AMC Liability for Deficient Appraisals

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Peter Christensen
Latest posts by Peter Christensen (see all)

AMC Liability for Deficient Appraisals - Can They Be Sued for Negligence?

…may AMCs be liable for the deficient work of contractor appraisers? Can AMCs be sued for negligence? Can they be sued by borrowers?..

It’s now been a decade since the market relevance of appraisal management companies surged in connection with the procuring of appraisals for residential lending. Since then, interesting recurring legal issues have arisen relating to AMCs’ potential liability for the work of contractor appraisers: when and how may AMCs be liable for the deficient work of contractor appraisers? Can AMCs be sued for negligence? Can they be sued by borrowers? Here’s an overview of the answers to these questions.

Among the first cases that explored the liability of AMCs for deficient appraisal work by contractor appraisers were the FDIC’s lawsuits in 2011 filed against two AMCs (eAppraiseIT and LSI Appraisal) relating to appraisal reviews performed for WaMu by panelist appraisers. In those cases, the applicable legal claims (contract versus tort) and the parameters of each AMC’s potential liability were very much up in the air. Could the AMCs be sued of negligence? Or, was their potential liability only for breach of the service agreements in place with WaMu? Those questions weren’t fully answered by the cases because they both settled in the end. However, the FDIC struggled to state a valid claim for negligence and its negligence claim against one of the AMCs actually was dismissed on an initial motion – leading the FDIC to accept a much smaller settlement payment than it probably had envisioned when it filed the case. (The FDIC settled for less than 10% of its original $129 million demand for damages against the AMC.)

In the intervening years since those cases, however, the legal landscape pertaining to appraisal management companies – as distinct from true appraisal firms – has changed greatly. Primarily, the biggest difference is that AMCs now conduct most of their services under the requirements of state appraisal management company registration laws enacted in all 50 states. As a result, more established patterns of liability risk for AMCs have emerged.

Can an AMC be liable for an independent contractor appraiser’s deficient appraisal?

In some circumstances, the answer is “yes.” It often comes as a surprise to a defendant AMC that AMCs generally do not escape from a legal action over a deficient appraisal performed by a contractor with the plain argument “we’re not liable because the appraiser was an independent contractor.” For starters, in some cases, the courts have viewed an AMC’s liability just like a true appraisal firm’s. At the prompting of plaintiffs’ lawyers, AMCs sometimes are perceived by courts simply as appraisal firms that use contractors, rather than employees, and thus fully liable for the appraisal work product as if it were the work product of the AMC itself. This kind of conclusion doesn’t reflect a good understanding of the differences between AMCs and appraisal firms, but I’ve still observed courts reach this result when the AMC’s defense counsel couldn’t articulate the differences effectively. (The specific thing that prompted me to post this article was reading a newly filed court complaint filed in Texas by a lender in which the lender’s attorney alleged that the AMC was negligent because the appraisal “grossly overstates the Property’s value by $1,000,000 primarily because of inaccuracies related to the subject’s condition.”)

In other cases, parties suing an AMC point to state appraisal management laws and industry practices as creating a “standard of care” for the AMC itself – the violation of which can serve as the basis for a viable negligence claim. In short, the argument by the plaintiff is that the AMC should be liable for its own “appraisal management negligence” as distinct from the appraiser’s negligence. In particular, plaintiffs point to the common language in state AMC laws obligating AMCs to have a process in place to ensure that appraisals are performed in compliance with the Uniform Standards of Professional Appraisal Practice (though what this means in practice is up in the air). Plaintiffs also point to the contractual assurances and representations about quality control and standards compliance that AMCs frequently make in service agreements, as well as publicly on their websites, as forming standards of care.

And, very clearly, AMCs certainly may be sued by their own clients for breaches of contract pertaining to service agreements. The details spelled out in these agreements play a critical role in shaping an AMC’s legal duties and potential liabilities to the client.

What parties have proven to be the biggest legal threat to AMCs?

By a wide margin, an AMC’s biggest appraisal-related liability risk has proven to be its exposure to claims by lending clients who seek to hold the AMC responsible for loan losses attributed to deficient appraisals. Most commonly in these claims, a loan has been foreclosed and the lender has suffered a significant loss of principal. Armed with hindsight and a critical review appraisal, the lender claims that the original appraisal overvalued the subject, that the AMC should have caught the appraisal deficiencies, and that the lender would not have made the loan if the AMC had done so.

In some instances, lenders even have made claims not just over losses relating to loans in default but also in relation to mortgage repurchases on performing loans. For example, when one of the GSEs observes an appraisal deficiency violating its loan selling guidelines, the GSE may force the originating lender to repurchase the loan. Some lenders then look to the AMC – not the appraiser – to be made whole for the loss it has taken in connection with repurchasing the mortgage.

Lender claims present a bigger monetary risk to AMCs, in general, than claims from other sources (such as borrowers) because of the potential severity of the amount of the claimed loss. While even a claim about a single bad mortgage – say, with a $300,000 claimed loss – has the potential to wipe out an AMC’s profit margin from managing thousands of appraisal orders for the lender-client, the scenario exists – and has occurred – where a lender will stack up the losses on multiple loans, resulting in a multi-million dollar claim against an AMC. This is most likely to happen after a lender already has shifted its business to a different AMC.

Borrower claims against AMCs, however, are actually filed more frequently than lender claims, but they are in most cases easier and less costly to defend. At the heart of the claim is usually a contention that the appraisal was too high or too low, or that the appraisal report misstated the square footage of the subject or failed to report a problem with the property (often the items complained about are far beyond the AMC’s control). The defense of borrower claims is aided by legal vagueness as to whether an AMC owes any legal duty to a borrower. State AMC laws are almost uniformly silent on this point.

Real-world observations from claims

Here are two basic observations I’ve made in actions against AMCs. The first is that some defendant AMCs haven’t appreciated – until involved in a claim – that when an appraisal service such as a desktop appraisal or review, or even a “full” appraisal, becomes commoditized into an inexpensive product, the same level of potential liability may still attach to that inexpensive product. The AMC’s representations and warranties, its indemnification responsibilities, the AMC’s statutory responsibilities and the appraiser’s own key certifications likely aren’t any different and neither are the risks. It’s jarring for an AMC (or appraiser) to be sued for several hundred thousand dollars over a report that produced a tiny margin of profit.

Another common element I’ve observed across multiple claims is the selection of appraisers who were unfortunately not competent to handle the particular assignment that resulted in the claim. Here, the biggest competency problems I’ve observed have related to commercial appraisals and properties outside the average experience of a panel appraiser, such as very high-end residential, vacant development land or agricultural properties. Sometimes the AMC has ventured outside of its own comfort zone to handle a special issue for its regular residential lending client by doing some like handling a one-off commercial or agricultural-related assignment or procuring an appraisal for litigation purposes.

Basic risk management

Prudent appraisal risk management for an AMC, of course, involves consistently executing an appraisal QC and review program designed to ensure that compliant and accurate valuations are delivered to clients. The problem is that even then, appraisals will still flow through that lenders will later claim to be deficient in the event of a mortgage default, and there are many appraisal errors that are outside the AMC’s control. For these risks, the best risk management strategies that an AMC can accomplish are upfront in the service agreement with the lender. That agreement is key because, despite rapid evolution of state AMC laws, many of the legal duties owed by an AMC to its clients remain contractual. In their service agreements, AMCs should pay special attention to:

  • The importance of distinguishing between the functions of the AMC versus independent contractor appraisers.
  • Representations and warranties with respect compliance of appraisals with USPAP or GSE guidelines.
  • Avoiding overly broad indemnification obligations in favor of the lender that go beyond the defense of third party claims.

Some lenders – especially a few of the largest and several of the riskiest (who engage in non-standard or crowd-based lending) – seek in their service agreements to push an AMC to accept financial responsibility “for any and all losses in any way related to” the managed appraisals, regardless of whether the issues are within the AMC’s control. Not many AMCs have the desire, or even financial wherewithal, to back up promises like that in the event of a claim involving a large volume of appraisals.

Image credit flickr - carnagenyc
Peter Christensen

Peter Christensen

Peter Christensen is an attorney, licensed in California and Washington. His legal practice primarily serves the real estate valuation community - Valuation Legal. He's the author of Risk Management for Real Estate Appraisers and Appraisal Firms, published by the Appraisal Institute.

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14 Responses

  1. Avatar Jason says:

    AMCs should be held responsible for appraisal report quality. Otherwise, what is the purpose of the AMC, as a fiduciary agent of the lender? To hire the cheapest service and then not verify the quality of the report they chose to receive for the cheapest price?

    14
    • Avatar Nick says:

      The concept is new (AMCs) and I think as we progress, the poorly written reports (especially in the next downturn) will lead back to the AMCs. After the last downturn, hopefully, appraisers started protecting themselves vis a vis EA and HC; if that language is in the report, and the AMC couldn’t care less….E&O will protect appraisers (assuming they did their due diligence), bad appraisers will be blown out/will have already left the field, and the AMC will be on the hook. Adam Smith’s Invisible Hand always resets/equalizes out, it just takes some time.

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      • Avatar HoneyWest says:

        Who is Adam Smith, pray tell? Sorry, you lost me….

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        • Avatar nick says:

          He was a Scottish economist, he’s usually known for “an inquiry into the nature and causes of the wealth of nations” and known as the father of economics/father of capitalism. Basically….the economy (at any level) will always seek out equilibrium. It just takes time. There is a price for an appraisal that should be paid, too cheap and you get a shit report, too much and other people will fill in. Right now, from my vantage point, this hybrid bull is excessively pushing the pendulum to too cheap. Bad things will happen/economic, downturn, appraisers got blamed last time. Hopefully people learned. The the super spark notes version.

          5
        • Baggins Baggins says:

          Use mozilla firefox or other browsers capabilities. Highlight the term in question. R click, select, search ‘x’ on your preset browser of research choice. Benefits of using a real desktop pc. Mobile device capabilities remain rudimentary at best. On top of Ublock, ad block plus, there is also a new add on called privacy badger, and highlight while you type spell checker which does not auto correct for you and does not use any ai. All worthwhile reasons to use firefox instead. You can access this website without needing a login, via an internet address, skip the data tracking and facebook if you want.

          https://en.wikipedia.org/wiki/Invisible_hand

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  2. Avatar HoneyWest says:

    A better question in my view is whether or not an AMC is liable for communicating Demands from lenders, when the Demand to add specific comps or to not value something is in and of itself unlawful; if the US Code says they are allowed to Request. I think transparency as to the Lender’s Reviewer should be required so that I can report the punk directly who makes false assertions & forces me to waste my time & energy responding. I don’t mind burning a bridge with an ignorant/ unethical Lender but don’t want to burn the AMC.

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    • Baggins Baggins says:

      You may have that relationship backwards. The amc knowingly facilitates the pressure placed on appraisers. Define which entity makes the request first because a lot of amc’s perform those actions in house. Make the lender upset, replace them. Make the amc upset, lose all the lenders at once and get placed on do not use lists for all the lenders they may work with in the future. Amc’s, the long arm of the lender.

      Hypothetically, under these conditions the article describes, one may actually benefit from the additional layer. However as the entirety of the amc’s operational expense is taken solely by way of driving the appraisers fee down, driving the consumers fee up, profiting from the difference, all losses the amc experience inevitably become the appraisers loses as well. Clever lenders because that has been the game all along, pass it down. Have you ever wondered why when trying to strike a consistently fair deal with amc’s, that you just can’t win?

      Amc’s have always sought to redirect the consequences of their indiscretion. Read the onboarding documents carefully because unless an appraiser is in a state which prohibits indemnity clauses, a great many amc’s seek to pass these liabilities to the appraiser and their insurer ahead of time. Great article. Insurers may consider reviewing those amc onboarding documents alongside any claim because if the appraiser signed their rights away, they have no one to blame but themselves. It may be difficult to squeeze the appraiser for any substantial settlement though, as the amc pilfered their earnings capacity ahead of time. Fractional reserve capital extension is the new staple so the gravity of repurchase demands continues to increase. All this is just getting started.

      2
  3. Avatar SB says:

    Honestly more concerned about the Appraiser being liable for a Deficient AMC

    Every AMC on the planet should be sued for EXTORTION

    10
  4. Susan Layne on Facebook Susan Layne on Facebook says:

    Do we care? Are they responsible for the content of potentially unlawful instructions / demands/ from Lenders? “They’re just the middlemen” Can’t have it both ways.

    3
  5. Avatar Ralph says:

    This is not surprising, when you have AMC’s shopping for the $250 48 hr turn time form fillers. Thank you Landsafe for this model and all the other rubes for following. Many AMC’s can’t pay their appraisers and just shut their doors, like Coast to Coast, you really think they are going to compensate lenders for losses of hundreds of thousands of $$ from just 1 loan????? More lenders will be dumping this business model and going back to approved panels, since AMC’s add NOTHING valuable to the process!

    5
  6. Avatar SB says:

    “Approved Panel Model” not much better.

    Most use Mercury Network or Xome which means excessive service charges. With no Trust Fund rules…. many Mortgage Bank Lenders are using borrower paid Appraisal Fees to pay the lenders overhead. It’s like a short term interest free loan to fund their working capital. Submit an appraisal fee invoice near the end of the month and you will be put to the end of the line and paid LAST or most likely pushed to the next bi monthly payment date.

    Sure miss the COD good ole days

    4
  7. Avatar garth says:

    A large AMC is in truth: just a portal for the lenders to place an order. The Lender places THE Order on the AMC site. The AMC software system is set up to send messages out to the appraiser. Appraiser sends the completed service through the AMC portal. *** Now as long as the AMC pays the State Board the yearly FEE, their roll as an AMC: in terms of “management” is a JOKE. ((((AND WHERE: the AMC gets to keep half of the total disclosed Client FEE.))) Hence, robbing the Hard-Working-Appraiser where the AMCs clock never stops RATING the Appraiser: by LOW Fee & Delivery dates.

    ***The only TWO questions of AMC concern: How LOW How QUICK???

    This has been THE case over-&-Over & OVER again with A very large AMC, one that covers the entire nation THAT does not have a CLUE how to “review” “quality control” an appraisal service. The BEST they have to offer: the ordering software which provides the acceptable Fee. The AMC indicated “they” had set the Fee based upon the area. (Take it or Leave it situation.)

    ***Early Last Week: I get a correction -revision from THE AMC. Reason: provided a Cost-to-Cure for the Repairs. For the NEXT 5 days & includes 3 Past the Due Date for the Lender: TRUE DELAY EQUALS: “The AMC could NOT answer the Appraiser’s response: “”Please send Reasons & where in the Report: for the requested Cost-to-Cure on an “as is” no cure-cost needed Report.”” (((Stupid STIP & so stupid IT did not even exist.)))

    YEP they really know “how the manage”. Seems it went through 3 tiers of “review” without actually “anyone really really” reviewing. Seems just kept passing it around to the Next Dead End. Boy -o-boy thats really GREAT for “MY” rating!!!

    *** One More: A young appraiser stated the other day: “I didn’t know that an order could be placed WITHOUT USE OF an AMC!” Now isn’t that NEWS worthy OR not. Big GOV’ crushed it WHEN they didn’t CORRECT the misinterpretation YEARS ago: of THIRD PARTY uses.

    This Post is a BIT off of subject Thread: So, oooops for that.

    7
    • Baggins Baggins says:

      Garth, just ignore grading completely, place operational priority on your best most reliable client or two. On the assignment side they have nifty checkbox criteria tools so they can find appraisers they like, have auto population with varied criteria they can change on the fly, etc. All anyone needs to do is call the desk managers and that’s how appraisers climb up or drop off of the effective assignment lists instantly. The tech systems are not about efficiency or bettering the process, they are about fulfilling the lenders wishes for more control of the appraisers methodology, processes, fees, turn times, and business modeling.

      I’ve identified your primary problem. “the amc”. As long as appraisers continue to accept amc orders, there is no room for those appraisers to complain. You personally are keeping the amc’s in business by accepting their orders. Think about it. Keep bidding I suppose, I only accept direct assignment orders with up front fees, I refuse to bid or play with pick me up orphan orders the discounters already passed up. I’ll find a new line of work before I go back to the amc abuses. Market and land direct assignment clients. It’s actually rather easy to get away from them. It’s rich and necessary to talk about the constant and expected abuses of the amc industry whenever they are brought up. Parasites. If their service was worth anything, they’d bill for their services separately.

      2
  8. Another interesting article by Mr. Christensen. Wide range of situationally unique cases.

    The one single thing I believe to be missing is any consideration of an oft-repeated phrase at TAF & other public meetings by the Executive Director of the Appraisal Sub Committee (Mr. Jim Park ASC) that “Federal regulators see no daylight between the lender and their AMC agents.” It is the lender that is held accountable for the actions or omissions of their AMC agents.

    I can see where that still leaves room for the lender to sue the AMC for ‘failing to assure delivery of USPAP compliant appraisals’. Presumably a violation of their contractual agreements.

    My question is WHY when a lender sues their own AMC for breach of contract is there not also an accompanying federal claim against the lender for failing to assure that the appraisal used in their lending decision was USPAP compliant? The lender has no right to delegate or sidestep responsibility. Only the tasks. Provided the results are federally compliant.

    The very complaint by the lender that their agent failed to live up to a contract is an admission that the lender also delivered a deficient product (if a correspondent) or used a deficient product in their decisions.

    If ASC and other regulatory agencies truly see no daylight between the AMC and the lender; and no ‘plausible deniability’ in lender claims or assertions that it wasn’t their fault, then why are we not seeing concurrent claims by federal regulators against the lenders every single time one of these cases arises? Their simple filing against the AMC is an admission of violating federal lending oversight requirements.

    FIRREA is broken. State enforcement has become arbitrary and inconsistent. As appraisers, we only see the appraisal side of regulatory deficiencies. Imagine that for every deficiency we see, that there are ten others on the lending side. Dodd-Frank has never been endorsed by lenders. The “feds” themselves (via FTC Lawsuit & Louisiana) have prevented the passage of implementing regulations for reasonable and customary fee provisions.

    AMCs, Lenders, FNMA, FreddieMac, and Wall Street itself are laughing all the way to their own “banks”. In the interim investors in bulk portfolios and REITS continue to be fleeced on a daily basis.

    FIRREA is DEAD.

    6

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AMC Liability for Deficient Appraisals

by Peter Christensen time to read: 7 min
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