Lender Liability for a Negligent Appraisal?

Peter Christensen

Lender Liability for a Negligent Appraisal?

Does a mortgage lender have liability to the borrower for a negligent appraisal? 

As residential property prices plateau or decline in various markets and as borrowers have financial problems with fewer financing options, there are more legal claims being filed by borrowers against appraisers and lenders in relation to appraisals for loans made in recent years. Essentially, the cases are situations of “buyer-borrower remorse.” Leaving aside the appraiser’s potential liability, does a mortgage lender have liability to the borrower for a negligent appraisal?

An Ohio appellate court recently said “no.” It ruled that the lender did not owe the borrower a legal duty to assure that the independent appraiser’s valuation was correct.

In this particular case, the appraisal was ordered to determine whether PMI could be removed on a loan – which would save the borrower from having to pay that premium. The appraisal, however, came into too low to support PMI removal. The borrower filed suit against the lender, contending that there were errors in the appraisal, and that the lender owed her “a duty to act in her best interests and correct errors in the appraisal report.”

The lender’s defense was simple — the appraiser is responsible for the valuation, the lender is not, and that the lender owes no legal duty to the borrower with respect to the accuracy of the value or correcting errors. The Ohio appellate court accepted that point of view and upheld the trial court’s dismissal of the case.

While the case is a relevant look at lender liability for appraisals, I’d certainly caution all parties that it’s just one decision from a state’s intermediate appellate court – and that the arguments and analysis were simplistic.

Geri A. Buckley, Appellant, v. Croghan Colonial Bank, Appellee.

Appellant, Geri Buckley, appeals the judgment of the Toledo Municipal Court, dismissing her claim against appellee, Croghan Colonial Bank, for damages arising out of her alleged overpayment of private mortgage insurance (PMI)…

 

Image credit wikimedia - Dina Dong
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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12 Responses

  1. Baggins Baggins says:

    That was a fascinating and worthwhile read. Suggest to read this complete document start to finish. Appraiser dodged a bullet here? Complainant could have just cut straight to suing the appraiser for a more optimal outcome? Where does the duty of care lie from an appraisers point of view? I suppose this is a relieving judgment but this does not tell the entire story. Because it sets prescient to incentivize people to go straight to the appraiser for judgments and not even bother with the lender. Additionally, the inference here is that if an appraiser refuses to talk to borrowers and end users, hiding behind the client relationship and confidentiality clause, the appraiser could have created even more liability for themselves, having denied redress through a known written avenue, ie the legal statutes, 15 U.S.C. 1639e(c).

    Legal writing is difficult but that’s what an appraisal report essentially is, a legal document. On the front side, just volume and tasks, values, assignments, deadlines. On the back side the appraisal report may be much more than that, with serious consequences and gravity. Think about it the next time some jr telecom guy asks you what your fee and turn time is or the next greedy company seeks to offload all their risk to you with hybrids and remote inspectors. Because all it takes is one single time and an appraiser may find themselves reviewing work they had long since forgotten about and filed away. Gives me the chills just re using 10 year old paper, should I really be saving these files forever?

    Love this guys articles. More please. Want to read more about complainants going directly to appraisers.

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  2. Kathy Morton Bunting Hoey on Facebook Kathy Morton Bunting Hoey on Facebook says:

    Many realtors in our area were having clients sign a document stating that they were aware that they were paying over market value for homes in bidding wars to protect themselves against buyers remorse and law suits. Lenders did not seem to care as long as they were getting paid. I was very careful in my value determination as I am sure many others were so as not in risk being accused of malfeasance!

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    • I held several Realtor classes and asked that question…..Do any of you provide a statement to the buyers about market conditions and possibly overpaying for properties, that both of you should sign? Not one of them raised their hands and I told them you need to start doing this NOW, that was several months ago when bidding wars were crazy! I was just talking about this issue today about the fact that lawsuits will be coming for Realtors due to buyers remorse and paying too much!

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  3. So much for underwring! That is their check and balance.

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  4. Avatar Red says:

    The lenders often have to be bonded as well as real estate brokers in most states and as I understand it. If any fiduciary negligence was uncovered or harm was caused the client could recover via claim to the state.

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  5. Avatar CJK says:

    Is the reverse also true? Appraisers should not be held liable for bad underwriting decisions. Nor should they be responsible for ignorant borrowers who look to blame others for everything. A property is in the MLS for 405k the borrower offers 480k, the lender gives them an appraisal waver. One year later the borrower goes into default and the property is now an REO. A retrospective appraisal is completed at $410k.

    The head of the quality control departments asks the appraiser how strong is the 410k? The appraiser says very strong, I found 3 sales of the same model home on the same street that close right before the subject went under contract. The sales prices were $405k, $410k and $412k. I also found 2 listings of the same model home at $408k and $415k. The appraiser asks why did the lender offer them an appraisal waver for $480k when comparables on the same street were selling for $405k – $415k? The head of quality control department says I cannot talk about that.

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    • Baggins Baggins says:

      Just talked to a list agent for an reo via hud. She said from a seminar attended, that there are remarkable jumps in fnma online sales and online auction, which previously only accounted for a fraction of what is happening now. That’s bad news for appraisers, cause they’re not going to need traditional appraisals. It’s bad news for communities, because corporations are bottom line focused not community care and growth focused. Commercial interest speculation in real estate is a certain game changer. How it will shake out is tbd but confirmation is there that it’s happening.

      If you thought arms ninjas and balloons disrupted the market when they came due and caused defaults, just wait till an international ibuyer type or massive investment company liquidates tens and tens of thousands of units all at once, if not far greater than that. They’ll hold them as rentals forever and never release them back to market except under distress. They prefer older more affordable stock too. Truly the current focus of regulatory agencies looking at appraisal reliability are grossly misplaced and off course. If they knew and are as competent as claimed, if the goals are actually increasing home ownership and long term gains, how in the heck can they ignore the monolithic corporations scooping up so many thousands at auction, in what sounds like a daily basis activity?

      Per your situational example, we hope it’s not working that way. For each person whom bids, they must pay cash out of pocket over, which proves a new benchmark for the market. The appraisal contingency clauses are necessary for upward movement. I called a lot of those and people were mad they actually had to pay. But it’s like don’t include the term if you’re not willing to abide by it. However, yes, it’s just problematic to use waivers in general, especially in a swiftly rising market setting when new peak benchmarks are set by individual buyers constantly higher, month after month. What goes up, may come down. Things are happening. Now is the stage when fed manipulation goes the other direction because they ran previous rate manipulations and QE too long. Goldilocks, again, and again, and again, now answered by inflation deflation or stagflation, who knows what will actually happen, even the fed does not know. We warned people this was a possibility. And here we are. We’re going to be set up as the fall guys for major investment firms dabbling in residential housing. There is going to be a lot more on the line than PMI removal, for sure.

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  6. Avatar SCS says:

    This should be a reminder to all Appraisers to understand your Scope of Work with the subject property and how to handle all assignment matters, and if you aren’t sure how to understand the Scope, withdrawl and protect yourself. I review so many files and see how we as Appraisers need to better job in understanding how to solve the problem with completing a report. They will always go after the Appraiser, we are the market experts.

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  7. Rvs Simon on Facebook Rvs Simon on Facebook says:

    Well , you are fully responsible for the method of completing the appraisal within USPAP, I do think that a Reviewer should take some heat as well as they signed it off too. The only thing about that is the reviewer doesn’t have a signature on the report. You do. If its a sketchy report with misleading data/info. That’s all on the appraiser. I’m sure someone can find something wrong or negligent in every report. Significant is a word that comes up.

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Lender Liability for a Negligent Appraisal?

by Peter Christensen time to read: 1 min
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