Limiting appraisal liabilityPatrick J. Butlerappraiser compliance, legislation, appraiseral fraud
Several laws were drafted in Illinois last year that included
language affecting the appraisal operations of brokers. The first
was a modification to the Residential Mortgage License Act of 1987
that now allows for the licensing of loan officers. Section 2-4(g)
of that act makes it a violation for a licensee to attempt to
influence the independent judgment of an appraiser. The second law
was the implementation of the High-Risk Home Loan Act. This act
affects appraisal operations to a lesser extent, but still covers
such areas as the proper determination of loan-to-value ratios and
deceptive practices.
The impact of these new laws is now becoming apparent. Choice
One Mortgage Inc. was fined $5,000 last summer by the Illinois
Department of Financial and Professional Regulation (IDPR) because
they attempted to influence an appraised value. The actual order
that was drafted did not provide enough specificity to explain if
it was one action in particular, or a combination of factors that
resulted in their negligence. Nonetheless, the order listed a
number of different actions taken by Choice One that contributed to
the fine. Brokers need to make sure that any actions taken by them
or their office personnel do not attempt to influence appraised
values.
The FBI recently reported that Illinois is one of the top 10
"hot spots" for mortgage fraud. They also indicated that industry
sources reported more than 12,000 cases of suspicious activity in
the past nine months alone. Many different parties in addition to
the IDPR and the FBI are fighting mortgage fraud. Many homeowners
will use a value-related defense during a foreclosure and their
attorney will most likely see the broker and appraiser as enticing
targets. The implementation of loan officer licensing also brings
additional professional liability. Now is the time for brokers to
implement the proper office procedures to protect themselves and
their loan officers against claims of influencing appraisers.
As a side effect, appraisers in Illinois are elated because they
consider these new laws to be very effective tools in dealing with
unethical brokers who want to push appraised values and otherwise
influence the appraisal process. Appraisers also consider these
laws to be useful in the collection area. If a broker refuses to
pay for an appraisal because it wasn't high enough, then the
appraiser has the option of filing a complaint with IDPR to assist
in their collection efforts.
It was a number of years ago that appraisers were first required
to identify the name of the person who ordered the appraisal
directly in the appraisal report itself. This was the first time
that a formal connection between the appraiser and loan officer was
made. IDPR uses this information to determine whether a particular
loan officer or processor is involved with multiple bad
appraisals.
Do you see a pattern here? All of a sudden, there are numerous
factors coming together, all of which contribute to increased
enforcement of brokers and loan officers, resulting in increased
liability. Industry professionals must be aware of these laws and
modify their procedures to limit liability. Here are some
suggestions of "best practices" that could be put in place as an
attempt to reduce appraisal liability:
Desiring a predetermined value
In the case of Choice One Mortgage Inc., it was found that the
company ordered appraisals "with (the) minimum value necessary to
complete the loan ..." It is unknown whether an indication of a
minimum value by itself is enough to trigger a violation of the
law. Choice One engaged in other actions in addition to indicating
a minimum value. Nonetheless, a best practice would be to not
include any writings on the order form that would indicate a desire
for a predetermined value.
Including an owner's estimate
Some brokers try to skirt the law and write down the "owner's
estimated value" on the order form. They feel that they are only
providing the appraiser with information that is coming from the
borrower. While this practice is still questionable, you will want
to make sure that any disclosure of the borrower's estimate is
reasonable based upon the history of their property. It is very
common for appraisers to receive orders where the homeowner's
estimate of value is 20 percent higher than what the house sold for
in the last year. Performing a little due diligence by interviewing
the homeowner and looking at the title report can go a long way to
making sure you aren't providing an appraiser with an artificially
high "owner's estimate of value." This would certainly be
considered an effort to influence the appraiser.
Challenging appraisals in an evenhanded
manner
Do you find that you sometimes challenge the appraised value of a
property? Sure, it's a common occurrence. Do you ever challenge any
appraisals that appear to be too high? Not likely. Make sure that
you have an unbiased system in place for challenging the results of
any questionable appraisals, whether low or high. If you are
audited by IDPR, you will have a tough time explaining why you only
challenged appraisals that seemed to be on the low side. This is
especially important when attempting to comply with the High-Risk
Home Loan Act.
Keep the borrower in the loop
Any procedures to dispute a property's value should include the
borrower's participation. Are you trying to get an appraised value
raised without the borrower's knowledge? The borrower is just as
likely as anyone to be a plaintiff in a liability case. Your
borrower might have been more comfortable with a lower value if
they were given a copy of the appraisal to review. Many buyers with
high loan-to-value loans were never aware that their appraisal
might have been artificially high. Be sure that you aren't
attempting to raise an appraised value without the borrower's
knowledge and consent.
Make sure "comp checks" are legal
"Comp checks" are a controversial practice for appraisers. In the
past, they only concerned appraisers; however, with the Choice One
ruling, they have suddenly become a problem area for brokers as
well. Appraisers can provide comp checks under a very narrow set of
circumstances. It would normally take the typical appraiser at
least 45 minutes to provide a legal comp check. Part of the
appraiser's legal obligation includes creating a work file that
includes the proper documents to support the development of their
"oral" appraisal report. Yes, a comp check provided over the
telephone is actually considered an oral appraisal report. The
problem is that very few appraisers actually spend the necessary
amount of time to do a comp check legally. Most appraisers get
numerous requests for comp checks each day and would be out of
business if they legally complied with every request. The most
honest, appraisers rarely provide comp checks because they lose
money doing them. Far too many appraisers comply with comp checks
by not having a supporting work file.
How does this affect your business? Simply put, if you are using
appraisers who provide you with comp checks, then make sure they
are complying with the law. Ask them to fax over their work file
once they provide you with a value. If they don't have it, then you
now realize you are in receipt of an unreliable oral appraisal.
Once you get in the habit of requesting a copy of the work file,
you'll suddenly realize how few appraisers are actually providing
legal comp checks. That might encourage you to discontinue comps
checks altogether. The Choice One ruling indicated that Section
2-4(g) of the act was derived from the Uniform Standards of
Appraisal Practice (USPAP.) These are the standards that appraisers
must comply with. This shows the emphasis IDPR has placed on the
broker's obligations as they pertain to appraisal standards.
If you still would like to request comp checks from appraisers,
then make sure you're not always awarding the appraisal order to
the highest bidder. Many brokers will fax out comp check requests
to multiple appraisers and assign the order to the appraiser that
provides the highest value. Do you think there are some bad
appraisers who realize that they can get more business if they are
always the highest bidder? Sure enough, there are some appraisers
making a very good living by always coming in with the highest
estimated value. This practice of conducting a comp check lottery
will almost guarantee that the majority of your appraisals will
have a bias towards the high side. Only you can decide for right
now whether you feel this practice complies with not influencing
appraised values. A better practice is to assign appraisals based
upon an appraisers availability and knowledge of a particular
market area.
Illegal comp checks are usually followed by a request for a
predetermined value. This occurs when the appraiser tells you that
the subject property should be worth a certain amount and then
accepts the order based upon promising that value. It is illegal
for the appraiser to accept an order on that basis and you want to
make sure your office isn't requesting appraisals in that way. An
appraiser who accepts an order on that basis could be surprised
when the subject property is in much worse condition than
originally assumed. That appraiser might then feel obligated to
deliver an appraisal to you with the value they promised, despite
being way too high. You might not even realize that you received a
misleading appraisal because the appraiser would have attempted to
hide the true condition of the property in the report. That
appraiser's favor would have just increased your liabilitylikely
without your knowledge. By making sure that you are not ordering
appraisals based on predetermined values, you can limit this sort
of behavior by unscrupulous appraisers.
Have an appraisal review process
Mortgage fraud typically involves at least one bad lender and one
bad appraiser. While you can monitor your own practices, how do you
ensure you are hiring competent appraisers? You should have an
appraisal review process in place to measure the quality of
appraisals you are getting. The formal appraisal review process is
very common in the secondary market but not as common on the
originating side. You can order an appraisal review from most
appraisal firms or you can use a larger appraisal management
company to perform the process. It basically consists of an
appraiser checking another appraiser's work while also complying
with USPAP. A desk review consists of reviewing an appraisal based
upon information that can be verified without the appraiser going
out in the field to drive by the properties. A full field review is
more thorough and the review appraiser will actually drive by the
subject property and sales comparables. This process can uncover
more mistakes that might not have been apparent with the simpler
desk review. You should make sure that your most popular appraisers
are at least reviewed occasionally. Failing to review the work of
your appraisers is almost certainly going to allow a few bad
appraisers into the rotation. Finally, if your appraisers are doing
comp checks without supporting work files, then you are already
aware of some lousy appraisers on your list.
The aforementioned recommendations may seem a little bit
extreme. You will certainly use only those recommendations that
seem appropriate for your situation. However, the Choice One ruling
has put the lending industry on notice that IDPR will indeed
enforce the Residential Mortgage License Act as it pertains to
influencing the appraisal process. The challenge is to modify your
operations so they comply with these new laws, while still being
able to compete with those brokers who will willfully ignore the
new laws.
Patrick J. Butler is founder and senior appraiser at
Montgomery, Ill.-based Appraisal Services Inc. He can be reached at
(630) 897-3339 or e-mail
[email protected].
