Monday, June 27, 2011

Appraisal Management Company (AMC) Surety Bond Requirements

*** This post is outdated -- see more recent post on AMC bonds here ***

Appraisal management companies, and even some traditional appraisal firms required to register as AMCs, must carry surety bonds under the new AMC laws in 10 states.  LIA Administrators & Insurance Services provides bonds in each state.  As of the date of this post, the states with AMC bond requirements are:
  • Arizona ($20,000)
  • Arkansas ($20,000)
  • Georgia ($20,000)
  • Kentucky ($500,000 pursuant to emergency regulations, effective 10/1/11, but subject to change because KREAB is considering the regulations) [Update -- amount changed to $25,000]
  • Missouri ($20,000)
  • New Mexico ($25,000)
  • Nebraska ($25,000 effective 1/1/12)
  • Oregon ($25,000)
  • Tennessee ($20,000 effective 7/1/11)
  • Washington ($25,000 effective 7/1/11)
How much do AMC surety bonds cost? Because there is very little claims experience with AMC surety bonds as of this date, the bonds are generally priced at the lowest premiums charged for generic surety and license bonds.  If a firm has an acceptable record and good credit, the average annual charge for an AMC bond is about 1% of its face amount for bonds in the range of $20,000 to $25,000 (i.e., $200 for a $20,000 bond).  Because of the administrative work entailed with issuing bonds, many brokers will charge an additional handling fee – some brokers charge several hundred dollars per bond.  LIA Administrators & Insurance Services does not charge any separate broker or administrative fees.

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 firm.  With some types of entities, guaranties may be required from the firm's principals.  These are necessary to ensure that the firm 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.  LIA's application for bonds can be found here.

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.  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.

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.  

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.