Friday, February 18, 2011

"Robo-Complaints" to State Appraiser Boards

Mortgage borrowers in default deal with "robo-signed" foreclosure documents.  Residential lending appraisers may soon have to deal with "robo-complaints" to state appraiser boards filed by lenders to comply with Dodd-Frank.  One of the end results may be more appraisers shy about value.

We at LIA and READI anticipate and are preparing for an increased volume of future state disciplinary complaints against appraisers by lenders and AMCs.  Our anticipation is based on Dodd-Frank's mandate that lenders and AMCs must report appraisers to state appraiser boards for apparent violations of USPAP, violations of applicable law, or other ethical or professional misconduct.  The Federal Reserve's interim final rule refines this a little by limiting the reporting duty to those violations that are likely to affect the value of the subject property.   A failure to comply with this reporting obligation will be a violation of the Truth in Lending Act and will subject the lender or AMC to potential penalties -- and could also conceivably provide a basis for other types of claims in civil actions by private plaintiffs.

A number of state regulators similarly expect a surge in disciplinary complaints when this part of Dodd-Frank is implemented in April.

To make it uglier:
A few vendor management system developers (i.e., companies that sell technology for ordering appraisals or managing appraiser panels) for lenders and AMCs are including tools in their systems that will automate the submission of disciplinary complaints against appraisers to state boards straight from the vendor management platform or software.  These products promise that when a clerk at a lender or AMC views a negative review of an appraisal or information suggesting an appraisal issue (perhaps just a BPO or AVM at variance with the appraiser's value), the clerk will be able to file a disciplinary complaint in any state against the appraiser simply by clicking a button in a software dashboard.  The disciplinary complaint will then be automatically prepared and submitted with supporting documentation to the appropriate state appraiser board.  The appraiser may then also be automatically added to the lender or AMC's ineligible list.  Because of the perceived threat of a Truth in Lending Act violation for non-compliance and because pushing the "report" button will appear to be an easy solution, it's not hard to imagine that some lenders and AMCs will over-report appraisal issues for discipline.

In essence, a computer-generated "robo-complaint" created by a mouse-click will commence an administrative law investigation process against the appraiser that may threaten his or her livelihood.  Just the existence of that pending investigation, regardless of the result, will cause anxiety for the appraiser, may cause many lenders and AMCs to deny work to the appraiser, may place the appraiser on ineligible or exclusionary lists, and may result in nonrenewal or denial of E&O insurance by some insurance providers (but not by LIA's program).  This process will be repeated thousands of times.  And, there is no reason under most states' laws that the clerk pushing the "report" button and robo-signing the complaint form cannot be located in an offshore outsourced office.  In fact, in those states that require an individual's signature on a complaint, I've heard from the in-house appraisal staff at a few lenders that they don't want to have their names attached to large numbers of future state board complaints against other appraisers. 

We saw a mini-version of this once before but it involved only one lender -- in 2009, Chase filed hundreds of disciplinary complaints against appraisers across the country using the form letter attached here when loans on appraised properties went into default and it possessed a negative appraisal review (even if the review itself was dubious in quality) concerning the origination appraisal.  Every letter to every state board by the lender was identical -- and each one put the affected appraiser through the hardship of a disciplinary investigation.  Of course, it was sometimes deserved, but many times it was not.  I saw firsthand the careers of several reputable appraisers injured by complaints that were later ruled by state boards to have no basis.  It was the existence of the pending investigation itself that caused the harm.

If the volume of complaints does surge as expected, there will likely be some unintended and negative consequences for various parties:
  • Robo-complaints filed by lenders and AMCs in the name of compliance may overburden state appraiser boards and prevent them from devoting attention to actual instances of consumer harm.  (Of course, state boards could increase their revenues by charging businesses, but not consumers, for each robo-complaint submitted.)
  • Appraisers may become even more conservative in their opinions of value.  Almost all disciplinary complaints filed by lenders concern alleged overvaluation.  Lenders file complaints with state boards primarily when a review appraisal or default loss suggests an overvaluation in a loan origination appraisal.  A big increase in new lender/AMC complaints may result in a greater tendency toward low valuations because that is simply the appraiser's safer route to avoid both disciplinary complaints and lawsuits by lenders.  Lenders who become known for filing large numbers of complaints will be more negatively affected.
  • Many good, reputable appraisers will be injured by the automated filing of complaints whenever a negative review -- regardless of its quality or the reviewer's competency or the purpose of the review -- suggests that the appraiser has violated USPAP.  Worse, complaints might be submitted based on BPOs or AVMs when the vales differ from an appraiser's opinion.