Washington State Raises AMC Bond Requirement to $100,000

As a direct result of the recent financial failure of appraisal management companies like Evaluation Solutions and ES Appraisal, the State of Washington recently enacted a new law raising the state's AMC bond requirement from $25,000 to $100,000.  As of July 28, 2013, all AMCs registered in Washington will be required to carry a bond in the new amount.

One of the purposes of the bond is to provide security for payments owed to appraisers by AMCs.  If an AMC fails to pay an appraiser in accordance with Washington's requirements, the appraiser then may have a claim against the AMC's bond.  The bonds also secure payment of fines and penalties that may be ordered by the state against an AMC.  This bill resulted from efforts of the Appraisers' Coalition of Washington.

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Overtime Lawsuits Continue to Spread Among Valuation-Related Companies -- Interthinx Becomes the Latest Defendant

First it was Integrated Asset Services.  In February, I wrote here about three employee overtime class actions affecting the Colorado AMC filed on behalf of "timeline managers," "valuation managers" and "quality reviewers."  Then it was LandSafe Appraisal.  In April, I wrote an article about a newly filed overtime lawsuit by staff appraisers against that company. 

There is definitely now a small wave of overtime litigation under the federal Fair Labor Standards Act (FLSA) affecting businesses in valuation-related fields.  The industry has become an easy target for such claims because of the tendency of businesses in this industry to classify their line staff, whether they are doing appraisals, quality review work or analysis of mortgage files, as professionals or administrative management and thus exempt from overtime.  The problem is that these exemptions under the FLSA often cannot be supported for such work functions.

The latest industry defendant to be named as a defendant in an alleged overtime class action is a company called Interthinx, Inc., which describes itself as a "provider of comprehensive risk mitigation solutions focusing on mortgage fraud, collateral risk and valuation, regulatory compliance, forensic loan audit services, loss mitigation, and loss forecasting."  This lawsuit was filed in federal court in Colorado on May 9 by a current employee Celeste Shaw, who performs mortgage loan auditing in Interthinx's Colorado Springs office.  Her attorneys seek to go forward with the case as a class action on behalf of an undetermined number of other employees throughout the U.S. who perform similar functions.  She alleges that "the estimated damages involved in these claims will exceed $5,000,000" among the potential class members.  On behalf of that class, she alleges in her complaint:


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LIA's Appraiser Liability Prevention CE Seminar in Phoenix on June 12 (and E&O Discount)

Based on our claims for the last 5 years, Arizona appraisers have more liability losses than appraisers in any other state. On June 12, in a 4-hour CE seminar hosted by the Arizona Chapter of the National Association of Independent Fee Appraisers (NAIFA) in Phoenix, I will explain why that is the case and also inform appraisers about steps they can take to minimize that liability risk. Appraisers who attend also become eligible for a premium discount in LIA's E&O program.

This is the seminar:


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Another Overtime Class Action Filed Against an AMC

A lawsuit filed last week by a former staff appraiser against LandSafe Appraisal Services, Inc. exemplifies the overtime liability risk faced by many appraisal firms and management companies.

In February, I wrote that overtime lawsuits by appraisers present a genuine risk to many appraisal firms and AMCs.  In that article, I explained some of the special issues relating to whether appraisers properly can be treated as "exempt" employees for purposes of overtime compensation.  The real-world risk to an appraisal firm or AMC is that a staff appraiser will file a legal action alleging that he or she worked more than 40 hours in a workweek, perhaps for a period of years, and will demand the unpaid overtime due plus penalty damages, interest and attorneys' fees.  For larger firms, there is also the threat of a collective action under the Fair Labor Standards Act (FLSA) -- the overtime equivalent of a class action.  Such actions could be filed either by employee-staff appraisers or potentially by appraisers who contend they were misclassified as independent contractors (i.e., "1099" contractors). 

It looks now like we are seeing a small wave of overtime litigation in the valuation industry.

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Non-Lending Appraisal Liability CE Seminars in Sacramento, San Diego, Petaluma and Portland, OR

How do appraisers who appraise conservation easements get sued? Do review appraisers get sued? What special language should be considered for engagement letters for different types of non-lending work? These are the kinds of questions answered in the CE seminar I am teaching in Sacramento on March 12, 2013.

The class is entitled "Liability Issues for Appraisers Performing Litigation and Other Non-Lending Work" -- or, in other words: “Staying out of the courtroom unless you’re being paid to be there.”

The class on March 12 is hosted by the REAA's Sacramento Chapter. LIA Administrators & Insurance Services is the educational provider. The cost is $45 for REAA members and $75 for non-members. Appraisers insured by LIA receive a discount on their E&O premium of either $25 or $50 for completing the class as explained further below.

Registration for the March 12 class in Sacramento is through REAA and further information about time and location are at this link: Registration. 

Other future dates of this class are -- registration for these classes is with each organization below:

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Read That Agreement Before You Sign or Leap

I recently ran across the provision below in a new contractor agreement between an AMC and its panel appraisers, when one of LIA's insured appraisers asked me to take a look at the agreement.  The contract contained the average indemnification provision found in most unfair AMC contracts in which an appraiser promises to defend and reimburse the AMC for "any and all liabilities, damages, costs and expenses (including all legal fees) arising out of or relating to any claim, action, suit, complaint, liability, damage, or other proceeding" relating to appraisals done by the appraiser and a long list of other things.

But then the contract got a little more crazy:


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Overtime Lawsuits Affecting Appraisal Firms, Lenders and AMCs

Under the federal Fair Labor Standards Act (FLSA), employees in most types of businesses are required to be paid overtime at 1.5x their hourly rate if they work more than 40 hours in a seven-day workweek, unless they are properly classified as "exempt."  As I'll show in three cases below against an appraisal firm, a lender and an AMC, this law presents a genuine liability risk to businesses in the valuation industry.  Let's start with what should seem like a basic question:

Are employee appraisers of appraisal firms, AMCs or lenders "exempt" from overtime pay under the FLSA?

Unfortunately, answering that question correctly is not always easy.  It cannot be answered categorically for all real estate appraisers. Under the FLSA, it's a two-part analysis to determine whether an employee appraiser is exempt. The first part is straightforward: is the appraiser paid on a salary basis and does that salary exceed $455 per week? If the answer is "no," then the appraiser is not exempt and must be paid overtime if he or she works more than 40 hours in a seven-day workweek. Under this first part of the analysis, for example, an employee appraiser would not be exempt if his or her employer paid the appraiser solely on a per-assignment basis; however, if the employee appraiser received per-assignment compensation on top of a base salary of at least $455 per week, then the appraiser would satisfy the first part of the exemption test.

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Evaluation Solutions and ES Appraisal Services: The Full Bankruptcy Petitions (with Schedules of Unpaid Vendors)

The full bankruptcy petitions filed by Evaluation Solutions, LLC and its subsidiary ES Appraisal Services on January 25, 2013 are available on AppraiserLaw.com at this link.    The bankruptcy petitions of each company identify unpaid debts to appraisers and real estate agents/brokers of $9,349,612.97 (owed by Evaluation Solutions) and $1,698,799.00 (owed by ES Appraisal Services).  The lists of unpaid vendors are included as schedules to each petition.  For a full article about the bankruptcy, read Evaluation Solutions: The Anatomy of an AMC's Failure.
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Evaluation Solutions: The Anatomy of an AMC's Failure and Why Lenders Should Care

Updated 1-30-13 to add information about subsidiary ES Appraisal Services.

$9,349,612.97 + $1,698,799 = $11,048,411.97.   That's how much failed Evaluation Solutions and its subsidiary entity ES Appraisal Services have left in combined unpaid appraisal and BPO fees owed to appraisers and agents/brokers -- according to their respective bankruptcy filings on January 25, 2013.

Last week, I had the opportunity to speak together with Tony Pistilli to the Collateral Risk Network about the subject of lender oversight of appraisal management companies.  With that exciting topic as the theme, I focused on the specific issue of AMCs failing to pay independent contractor appraisers (and also failing to pay agents/brokers) and why that should concern lenders in terms of regulatory and liability risk.  Of course, the issue already is a concern for many appraisers and their bank accounts because of the recent failure of not only Evaluation Solutions but also National Real Estate Information Services (NREIS). 

The failure of Evaluation Solutions and its subsidiary ES Appraisal Services (I refer below to both companies as "ES"), in particular, provides a good look at the anatomy of an AMC's downfall and bankruptcy.  ES filed its Chapter 7 Bankruptcy Petition on January 25, 2013 in Florida.  The AMC had signaled that it would file for bankruptcy in December, when it was widely reported to have lost its biggest client JPMorgan Chase Bank.

Here are some of the interesting points I gleaned from reading ES' 231-page bankruptcy petition and its subsidiary's 87-page petition:

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Seven Cases the Defendant Appraisers Won Based on Expiration of the Statute of Limitations

I am biased in favor of defendant appraisers.  I always root for the defense, even if it's one appraiser suing another appraiser (as in one case below).  Defense is our business.  Here, are seven cases where the defendant appraisers won based on a statute of limitations defense.  That means even if there was something wrong with the appraisal at issue, the defense counsel still won the case.  So, you have to give the credit to the defense counsel.  That's not to say there really was a problem with the appraisal in each case below -- it just didn't matter if there was.

READI members can find more cases like these, including cases where the appraisers lost, here on www.readimember.org.

Here are the seven cases:


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Who Has Been Suing the Most Appraisers? Two Names You Know. Two Names You've Probably Never Heard.

These are four of the parties who have been suing the most appraisers in 2011-12.  I suspect most appraisers won't recognize two of the names, unless the appraisers are defendants in one of their cases.  The parties are in no particular order, but the last one does file the most lawsuits. 


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New York Attorney General v. eAppraiseIT: Settlement

The New York Attorney General's Office has announced reaching a settlement with CoreLogic, as successor to eAppraiseIT, over the 2007 lawsuit filed against eAppraiseIT by then-Attorney General Cuomo.  This was the case, of course, that led to the HVCC with Fannie Mae and Freddie Mac. It also put the AMC liability train in motion, which has kept rolling since -- resulting in significant lawsuits filed by both government agencies and private parties against a majority of the 10 largest AMCs.

The NY AG noted that the lawsuit concerned approximately 10,000 appraisals in New York for WaMu in 2006-2007 and described the following terms of the settlement:

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Appraiser Liability Prevention CE Seminar in N VA

I am presenting -- on behalf of LIA -- our 4-hour liability prevention CE class "Loss Prevention Program for Real Estate Appraisers"in Northern Virginia on October 11.

Who is suing appraisers? What do they sue for? When does the FDIC file a lawsuit? Can appraisers be sued more than five years after the appraisal – i.e., what are the relevant statutes of limitation? What kinds of liabilities do review appraisers face? What kinds of language can I use to decrease liability risk?  What are the hot button appraiser liability issues in your state?  Have any AMCs sued appraisers?  (Which ones?) What is the most likely scenario for a negligence claim against an appraiser who performs litigation-related work?  These are the types of questions answered by the seminar.

Northern Virginia, October 11, 2012, 10:00 am to 2:00 pm at the Dulles Area Association of Realtors, 21720 Red Rum Drive, #177, Ashburn, VA 20147. Hosted by the Northern VA Chapter of the Appraisal Institute. This class is free to N. VA Chapter members. It is $40 for non-members (payable by check at the seminar). Please bring your own food or snacks for the seminar because we won't be taking a full lunch break -- just 15-20 minutes. CE approval notes: our class is approved for 4 hours of appraiser CE in VA, MD, PA, and DE (and many other states), but not in WV or DC -- the class was previously approved in DC and an application for approval is pending in DC. Appraisers interested in attending this seminar, can contact me directly by email to peter@liability.com or can contact Craig Sewell, SRA at the contact information on the chapter's website at http://nova-ai.org/contact.html.

Appraisers who are insured by LIA’s E&O program with Liberty Mutual, or who purchase E&O from LIA within a year after the seminar, become eligible for a one-time discount on their premium of $50 for a $500K or $1m per claim policy or $25 for a $300k per claim policy per appraiser by completing the Loss Prevention Program.

Thank you,
Peter Christensen
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FDIC Diversifies Its Appraiser Targets in Recent Lawsuits

In the last three months, since May 1, 2012, the Federal Deposit Insurance Corporation (FDIC) has sued 45 individual appraisers and appraisal firms in its capacity as receiver for one of the failed banks or lending institutions under its supervision.  The appraisers targeted by the FDIC in its recent cases are a more diverse group, geographically and professionally, than in earlier cases, but in other respects the FDIC's recent cases represent more of the same familiar story -- suing appraisers to recover money damages for allegedly appraising properties too high for loans extended during the peak of the real estate bubble which are now in default.

Here are the facts regarding the FDIC's recent cases against appraisers:

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Webinar about Appraisal Management Liability Hosted by the Appraisal Institute

I mentioned in my prior post about the appraiser defendant class action in West Virginia that I would present a webinar through the Appraisal Institute on September 12 to address the issues presented by that case and similar cases.  The description below is from the Appraisal Institute's webinar and registration page found at this link:

The AMC liability train left the station in 2007 with Andrew Cuomo’s legal action against eAppraiseIT.  Five years later that train is still rolling, picking up new AMCs and appraisers. Its most recent stop has resulted in an alleged defendant class action in West Virginia, in which the plaintiffs not only are suing the AMC but also are seeking to sue a class consisting of panel appraisers of the AMC.

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Class Action Nightmare for an AMC and Its Panel Appraisers in West Virginia

Update note 8/14/12: this case, particularly the plaintiffs' attempt to create a defendant class of appraisers, presents significant new liability issues for appraisal management and appraisers.  I will address the liability issues in this case and in other current AMC litigation (including the FDIC's actions against two national AMCs) in a webinar hosted by the Appraisal Institute on September 12, 2012.  The details and registration information are on the Appraisal Institute's webinar page at this link. 

West Virginia has been among the riskiest states in which to be a residential appraiser for several years.  It's my educated guess that a residential appraiser is more likely to be sued in West Virginia than in any other state.  A plaintiffs' law firm has elevated that level of risk to a nightmare for one particular AMC and its panel appraisers in West Virginia who performed appraisals for certain loans by the AMC's primary client.


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Should I Attach My E&O Declarations Page to My Appraisal Report?

Because some AMCs still wrongheadedly insist that appraisers do it, we are asked this question a lot: "should I attach my E&O declarations page to my appraisal report?"  The answer is always the same: it's a bad idea.  It's bad for both the appraiser and the client/AMC.  It is perfectly reasonable for a client or an AMC to ask for proof of E&O insurance and ask to receive updated insurance information each year.  That's common to many professions, but there is no good reason to require that the information be included within or attached to appraisal reports.  (Lawyers like myself certainly don't attach proof of insurance to our opinion letters or legal briefs.)

Why is it a wrongheaded practice?

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What Is the Statute of Limitations for Suing about an Appraisal?

The most common search question by appraisers and appraisal management company personnel that leads to the Appraiser Law Blog is some form of: "What is the statute of limitations for suing about an appraisal?"

Because this is so frequently misunderstood by appraisers, let me say this first: the relevant time period for suing an appraiser or AMC about an allegedly bad appraisal has nothing to do with USPAP's minimum 5-year record keeping requirement.  Don't throw those workfiles away!

So what is the time period for suing about an appraisal?  The time period varies by state and by the precise claim asserted, ranging from 1 year in Kentucky to 10 years in Rhode Island, and further depends on whether the "discovery rule" will apply.  So, it takes a 50-state chart to answer the question completely.  Appraisers and AMCs (who are in the same boat with appraisers when it comes to lawsuits) have access to such a chart at www.readimember.org (registration is required and subject to approval by READI).


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The Mysterious "Notice of Claim" to Appraisers Relating to FDIC Lawsuits

This post is for appraisers who have received a document entitled "Notice of Claim -- Appraiser" relating to lawsuits filed by the FDIC (see example to left).

We have received multiple reports from appraisers and defense counsel about the mysterious "Notice of Claim."  The notices are so far nearly identical and state that the FDIC has filed a lawsuit for damages against one of two AMCS (either CoreLogic-eAppraiseIT or LSI Appraisal) based on one or more of the recipient appraiser's appraisals and that the appraiser may be the subject of claims for negligence by one of those AMCs or by another party. The notices further direct the appraiser to report the notice to his or her E&O insurance carrier.  The notices then attach the first page of a lawsuit complaint filed by the FDIC, a list of appraisers who are identified as having provided allegedly negligent appraisals in that lawsuit, and a "key" to the alleged appraisal deficiencies (these two documents come from the lawsuit complaints filed in court as well).  The notices do not identify who is sending them.

If you've received one of these notices, please read on below.  For a general update on FDIC appraiser claims, others may want to read: "An Update on FDIC Claims Relating to Appraisals."


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An Update on FDIC Lawsuits Relating to Appraisals and a Chart of Target Appraisers' Locations

Update on the update: May 19, 2012 - in the last week, the FDIC sued approximately 20 more appraisers as the receiver for BankUnited in a last-minute rush to file the actions before the deadline for its negligence claims relating to that failed bank.  The appraisers affected by these new lawsuits are in New York, Pennsylvania, New Jersey, Washington, California and Florida.  All of the appraisals were performed for mortgage brokers.

In 2011, the FDIC filed its highest number ever of lawsuits naming appraisers as defendants.  So far in 2012, the FDIC's pace for suing appraisers has slowed, but that may change as the relevant statutes of limitations approach for several large lenders that failed in 2009.  (READI members can read about statutes of limitations and how they differ for the FDIC in "What Is The Statute of Limitations for a Lawsuit Against an Appraiser in My State?")

Since January 1, 2007, the FDIC has sued or identified in court documents approximately 500 individual appraisers for allegedly negligent appraisals.  Of these, approximately 165 individual appraisers and appraisal firms have been named as defendants and the remainder identified as negligent by the FDIC in its lawsuits against other defendants, such as bank officers and directors and appraisal management companies. 

In the last 5 years, the FDIC only has sued fee appraisers for one thing: over appraisal of subject properties.  Most typically, the FDIC has alleged that the appraiser's opinion of value was inflated because the appraiser selected inappropriate comparable sales (to use the FDIC's own words:  "more than one mile from the subject property").  For examples of allegations in recent FDIC lawsuits see "What Is the FDIC Suing Appraisers About?"

A few appraisers have now been sued or identified as negligent in multiple actions by the FDIC -- in other words, some have been sued twice for different appraisals, some have been identified as negligent for different appraisals in more than one lawsuit naming other defendants, and some are subject to both of those issues.  Though suing or identifying approximately 500 appraisers as allegedly negligent in its lawsuits, however, the FDIC has not, as a general rule, filed any complaints against appraisers with state appraiser regulators. Rather than pursue discipline, the FDIC almost uniformly only sues for monetary damages.  The average damage amount claimed by the FDIC in relation to an allegedly negligent appraisal exceeds $450,000.

The chart below shows the city and state of each appraiser sued or publicly identified by the FDIC as allegedly negligent since January 1, 2007.  In a few instances, I've changed the names of smaller cities/towns to more general descriptions. 

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FDIC Sues Bank Officers and Directors for, in Part, Failing to Heed Chief Appraiser's Advice

Can chief appraisers and other managerial appraisers at banks be sued for failing to fulfill their responsibilities with regard to oversight of the bank's appraisal functions?  Yes, they can and have been sued.  The types of actions they have been named in range from fraud actions by private plaintiffs, to whistleblower suits by other employees, to cases filed by government agencies after a bank's failure.

Has the FDIC sued any chief appraisers in the current spate of bank failures that began in 2008?  No.  Not yet.  While some chief appraisers or other managerial appraisers have captured the investigative attention of FDIC attorneys, the FDIC has not named any as defendants in any of its 490+ lawsuits since January 1, 2008.  In fact, so far, the FDIC actually has blamed a few failed banks' officers and directors for disregarding advice or information supplied by chief appraisers.  This new case provides a recent example.


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Court Permits Negligence Claims to Go Forward in Gibson v. Credit Suisse and Cushman & Wakefield

One case that cannot be ignored on something called the Appraiser Law Blog is Gibson, et al. v. Credit Suisse, Cushman & Wakefield, et al.  Even though the plaintiffs' claims in my view just amount to buyer's remorse following a deflated real estate price bubble, the case needs to be recognized because:

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What is the FDIC Suing Appraisers About? Some Examples of the FDIC's Specific Allegations

The FDIC continues to sue residential appraisers in connection with origination appraisals and review appraisals performed for failed lenders between 2003-2009 on loans now in default.  It may be helpful, or scary, for appraisers and AMCs to see for themselves exactly what kinds of alleged USPAP violations or other errors the FDIC is claiming in lawsuits against appraisers.  Therefore, I have copied below the FDIC's actual allegations against several appraisers.  These are word-for-word the entirety of the FDIC's claimed errors against these appraiser defendants.  Please don't shoot the messenger.  I'm a lawyer, not a USPAP expert, but even I know some of these things aren't really "USPAP violations" despite the FDIC's allegations.

The FDIC's favorite alleged "USPAP violations" or other alleged errors in its most recent cases have been:

• "USPAP required that [the appraiser] analyze whether the level of appreciation was sustainable;"
• The comparable is "more than one mile from the subject property;" and
• The comparable "involved a sale that was more than six months old."

Even though the complaints filed by the FDIC in court are all public documents, I've chosen to conceal the appraisers' names because I don't think the focus should be on who they are -- they could be any of tens of thousands of appraisers who delivered appraisals to failed lenders now under FDIC receivership.

Again, the portions of the FDIC's complaints I've provided below are word-for-word the entirety of the FDIC's claimed errors in the lawsuit complaints against these appraiser defendants.  In other words, I'm not cherry-picking from the FDIC's allegations or taking them out of context.  (In fact, if we looked at the full context of the loan transactions in these lawsuits, the complete stories involve borrower and mortgage broker misrepresentations about occupancy, employment and income.)

1.  FDIC v. Appraiser (in Black):

In this 2011 case, the FDIC sued the appraiser for alleged professional negligence relating to appraisals for two loans extended in 2005.  The FDIC demanded $518,000 in damages against the appraiser.  Below are the FDIC's allegations about the alleged errors in one of the appraisals:


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Appraiser Liability Prevention Resources

Listed below are 9 of the most popular written resources on READI's site www.readimember.org.  The materials contain analysis and information that cannot be found elsewhere on the internet or in print.  We are able to share more detailed information there than we can in a public setting, such as this blog, because access to READI's materials is limited to persons with a legitimate interest in READI's liability prevention mission.

Appraisers and appraisal firms insured by LIA www.liability.com have access to READI's resources.  Subject to approval, others may join READI for access to most resources by following the registration procedure explained on the site. READI is free for appraisers who fulfill the registration requirements.

1.  What is the Statute of Limitations for a Lawsuit Against an Appraiser in My State?

. . . the chart below identifies the relevant time period for a professional negligence claim against an appraiser in each state, provides the statutory basis for that time period, and indicates whether courts in that state will likely apply a “discovery rule” to a claim. . .

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FDIC Filing MBS Lawsuits Based on Appraisal Defects as Determined by AVMs

The FDIC has joined the fray of mortgage backed securities (MBS) litigation as a plaintiff.  In one of several MBS-related legal actions, the FDIC recently sued Countrywide Financial and Bank of America in connection with poorly performing MBS held by failed Security Savings Bank.  The FDIC filed this particular lawsuit in state court in Clark County, Nevada on February 24, 2012.  Countrywide and BofA have since removed the action to federal court.  It's among the first of several MBS cases that the FDIC has filed as a plaintiff, though it has inherited other cases after plaintiff banks failed.

The FDIC's complaint in this case is virtually identical to the dozens of other MBS complaints against mortgage originators and aggregators filed by pension funds, insurance companies, banks and other MBS investors. The newsworthy point here is that the FDIC is deciding to join in this litigation boondoggle and is doing it exactly in the same way as many "civilian" MBS investor plaintiffs.  For the appraisal industry, it's also worth observing that the FDIC is using the same retrospective AVM model as the other MBS plaintiffs to claim the appraisals at issue were flawed and failed to comply with USPAP.

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