximate and simi- personal benefits.
lar from a reliable, customary and
Yet in the next question, there is
verifiable data source.
NO violation when appraiser Willie Could there be more than Ten
2.Though shalt not make unsupported
fails to check online sources or MLS Appraisal Commandments?
adjustments.
after the property owner assures him Additional tablets could be
3.Thou shalt use no comp situated
the property is not publicly listed for inscribed to expand them to 25, but
across a God- or man-made neighbor-
sale. (This same thread of delusion more than that would be unnecessary.
hood boundary, especially rivers and
seems to run throughout USPAP, The reader undoubtedly has a few to
multi-lane highways.
undoubtedly promulgated by crusty contribute. The toughest command-
4.Thou shalt not estimate costs with-
old MAIs: If any carbon-based life ment to follow is #10. As a digres-
out referring to the cost data source
form tells you something, it's okay to sive anecdote, the writer has personal-
(book, page or URL) and including a
believe it's true without any further ly known only one billionaire in his
copy of the analysis in the report.
investigation.) Then in the next test entire career. Mr. Billionaire, a hard-
Likewise, thou shalt not estimate land
question, appraiser Ariana goes to money commercial mortgage guy
value in a cost approach context with-
USPAPjail for not checking MLS on with two Ph.D.s and a propensity for
out supplying supportive valuation
experimentation with hallucinogens,
data in a separate sales comparison,
asked the writer at a cocktail party in
PAGE 10–©Appraisal Today–October 2012