Although appraisers and lenders work closely together, the Valuation Institute believes that there is still some confusion in the market as to when, if and how valuations can be transferred.
According to Advisory Opinion 26 of the Appraisal Standards Board, after an assignment has been completed and the report has been delivered, appraisers are sometimes asked to redirect (transfer) the report to another party. The Uniform Standards of Professional Appraisal Practice state that once a report has been prepared for an indicated client and any other identified intended user and for an identified intended use, the appraiser cannot redirect (transfer) the report to another part.
To illustrate this point, let’s take the example of an appraiser hired by Client A to appraise a property. The appraiser delivered the appraisal to Client A. The client decided not to proceed with the operation that generated the need for the appraisal. The appraiser is then contacted by Client B who requests that the original report be redirected by replacing Client A’s name with Client B’s name in the report. This is unacceptable, according to USPAP Advisory Opinion 26. The mere change of the client’s name in the relationship cannot modify or replace the original appraiser-client relationship that was established with client A.
When an appraiser identifies the customer, other intended users and intended use at the start of an appraisal engagement, the appraiser thereby undertakes to meet the needs of those parties for that use. The scope of the appraiser’s work must be appropriate for the intended use and the level of detail in the appraisal report must be sufficient to enable the client and other intended users to understand that report. If a report is simply transferred to another party, that report may not be appropriate for that party’s use. An appraiser is hired to provide valuable professional advice for a particular circumstance, not to prepare a report that can be used by anyone for any purpose.
The SBA addresses another common problem in its advisory opinion 27; the experts who have previously evaluated a property are called by a different party to evaluate the same property. In some cases this request is made shortly after the first appraisal; in others, it could be months or years later. According to the USPAP, acceptance of the assignment from the next prospective client is not prohibited as long as adequate disclosure is given to the client prior to hiring and all existing confidential information is handled properly. If a previous engagement included confidential information, disclosing it to a different customer or intended user without the prior customer’s permission would violate the Rule of Ethics if the information were still classified as confidential information.
The litigation assessments are also addressed by the advisory opinion 27. Sometimes the appraisers perform appraisals for a client involved in a dispute and then are asked to evaluate the same property for the opposing party. This is not prohibited by the USPAP assuming that adequate disclosure is made to the customer and that confidential information is handled properly.
Seven assignment elements set the parameters for the assignment and define the problem to be solved. The identification of these seven elements constitutes a significant part of Standard 1 in the USPAP. The evaluation process begins with determining:
- Other intended users;
- Intended use;
- Purpose (type of value, in a valuation assignment);
- Effective date (value date)
- Relevant characteristics of the property; And
- Conditions of assignment.
If any of the elements of the engagement change, the evaluator should stop and rethink the engagement. Many customers and appraisers mistakenly assume that a brand new report will be needed, which is not the case. The appraisers must carefully explain the new details to the client to avoid surprises.
When it comes to updating a previous assignment, updates are commonly misunderstood by both appraisers and their clients. For many customers, “upgrade” means faster and cheaper. This is not necessarily the case. In an update, the effective value date in the new assignment differs from the effective value date in the previous assignment, so the appraiser will need to consider market data and changes in market conditions that have emerged from the previous assignment. In the past, loan originators have required appraisers to update their appraisals prepared for other institutions free of charge. It goes without saying that there is an additional responsibility created for the appraiser when performing work for a new client. Appraisers will likely charge a proportionate amount for the time, expense and additional responsibilities to perform a valuation update service, which is essentially a new assignment.
Let’s consider a couple of other examples where lenders may have misconceptions about the evaluation process.
►Customer B asks the appraiser for a letter of trust regarding an appraisal that has been prepared for client A. The appraiser cannot accept this request. A letter authorizing a party to rely on an evaluation is not appropriate. This would be tantamount to adding the intended users after the fact. USPAP requires that intended users be identified at the time of the assignment, not after it is completed. If Client B wants to rely on the valued appraiser, he should hire the appraiser for a new assignment.
►Customer B asks the appraiser for a copy of the appraisal report that has been prepared for client A. The appraiser can provide client B with a copy of client A’s report only if authorized to do so by client A. Give a copy to client B does not make Customer B a customer or intended user. If, after obtaining Client A’s authorization, the appraiser delivers a copy to Client B, the appraiser should notify Customer A. It is important that credit institutions and appraisers notice that there are a couple of new USPAP requirements that impose certain actions by the expert:
- Communicate to the prospective client (before accepting the assignment) if in the last three years he has been involved in any service related to the property; And
- Insert the following statement, duly drafted, into the certificate to the report: “I have not provided (or the specified) services, as an expert or for any other reason, regarding the property covered by this report within the three-year period immediately preceding the acceptance of this assignment “.
While it is important that lenders and brokers are more familiar with the rules and standards that appraisers must follow, it is also worth exploring Fannie Mae and Freddie Mac’s rules regarding acceptance of original appraisals, via the following examples. This is further addressed in the Guidelines for Inter-Agency Assessment and Evaluation.
A mortgage broker presents a loan to Lender A, who orders an appraisal. The broker subsequently decides to submit the loan to lender B because lender B offers better terms or for another reason. Assuming the mortgage broker has no control or involvement in the appraisal engagement, Can the appraisal obtained by lender A be used by lender B?
Yes. A lender can accept a valuation from a different lender if that valuation complies with the independence requirements of the valuer. In this scenario, as Lender A is the original Lender, Lender A must be listed as a customer in the valuation report.
Can lenders accept appraisals transferred from another lender?
A lender may accept a valuation from a different lender if the valuation is obtained in a manner consistent with RIA and the lender receiving the transferred valuation determines that the valuation meets their requirements and is otherwise acceptable.
Can lenders accept a valuation from an AMC specifically authorized by another lender to act on its behalf?
Yes. If the lender receiving the transferred valuation determines that the valuation was obtained in a manner consistent with AIR that the valuation complies with the lender’s requirements and is otherwise acceptable.
Can an appraiser update a valuation for another lender?
Yes. An appraiser is authorized to perform a valuation update for another lender.
What documentation is required during an appraisal transfer to prove that the lender transferring the appraisal to another lender is AIR compliant?
Each lender must develop their own documentation requirements to ensure compliance with AIR, based on their business model and processes.
AIR allows Lender B to issue a loan using a valuation transferred from Lender A. Lender B determines with written assurances that the valuation was obtained in a manner consistent with AIR. This complies with Lender B’s requirements for assessments and is otherwise acceptable. Will Freddie Mac hold Lender B accountable for remedies if it is discovered after the transfer that Lender A has not obtained valuation consistently with AIR?
Yes. As with all other representations and warranties under the Guide, Freddie Mac will hold Lender B, the lender who sold the loan to Freddie Mac, fully responsible for any violation of AIR and the requirements of the Guide.
Appraisers and lenders have the opportunity to collaborate on a regular basis, and with a greater degree of appreciation for the standards and rules governing appraisers’ actions, these employment relationships will only be improved for the benefit of both parties.
Richard L. Borges II, MAI, SRA, is the 2013 president of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. Based in Chicago, the Appraisal Institute has nearly 23,000 professionals in nearly 60 countries. He can be reached by phone at (888) 756-4624 or email [email protected]