Friday, December 31, 2010

AMC Surety Bonds

Update: more current information about AMC bonds is in a newer post here.  
 
LIA Administrators & Insurance Services is qualified to sell all types of licensing and surety bonds in all 50 states.  Appraisal management companies, and even some true appraisal firms ensnared by AMC regulation, are currently required to carry surety bonds in eight of the 20 states that have enacted AMC registration laws as of this date.  The following states require AMCs to have bonds:

  • Arizona ($20,000)
  • Arkansas ($20,000)
  • Georgia ($20,000)
  • Missouri ($20,000)
  • New Mexico ($25,000)
  • Oregon ($25,000)
  • Tennessee ($20,000 7/1/11)
  • Washington ($25,000 1/1/12)

What’s the purpose of an AMC's surety bond? The surety bond is essentially a financial guaranty by the surety company -- the insurance company -- that it will pay amounts owed by the AMC stemming from obligations under a state’s AMC law, but only up to the total amount of the bond.  In most states, an AMC surety bond provides that protection to both the state and to consumers – this means, for example, that if a consumer can show that an AMC’s violation of one of its statutory obligations caused the consumer a monetary loss, the consumer can potentially make a claim against the AMC’s bond.  If the AMC doesn’t pay what is adjudged to be due to the consumer, then the surety company must pay it, up to the amount of the bond.  In a few states, individual appraisers may even be able to make claims against an AMC's bond for issues such as improper panel management or unpaid fees (on the other hand, several states' AMC laws expressly exclude unpaid fees as being covered by the bond).

For AMCs, however, it’s important to understand that bonds are not insurance.  Thus, if the surety company makes a payment to a third party on the bond, the AMC and potentially its principals are liable to the surety company for that payment.

How much do AMC surety bonds cost? At this time, because there is very little claims experience with AMC surety bonds, they are generally priced at the lowest premiums charged for generic surety and license bonds.  If an AMC has an acceptable track record and credit, the annual charge for a bond is generally 1% of its face amount (i.e., $200 for a $20,000 bond).  Because of the administrative work entailed with issuing bonds, many brokers will charge the AMC an additional handling fee – some brokers charge several hundred dollars per bond.  LIA Administrators & Insurance Services does not charge any broker or administrative fees.

Are separate bonds needed for each state?  Yes, separate bonds are required for each state because: a bond is written for the specific benefit of the named state and must use the statutory wording of that state.  Also, the entire principal amount of a bond must be available in each state, not spread among several states.  

What is the application process?  Applying for a surety bond entails a short application -- shorter than for insurance -- but does require financial statements for the AMC.  With some types of entities, guaranties may be required from the AMC's principals.  These are necessary to ensure that the AMC has the financial ability to pay the full face amount of the bond if required.  Approval and issuance of the bond usually takes no longer than two days.

We welcome further questions from our clients and potential clients about these and other regulatory compliance matters.  Having assisted a number of state regulators in their consideration of regulations under the new AMC laws and having worked with the state boards since FIRREA's enactment, we are very familiar with such issues.