Could New Surety Bond Laws Really Curb Problems with AMCs?
Could new surety bond laws really curb problems with Appraisal Management Companies?
Unfortunately, a fair share of real estate professionals don’t know much about the surety bond process and how it helps regulate the industry they work in. However, with the recent implementation of new surety bond requirements for appraisal management companies, understanding how surety bonds work should be a growing interest for a number of real estate professionals.
1. Appraisal Management Company bonds function as legally binding contracts.
When Appraisal Management Companies purchase a surety bond, they’re entering into a legal contract. Each surety bond that’s executed binds three entities together.
- By purchasing the appraisal management bond, a company acts as the bond’s principal and agrees to conduct work according to the bond’s terms.
- By requiring the appraisal management bond, a government agency acts as the bond’s obligee.
- By executing the bond, the surety provides a financial guarantee of the appraisal management company’s work. The surety becomes legally accountable for the principal’s performance.
An Appraisal Management Company’s failure to meet expectations as outlined in the bond means the obligee can make a claim on the bond to gain financial reparation. The surety would be legally obligated to pay for reparation, and, in turn, would seek to be reimbursed by the Appraisal Management Company.
2. Appraisal management company bonds reinforce industry regulations.
The goal behind most surety bonds is to regulate industries and protect the best interests of both the government and the consumer. Currently, Appraisal Management Companies must provide a surety bond before they can be licensed to work legally in 10 states, which are:
- New Mexico
The exact terms of an appraisal management bond will vary depending on the specific state and its laws. Generally speaking, though, appraisal management bonds fulfill two primary tasks.
- They guarantee fulfillment of the company’s professional obligations.
- They protect consumers from negligent or improper real estate appraisal activity by an Appraisal Management Company.
When necessary, appraisal management bonds are used to reimburse consumers who are damaged by companies that fail to follow their state’s laws according to bond terms.
3. Appraisal Management Company bonds aim to decrease instances of fraud within the real estate industry.
Since the inception of Appraisal Management Companies, consumers and real estate professionals alike have criticized their effectiveness. Fortunately, setting surety bond requirements can help regulate the questionable nature of Appraisal Management Companies in two key ways.
- As previously discussed, surety bonds give consumers a guaranteed means through which they can be reimbursed for any loss due to the nonperformance of an Appraisal Management Company. The offending company would ultimately be accountable for repaying the surety for claims made against the bond, as well as any court costs. The potential legal implication of breaking a surety bond’s terms can encourage Appraisal Management Companies to think twice before cutting corners in their practices.
- As a part of the surety bond process, surety providers evaluate the financial credibility of Appraisal Management Companies before issuing them the needed bonds. Business owners can be denied a surety bond if they have bad credit or do not qualify for surety bonds with high amounts. At this point, Kentucky’s $500,000 appraisal management bond requirement is best suited for deterring financially unstable companies from getting licensed. The other 9 states that enforce surety bond requirements for Appraisal Management Companies require surety bonds of $30,000 or less.
So, is it possible for the new surety bond laws to curb problems with Appraisal Management Companies? Absolutely. However, the effectiveness of these new bonding regulations remains to be seen. The real estate industry will have to wait a few years to determine just how effective the new regulations are.
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I don’t think so, because as long as the management is really well in managing the surety bonds, problems cannot arise.
I wrote this article back in the fall, and I just wanted to let everybody know that since this article was published, four more states have established surety bond requirements for AMCs. If you operate an AMC in Pennsylvania, Mississippi, Utah or Virginia, you’ll need to get a surety bond before you can register/license your business.
You can read more about the new developments here: