In This Issue Client indemnification agreements - be careful! Page 1
Review market explodes - lots of work Page 4
Identity theft, forgery, and other “altered states” Page 10
Over 60 ways to cut costs and increase cash flow Page 13
Client indemnification agreements - be careful! By Liability Insurance Administrators, reprinted with permission. Editor's note: With more work going to AMCs, be sure to consider their requirements. Liberty refers to the insurance company that LIA uses. This article was originally written for their policy holders.
Frequently Asked Questions My client requested that I include a copy of my license and E&0 insurance declarations page in each appraisal report
We recommend that you not include a copy of your license and E&O insurance declaration page in each appraisal report (to protect your personal information).
Some lenders have required inclusion of these documents in appraisal reports for many years and whether an appraiser decides to comply with this request is a business decision to make. If this request comes from an important client you may decide to comply with their request, if you do decide to include these documents in your appraisal report it will not jeopardize your coverage under your Liberty policy.
We suggest that you attempt to negotiate an alternative with your client, e.g. fax a copy of your declaration page or a certificate of insurance upon renewal of your E&O insurance every year for their records.
My client wants me to sign an indemnification agreement
We understand that many appraisers are asked to enter into contracts that contain an indemnity or hold harmless provision. Unfortunately, the provisions of the policy issued to you by Liberty would not provide coverage to any of your clients pursuant to an indemnity or hold harmless agreement that you may have signed. Further, the policy would not provide any additional coverage to you for any added expense or obligation which you incur as a result of such an agreement.
The reasons for the positions above are found in the policy. First of all, Liberty's insurance is afforded to only the company or those individuals that fall within the definition of "Insured" found in the policy. The definition of "Insured" does not include any of your clients. In addition, the EXCLUSIONS portion of the policy clearly indicates that the insurance afforded thereunder does not apply:
"...to any claim based upon or arising from the liability of others assumed by the Insured under any contract or agreement, unless such liability would have attached to the Insured even in the absence of such contract or agreement;..."
Please understand that signing such an agreement will not, in and of itself, jeopardize your coverage under your Liberty policy. However the additional, potential risk and cost that may result to you would remain your sole responsibility and cannot be passed on to the carrier.
Whether you sign the document is a business decision for you to make. If the request to sign such a contract is made by an important client, you may decide to sign the document and accept the associated additional risk.
By Peter Christensen We are receiving many calls from our insured appraisers about AMC agreements. Many of our recent calls have concerned the TSI Appraisal Services Appraiser Agreement. This agreement is worth looking at because, though more extreme than others in its one-sided wording, it illustrates the typical legal problems for appraisers found in AMC agreements. Some of the language discussed below is verbatim the same as in other AMC agreements.
With regard to the TSI agreement, appraisers are particularly concerned about the indemnity section. Indemnity provisions are a recurring issue with AMC agreements. The bottom line is they are usually an AMC's attempt to shift potential liability by contract from the AMC to the appraiser. Because of the current mortgage crisis, this attempted shifting of liability is occurring more than ever.
Section 7 of the TSI agreement is entitled "General Indemnity." From our insurance and legal defense perspective, the main problems we see in this section (and in various other similar AMC agreements) are:
1. Indemnity Provision. The first paragraph of section 7 requires, in part, that the appraiser "indemnify, defend, save and hold harmless [TSI] from and against any and all liability, claims, damages, penalties, losses, fines, judgments . . . [and] any other costs, fees and expenses . . . in any way related to . . . [among other things] any appraisal report submitted to [TSI] by Appraiser pursuant to this Agreement." Simply construed, this means the appraiser is promising to pay TSI for any cost or loss of any kind (including criminal or civil fines ordered against TSI) for anything related to an appraisal submitted by that appraiser.
This is an unusually broad indemnity provision because TSI could conceivably take the position that the appraiser is required to indemnify TSI for losses caused by TSI itself in handling an appraisal or resulting from TSI's own negligence. For example, if TSI conveyed erroneous instructions to the appraiser which resulted in a problem with the appraisal and the lender client demanded that TSI make up a resulting loss, TSI could conceivably demand that the appraiser pay TSI for TSI's own mistake. As another example, class action litigation is becoming more common against lenders and their subsidiary AMCs, TSI could, here again, argue that appraisers whose appraisals are the subject of such a lawsuit must indemnify TSI for defending the lawsuit because it relates to their appraisals. There may be questions about whether such an overbroad indemnity provision like this one is enforceable under various states' laws, but that is a question that would only be resolved after an appraiser is embroiled in litigation by the AMC.
(As noted below, the TSI agreement specifies that Michigan law will apply. Under Michigan law, an indemnity provision requiring indemnity of a party whose sole negligence caused certain types of damage is against public policy and unenforceable. It's beyond this short memo to fully analyze the outcome of a dispute regarding enforceability because resolution of the issue would depend on numerous hypothetical facts and whether Michigan law will even apply is itself subject to dispute. And again, this type of defense for the appraiser would only come out after the appraiser is sued by an AMC. It would be better if this legal mess was avoided entirely by not having overbroad language in AMC appraiser agreements.)
2. Mortgage Repurchases. Another significant issue is raised in the second paragraph of section 7. In this part, the appraiser "agrees that if a mortgage lender is required to repurchase a mortgage loan for any reason in any way related to [among other things] . . . any appraisal report submitted by Appraiser pursuant to this Agreement, Appraiser shall pay [TSI] an amount equal to the repurchase price paid by such mortgage lender to repurchase such mortgage loan." The appraiser is further required to "pay the reasonable attorney's fees of [TSI] incurred in enforcing Appraiser's obligations hereunder, including, with [sic] limitation, the obligation of Appraiser to pay [TSI] an amount equal to the repurchase price of a mortgage loan as set forth above."
There are obvious problems with this provision. In particular, there could be many reasons why an originating mortgage lender might be contractually forced by a mortgage purchaser to repurchase a mortgage based on something in an appraisal that have nothing to do with any error by the appraiser. For example, what if the appraisal disclosed that the subject property was being used commercially and the originating lender was required to repurchase the mortgage based on the disclosure of this fact in the appraisal? That's not an error by the appraiser. Yet, under the language in the agreement, TSI could conceivably argue that the appraiser is financially liable for the repurchase price. Aside from that unfairness, why should the appraiser be required to pay TSI at all for a repurchased mortgage? TSI isn't the lender and has not sustained any loss. (It's my guess that TSI might be guaranteeing repurchase demands to their lender clients and trying to pass that cost on to appraisers). Finally, a repurchased mortgage does not even necessarily result in a loss to the originating lender or a loss equating to the full repurchase price. Yet, under the provision here, the appraiser is required to pay TSI the full "repurchase price" paid by the originating lender. Like the first paragraph, there are serious questions as to whether this language would even be enforceable by an AMC -- one of the main issues being that the provision could be construed as an unenforceable penalty. Once again, however, this is a question that would only be resolved in court after the AMC has sued an appraiser.
3. Insurance Issues. The problems discussed above are compounded for appraisers because the potential liabilities they are assuming in some cases are beyond their insurance coverage. As to this issue, appraisers should understand, as I have pointed out before, that an indemnity agreement such as the one in the TSI agreement does not change an appraiser's E&O insurance coverage or "void" the policy. The E&O policy will still provide the same degree of protection and coverage as if the AMC agreement did not exist and still provide the same level of defense set forth in the policy for claims against the appraiser alleging professional negligence. This means, for example, that an appraiser would still be defended under the policy against claims by a lender, borrower or AMC alleging a mistake by the appraiser in an appraisal (assuming that the appraiser maintains current insurance and that all other regular terms and conditions of the policy are met and no regular exclusions in the policy apply, etc.).
However, under the indemnity section of TSI's agreement, an appraiser is purportedly agreeing to pay all of TSI's losses, damages, expenses, attorneys' fees, etc. which might result from an appraisal delivered to TSI -- even if the loss or damage results from TSI's own errors. In doing so, the appraiser is agreeing to pay potential costs and damages that are broader than can be covered by the appraiser's insurance. An appraiser's E&O policy can only cover mistakes or damage caused by the insured appraiser (not a third party such as TSI) and cannot cover liabilities forced on the appraiser by contract. But TSI is demanding that the appraiser agree to pay for losses not only due to his or her own mistakes, but also due to other parties' conduct. TSI is further requiring appraisers to agree to pay monetary amounts for which an appraiser would never have liability except because of the agreement (such as paying to TSI the repurchase price of a mortgage). In this way, TSI's indemnity provision and similar provisions used by other AMCs expose appraisers to potential liability not covered by insurance. No one would reasonably expect that an appraiser's insurance would cover the AMC's or other parties' mistakes or pay the AMC for damages for which an appraiser would otherwise have no liability. Such insurance is simply not available.
4. Applicable Law. Aside from issues with the indemnity section, we feel it is important to note that the TSI agreement requires the appraiser to agree that Michigan law will apply to any disputes between the appraiser and TSI, and that any such disputes will be litigated in the courts of Oakland County, Michigan, where TSI is located (regardless of where the appraiser lives or works). This is an obvious concern for an appraiser who lives outside Michigan. It is not unusual to see similar clauses in agreements with other AMCs.
In the end, whether an appraiser signs an AMC agreement like TSI's comes down to a business judgment: whether the benefit of doing business with the AMC (and receiving its appraisal orders) outweighs the potential risk it may cause, including potential liability beyond insurance coverage. Based on our claims experience, as of this date, we have not received a material number of claims affected by indemnity provisions in AMC agreements, but the future is uncertain and these liability shifting provisions may become more significant. An appraiser could also try to persuade an AMC to drop or amend its indemnity language. Obviously, the more that appraisers demand such changes, the more likely that AMCs will have to change their agreements and make them less one-sided.
About Liability Insurance Administrators (LIA)
LIA is an insurance administrator and program manager licensed and able to transact insurance in all 50 states. In addition to insurance LIA also provides education in risk management and loss prevention via articles, Claim Alerts and Loss Prevention Seminars..
The Appraisers Liability Insurance Trust is the oldest and largest Errors and Omissions (E & O) Insurance Program for Real Estate Appraisers in the U.S. It was created in 1987 under the Federal Risk Retention Act of 1986 as a purchasing group.
For more information, go to www.liability.com .
Review market segment explodes - lots of work By Doug Smith, IFAS Appraisal review is the quality-control function of the appraisal profession. A review appraiser tests the reasonableness of the logic, assumptions, and value conclusion presented in an appraisal report as well as its compliance with professional standards, the client's criteria, and appraisal regulatory requirements.-Appraisal Institute-Appraising the Appraisal, Richard C. Sorenson, MAI
The current market for appraisal services in the residential market has a combination of challenges from not only the reduced volume, but the hectic nature of the implementation of the Home Valuation Code of Conduct (HVCC).
In the process of adjusting to the sudden increase in appraisal management companies and lower fees, appraisers are responding by turning down work and some of this work is review work.
The decision to turn away review business may deserve a second look. The review process is a very integral part of the appraisal profession and as such is important to the overall maintenance of high standards and professional conduct.
Appraisers can play a part in ensuring the well being of the appraisal profession by accepting appraisal assignments even in these hectic times. Despite low fees, appraisal review income has an incremental effect of increasing the bottom line and therefore bears scrutiny for the possible contribution to the financial health of the appraisal firm.
Driving forces in the increase of review work
Several forces are driving the recent uptick in orders for reviews. First, The recently imposed Home Valuation Code of Conduct, (HVCC) in part VI, Appraisal Quality Control Testing states:
"The lender agrees that it shall quality control test, by use of retroactive or additional appraisal reports or other appropriate method, a randomly selected 10 percent (or other bona fide statistically significant percentage) of the appraisals or valuations that are used by the lender, including the results of automated valuation models, broker's price opinions, or "desktop" evaluations."
"The lender shall provide to Fannie Mae or Freddie Mac a report of any adverse, negative, or irregular findings of such quality control testing, and any findings indicating non-compliance with any provision of this Code of Conduct, with respect to loans sold to Fannie Mae and Freddie Mac respectively, and the Enterprise may enforce all applicable rights and remedies, including requiring the lender to repurchase mortgages or the Enterprise's participation interest in mortgages."
Secondly, there is a sharp increase in review work from private mortgage insurance (PMI) companies. Not used to paying claims, the rapid increase in foreclosures puts new pressure on these insurers. Having restricted their potential payout to, in most cases, 80% Loan to Value loans, the fall in real estate values of more than 20% has increased the exposure of these companies.
They are reacting by essentially attempting to discredit the original appraisal. This is done in mostly a two- step process. The appraiser will receive an order for a retrospective drive-by appraisal. If this appraisal does not result in a value within a certain percentage of the original appraisal, a full retrospective field review is ordered.
Thirdly, FHA is increasing their review work in addition to requiring a second appraisal on loans with high loan-to-value ratios. Reportedly, FHA is increasing quality control measures and reviews of appraisals using contractors in each market.
Lastly, and this is mostly confined to loans purchased by Fannie Mae and Freddie Mac, retrospective appraisals are ordered for investigative purposes for loans that have gone into or are about to go into foreclosure.
Why appraisals are reviewed
The overall premise of licensing appraisers and the more stringent qualifications introduced in 2008 was that with more education, specific education about USPAP, experience hours and time spent in the field, appraisers would necessarily be more competent.
If there was such a high degree of training, why should appraisals be reviewed?
We can learn from other trades and professions. Virtually in every trade and profession, individuals review, criticize, critique, examine, cross–check, retest, question, judge, or comment on the work of others. It is no different for those for whom appraisal reports have been prepared. The end result is to increase the confidence level that the conclusions are sound and the information leading to the conclusions is reasonably supported.
There has also been an increase in control over financial institutions. In the increased regulatory environment there is a greater emphasis on compliance.
There is a distinction between the valuation process and the valuation report. The purpose of the valuation process is to reach a conclusion. The purpose of the report is to communicate that decision. Reports, then, do not appraise, appraisers appraise; reports set out their conclusions.
In an Appraisal Institute publication, "Appraising the Appraisal: The Art of Appraisal Review, Richard C. Sorenson, MAI summarizes the reasons why each appraisal report should be carefully reviewed:
1. "To provide a test of reasonableness for the user of the appraisal report.
2. To test whether the methods and techniques employed in the appraisal are appropriate to the assignment.
3. To bolster their client's confidence in the appraisal.
4. To help lending institutions manage risk.
5. To support litigation and dispute resolution.
6. To assess the work product of other appraisers for clients who do not have internal appraisal capabilities."
Why do review work?
Review appraising is an integral part of the appraisal profession and an accepted part of the entire valuation process.
I'm very busy; don't bother me with appraisal reviews
While it may make sense on the surface to turn away review work, review work does come with fees and these fees may provide incremental income to a firm.
How to screen AMCs and other clients
In these uncertain times, there are times to say no. Start with dead beats. Before accepting any client today, go to www.Appraisersforum.com . Sign up to access the dead beat files.
Do a quick check on any potential client. Next, weed out clients in the slow pay lane. While the same tests apply to companies requesting field reviews, most companies requesting reviews don't fall into the category of dead beats, slow pays and fly-by-night mortgage companies Rarely, however, do these types of clients request reviews.
How to find time for review work
If we accept that review work does provide incremental income, the next step is to find the time to do the work. A lot has to do with workflow, scheduling and reporting.
In most cases, review work when combined with other assignments can fit in with regular work. While on one assignment, the property can be viewed and photographed without cutting into the time of the primary assignment.
Also, when the assignment is placed, there is time to negotiate a desk review. Pressed for any results, more lenders are satisfied with a desk review or leave it to the appraiser's judgment if a field review is necessary. This step is very individual with the appraiser, and for that matter, the local market.
Again, it is important to understand the central element of USPAP regarding the scope of work of the assignment.
Reviewing helps you become a better appraiser
The second benefit to the appraiser is the opportunity to learn. With all the shenanigans of the last few years regarding pushing for value, I certainly have learned a lot from the review process. While everyone can learn from good example, there is worth in learning from a bad example and there is a lot out there from which to learn.
The review process clarifies and forces the appraiser to challenge his or her assumptions. When looking at a report done by another appraiser, it might be a good time to run those adjustments again.
Adjustments are not forever. When signing off on a summary report, it is always good to keep in mind, it is a summary and everything in that report requires back up and that back up is current as of the date of the report.
The ethics of accepting review assignments
Field reviews, and for that matter desk reviews, given the time spent on them, do not generally yield as much revenue as a regular and standard appraisal.
No one likes to give up business, but appraisers are quickly dismissing the opportunity for review assignments without much consideration of the overall impact on the appraisal firm or the profession as whole.
The Ethics Rule in USPAP begins: To promote and preserve the public trust inherent in professional appraisal practice, an appraiser must observe the highest standards of professional ethics.
Ethics courses highlight a philosophical formulation proposed by Immanuel Kant. Kant stated: "Act only according to the maxim by which you can at the same time will that it should become a universal law." What if no one accepted review assignments? Kant thinks that morality must be based on this formulation because morality must apply to everyone regardless of inclination.
It is not enough to write off the opportunity to complete appraisal reviews based entirely on remuneration. The quality control function cannot be emphasized enough, but the review process also raises the level of professionalism among practicing appraisers promoting high standards in both developing and reporting the results of valuation assignments.
Beyond any benefits to the appraisal practice, performing appraisal reviews is simply the right thing to do.
First step - Preparing to take review assignments
Appraisers are reporting that clients including them in the requests for appraisal reviews. As business slackens for some, appraisers are undertaking reviews. In this business climate these opportunities are likely to increase.
Competency is always an issue. There are several steps in the process of sharpening appraisal review skills.
The most obvious is taking the time for a full review of Standard 3: Appraisal Review, Development and Reporting. A substantially re-written version of Standard 3 will be introduced In January 2010. The summary of changes may be found on the Appraisal Foundation website.
Standard 3 in the 2008-2009 version of USPAP takes up 6 pages with the developing and reporting steps folded into one standard. Advisory Opinion 20 addresses reviews. AO-20 addresses the appraisal assignment including the reviewer's own opinion of value. Revisions made to the upcoming edition of USPAP, tighten the requirements for reporting the reviewer's own opinion of value and clear up several issues of consistency with other standards.
With the attention given to Standard 3 and the supporting Advisory Opinion, the ASB signals their concern about the review process and the importance to the overall process of appraising.