b y L I N D S AY M c M E N A M I N
The success of third-party claims against appraisers often
depends on determining who the appraiser’s clients are
Most real estate appraisals are performed as Under California law, USPAP is the generally accepted
credit support for secured residential loans. and recognized standard of appraisal practice and serves
Since the crisis in the housing market, apprais- as the foundation for arguments on the standard of care.1
ers have found themselves under heightened California requires licensed appraisers to be regulated
scrutiny for their role in mortgage loan genera- under USPAP.2 For federally regulated transactions—
tion, with particular focus on their precrisis valuations. This which most lender-issued mortgage loans are—appraisers
has led to an increase in claims made against appraisers. have to perform their appraisals in accordance with
Their risk of liability turns on a number of factors, includ- USPAP,3 which provides guidelines on developing and
ing the type of appraisal, the contractual relationship (or reporting the appraisal.4 USPAP also addresses other types
lack thereof) between the claimant and the appraiser, and of written appraisals.5
the real estate appraisal standards applicable on the date
of the appraisal. Solving for Market Value
In the aftermath of the savings and loan crisis of the USPAP deﬁnes an appraisal as “the act or process of devel-
1980s, appraisers formed the Appraisal Standards Board oping an opinion of value.…”6 The appraiser is “one
to articulate and publish the generally accepted standards who is expected to perform valuation services compe-
and rules for developing an appraisal and reporting the tently and in a manner that is independent, impartial,
results of an appraisal. These standards, as interpreted and
amended in the years since their original publication, are Lindsay McMenamin is a licensed real estate appraiser and asso-
known as the Uniform Standards of Professional Appraisal ciate attorney at Gaglione, Dolan & Kaplan, a civil defense ﬁrm
Practice (USPAP). with offices in Los Angeles and Woodland Hills.
22 Los Angeles Lawyer January 2012
Los Angeles Lawyer January 2012 23
and objective.”7 The opinion of value in most to-value ratio required by the lender. Similarly, ware issue that an appraiser is not able to
residential appraisals is based on market some recent claims against appraisers are change and that should not be binding on the
value. Market value is deﬁned as “a type of brought by sellers of properties asserting that appraiser.
value, stated as an opinion, that presumes the they lost the sale of a property because the Although a third party, usually the bor-
transfer of a property…as of a certain date, appraiser’s opinion of value was not equal to rower, may bring a negligence cause of action
under speciﬁc conditions set forth in the def- or more than the purchase price.11 Attorneys against the appraiser, only the client who
inition of the term identiﬁed by the appraiser defending appraisers against these claims retained the appraiser, or an intended user of
as applicable in an appraisal.”8 therefore should emphasize the market data the appraisal report, can succeed.17 Borrowers
Appraisers preparing appraisals for resi- available prior to the date of the appraisal as may claim that the appraiser owes a duty to
dential mortgage loans typically are required well as the deﬁnition of “market value.” them because they paid for the appraisal,
to use standard forms that have been cre- Complaints against appraisers frequently but under USPAP, payment does not change
ated by secondary lender Fannie Mae/Freddie contain causes of action for negligence, neg- the client relationship.18
Mac. Different forms apply depending on ligent and intentional misrepresentation, Another area of focus for defendant
whether the property is, for example, a sin- fraud, breach of contract (brought by either appraisers should be the appraisal report’s lim-
gle-family residence, a multifamily property, a contracting party or an alleged intended iting conditions and certiﬁcations, which pro-
a condominium, a mobile home, or vacant third-party beneﬁciary), civil conspiracy, and tect the appraiser from liability and serve to
land. In appraising a single-family residence, violation of various consumer protection warn the client what information is and is not
the applicable form is the Freddie Mac Form acts. Negligence and negligent misrepresen- included in the appraisal report. Some of
70 March 2005/Fannie Mae Form 1004 tation appear to be the most hotly contested. these conditions include:
March 2005. (Fannie Mae/Freddie Mac are • The appraiser is not responsible for legal
collectively referred to as a government-spon- Negligence matters that affect the property.
sored enterprise or GSE, and the form is typ- To prevail on a negligence claim, the claimant • The sketch is approximate.
ically called a GSE form.) must show duty, a breach of that duty, a • The appraiser is not a surveyor or a home
During the real estate boom of 2002 proximate causal connection between the inspector.
through 2007, lenders increasingly relied on negligent conduct and the resulting injury, and • The appraisal was made under USPAP.19
the opinion of value in the GSE form to issue loss or damage resulting from the negli- Many of these conditions can be a defense
mortgage loans. These lenders also made gence.12 Duty is often a critical element liti- against complaints regarding such issues as
loans that required no veriﬁcation of the bor- gated in cases against appraisers. Appraisers surveying, home inspection, construction
rower’s income or assets.9 Instead, the lender’s provide opinions of value and as such are con- defects, measurement errors, and encroach-
credit decision relied on an appraised value sidered to be “professional information sup- ments. In preprinted addenda, the GSE forms
that was for a speciﬁc date, typically the date pliers.”13 Under California law, a profes- include many of these conditions limiting the
the appraiser saw the property. In a time of sional information supplier owes a duty only extent of the appraiser’s duty.
steadily rising real estate values, lenders did to the client, not third parties.14 The client is After duty, another typical issue is rea-
not always consider what would happen if a the particular person, or class of persons, sonable standard of care. With this issue,
buyer defaulted and the value of the property that the appraiser “knows with substantial the best defense is a good offense. When the
declined. certainty…will rely on the representation in appraisal is difficult to defend, contributory
In the years after 2007, however, real the course of the transaction.”15 negligence can help. Defense attorneys may
estate values have declined, borrower defaults To determine whether the appraiser owes argue that lenders failed to protect them-
have increased, and lenders have faced losses. a duty to the claimant, the attorney defend- selves. For example, did the lender comply
To try to recoup those losses, lenders made ing the appraiser should ﬁrst examine the with its own underwriting criteria? The cri-
claims against appraisers mainly for the engagement letter or appraisal order. The teria may have required that the lender obtain
“inflated” values provided in appraisal client and any intended users of the appraisal an appraisal review (a summary review of the
reports. Borrowers have also brought similar report should be clearly noted. If, for exam- appraisal report by another appraiser) prior
claims against appraisers, contending that ple, the plaintiff is the borrower, but the to making the loan. Another question is
because the property value was inﬂated when lender is the listed client, the defense attorney whether the lender adequately veriﬁed that
the loan was issued, they were issued an may argue that the appraiser owed no duty the borrower could repay the loan. Loan
inﬂated loan that they could never repay. to the borrower. USPAP deﬁnes an intended underwriting experts can be retained to point
In defending against these claims, it is user as “the client and any other party as iden- out red ﬂags in the loan ﬁle that were ignored.
important to emphasize the definition of tified, by name or type, as users of the For example, did the lender question the
“market value,” particularly on a specific appraisal…by the appraiser on the basis of manicurist showing a monthly income of
date.10 Although the claimants typically con- communication with the client at the time of $15,000 on the loan application? Does evi-
tend that the appraised value was inﬂated at the assignment.”16 dence appear in the loan ﬁle that the lender
the time the appraisal was made, in many Attorneys defending appraisers should sought any veriﬁcation from IRS statements
instances the evidence for that claim is the fact also be aware of a software issue that has that $15,000 per month was normal for the
that years after the loan was made, the prop- arisen on the GSE forms. Some of the soft- applicant? Negligent underwriting that is
erty value is signiﬁcantly lower. However, an ware companies used by appraisers to input not the fault of the appraiser can obtain a
appraisal is an opinion of value on a certain data onto the required GSE forms continue favorable outcome for the defense at trial or
date, not a representation that the value will to include “client/borrower” on the cap- mediation.
be stable. tions on the top of the ancillary pages (the Another defense may involve a battle of
In a more recent twist, borrowers claim photo page, addenda page, map page, etc.). appraisal experts on the issue of whether the
that they cannot reﬁnance their loan because Borrowers have argued that this form lan- appraiser followed the standard of care under
the appraised value of their home is too low. guage shows that the appraiser’s client is the USPAP. Was the valuation reasonable, based
Either the loan being reﬁnanced is more than borrower. Attorneys defending appraisers on the comparable sales selected, the adjust-
the property value or it cannot meet the loan- should be ready to explain that this is a soft- ments made, and the limiting conditions cited?
24 Los Angeles Lawyer January 2012
If so, the appraiser fulﬁlled his or her duty. weight than the speciﬁcally named users in the judicial foreclosure sale and makes a full
Finally, appraiser defense attorneys may appraisal report is sometimes not enough to credit bid at the sale, the lender has no loss
argue that there is no proximate causation. An persuade the trier of fact. This warning also to recover. Under California law, if the lender
attorney can argue that it was not the ap- applies to the issue of the words “client/bor- chooses to bid at the sale, “it does so in the
praisal report that caused the loan to default. rower” appearing in the captions of the ancil- capacity of a purchaser.”24 If the full credit bid
Rather, it was the failure of the borrower to lary pages of the GSE appraisal forms. is successful and results in the acquisition of
make payments as promised. Because the Assuming that the plaintiff is able to suc- the property, “the lender pays the full out-
appraiser is not the proximate cause of the cessfully establish that he or she belongs to a standing balance of the debt and costs of
lender’s loss, the negligence claim fails. class that can rely on the appraisal, the next foreclosure to itself and takes title to the
potential defense for an appraiser centers on security property, releasing the borrower
A species of the tort of deceit, negligent mis-
representation is distinct from negligence.20
The elements of negligent misrepresentation
are 1) the defendant made a representation of
an important fact, 2) the representation was
not true, 3) the defendant made the repre-
sentation without any reasonable ground for
believing it to be true, 4) the representation
was made with the intent to induce reliance,
5) the plaintiff acted in justiﬁable reliance
upon the representation, and 6) there was a
For an appraiser, negligent misrepresen-
tation is typically more difficult to defend
against than negligence, because of the ambi-
guity of which third-party plaintiffs may be
legally entitled to bring a claim. Unlike neg-
ligence claims, a third party who is neither the
client nor a speciﬁcally identiﬁed intended
user can still sue for negligent misrepresen-
tation if the third party can show that it
belongs to a particular class of persons to
whom or for whom the representations were
made.22 When the appraiser’s client was a
lender, this third party is often another lender
that purchased the loan.
The appraisal agreement (or the order
and limiting conditions in the appraisal
report) can help the defense by speciﬁcally
naming the client and all intended users. If the the requirement that the misrepresentation be from further obligations under the defaulted
plaintiff’s name does not appear on the agree- one of fact. An appraiser can argue that his note.”25 As such, after a full credit bid, the
ment, the argument can be made that there or her opinion of value is an opinion, not a lender cannot pursue any other remedy
was no reasonable belief that the plaintiff fact, and that the appraiser believed that regardless of the actual value of the property
would rely on the report. opinion to be true at the time. After this on the date of sale.26 Thus the lender is pre-
The GSE forms, however, contain a defense is presented, another battle of the cluded from collecting its debt from an
preprinted certification that damages this appraiser experts is likely to ensue about the appraiser by claiming that the property was
defense. Certiﬁcation 23, which was added on value of the property, the comparable sales actually worth less than the bid.27 Few full
the GSE form in March 2005, arguably selected, and the adjustments made. credit bids are made, but when they are, this
undermines an appraiser’s argument that Defense attorneys should be aware, how- defense is typically successful.
reliance is limited to only the named intended ever, that in California, contributory negli- Another defense issue is insurance policy
users. The certiﬁcation reads: gence is usually not a defense against negli- limits, which come into play in settlement
The borrower, another lender at the gent misrepresentation.23 However, the same negotiation and trial. As housing values rose,
request of the borrower, the mortgagee facts that may establish contributory negli- many appraisers did not raise their insur-
or its successors and assigns, mort- gence may be used to prove that the reliance ance policy limits. Appraisers may still have
gage insurers, government sponsored was unreasonable. An appraiser’s defense a policy limit as low as $300,000, which was
enterprises, and other secondary mar- attorney can argue that reasonable and pru- adequate when housing values in many local
ket participants may rely on this dent underwriting was ignored by the lender. markets ranged no higher. During the bubble,
appraisal report as part of any mort- Similarly, the defense can argue that there is that range was more often exceeded, expos-
gage ﬁnance transaction that involves no proximate cause, since the lender’s loss is ing appraisers to liability in excess of policy
any one or more of these parties. from a borrower default, not from the limits. Settlement talks therefore take policy
This certiﬁcation is often part of the con- appraisal opinion. limits into consideration. Most errors and
tentions in complaints. A defense argument Finally, a defense attorney may attack the omissions insurance policies have diminish-
that boilerplate should not be given more loss. If the lender forecloses through a non- ing limits in which the defense fees and costs
Los Angeles Lawyer January 2012 25
are counted against the policy limit. The Dodd-Frank Act will affect appraiser liabil-
insurance carrier therefore has to weigh the ity, it appears that appraisers are likely to
cost of defense against exposing the appraiser face more claims in the future. Appraisers
to a judgment at trial. need to remain current with the legislation,
statutory codes, and appraisal forms and
The Dodd-Frank Act software in order to be able to better defend
The defense tactics described above apply to their appraisals and opinions of value. This
appraisals written between 2003 and 2008 will take detailed work ﬁles and adding more
under the guidelines in place at that time. limiting conditions and certifications that
ER OF THE ★★★
The recent mortgage meltdown, however, speciﬁcally address all issues and conditions
SERVICE AWA has resulted in new rules for appraisers, and affecting each appraisal report. With that,
COMMUNIT Y e
ice Panel of th these rules are for the most part untested in attorneys can better defend their appraiser
Criminal Just ’s O ffice court. In March 2008, for example, Freddie clients. ■
Los Angeles Mac, the Federal Housing Finance Agency,
and the New York State Attorney General 1 THE APPRAISAL FOUNDATION, UNIFORM STANDARDS
issued the Home Valuation Code of Conduct OF PROFESSIONAL APPRAISAL PRACTICE U-1 (2010-11)
(HVCC) to enhance the independence and [hereinafter USPAP].
2 BUS. & PROF. CODE §§11300 et seq., 11319.
accuracy of appraisals.28 The purpose of this 3 The Financial Institutions Reform, Recovery, and
Be an attorney new standard is to maintain a separation
between risk management and loan produc-
Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat.
183 (1989) (incorporating USPAP). See also 12 U.S.C.
who makes a tion. This has resulted in the rise of Appraisal
Management Companies (AMCs), which act
§3339; 12 C.F.R. §225.64.
4 USPAP, supra note 1.
difference as intermediaries between the lender and the
appraiser. To protect themselves, AMCs often
6 Id., Deﬁnitions, Appraisal.
7 Id., Deﬁnitions, Appraiser.
have contracts that include the appraiser’s 8 Id., Deﬁnitions, Market Value.
Volunteer with the agreement to indemnify the AMC should a 9 U.S. Regulator to Sue Major Banks over Mortgages,
LACBA claim be ﬁled. Appraisers are advised not to L.A. TIMES, Sept. 2, 2011.
10 Freddie Mac Form 70 (Mar. 2005)/Fannie Mae
Domestic Violence sign these contracts, which increase their
Form 1004 (Mar. 2005), Deﬁnition of Market Value
exposure to liability. Most errors and omis-
Project [hereinafter GSE form].
sions insurance carriers for appraisers do not 11 Mitra Kalita & Carrick Mollenkamp, Judgment
cover such claims. The era of the HVCC Call: Appraisals Weigh Down Housing Sales, WALL ST.
We provide one-on-one legal appears to have ended, however, with the J., Aug. 12, 2011.
12 Carleton v. Tortosa, 14 Cal. App. 4th 745, 754
assistance to our clients to enable Dodd-Frank Act,29 which went into effect
them to obtain temporary (and (1993).
in November 2010. 13 Bily v. Arthur Young & Co., 3 Cal. 4th 370, 406
ultimately permanent) Restraining That act includes many of the provisions (1992).
Orders against their assailants. that appear in the HVCC and is still under- 14 Id.
15 Soderberg v. McKinney, 44 Cal. App. 4th 1760,
going scrutiny. The act requires anyone
reviewing appraisals to file a state board 1768 (1996).
This is a rewarding opportunity (with 16 USPAP, supra note 1, at U-3.
a minimal time commitment) to give complaint against any appraiser who has 17 Soderberg, 44 Cal. App. 4th at 1766.
valuable assistance to an under- prepared an appraisal report that appears to 18 USPAP, supra note 1, Frequently Asked Questions,
be below the standard of care. 30 Many at F-44, Item 93, Payment by a Party Other Than the
represented population of our
appraisers are critical of this measure for Client.
community who is in dire need of 19 GSE form, supra note 10, Statement of Assumptions
being overbroad and lacking due process.
help.The Project is located in both the Should someone who knows little about and Limiting Conditions: Appraiser’s Certiﬁcation.
20 Bily v. Arthur Young & Co., 3 Cal. 4th 370, 407
Downtown Los Angeles and appraisals, such as a borrower, be obliged to (1992).
Pasadena Branches of the Superior ﬁle a state board complaint? Other potential 21 CACI 1903; Fox v. Pollack, 181 Cal. App. 3d 954,
Court. claimants are reviewers of appraisals, who 962 (1986).
22 Soderberg, 44 Cal. App. 4th at 1771.
often are competitors of the appraiser they
23 3 LEVY, GOLDEN, SACKS, CALIFORNIA TORTS §§40.11,
No prior experience is required. No are reviewing. Some appraiser reviewers are
40.48.11-40.48.12 (2007). See also 5 WITKIN, SUMMARY
ongoing representation is required from a state in which the property is not OF CALIFORNIA LAW, Torts, §820, at 1183 (10th ed.
although volunteers have the option located and have little knowledge about the 2005).
of representing their clients at the area in question. Under what criteria should 24 Passanisi v. Merit-McBride Realtors, Inc., 190 Cal.
they ﬁle a complaint and interfere with the App. 3d 1496, 1503 (1987).
time of their hearing. 25 Alliance Mortgage Co. v. Rothwell, 10 Cal. 4th
appraiser’s business? While waiting for the
1226, 1238 (1995).
state board’s ﬁndings, an appraiser can lose 26 Passanisi, 190 Cal. App. 3d at 1503.
FOR INFORMATION CONTACT a substantial amount of work, especially 27 Alliance Mortgage Co., 10 Cal. 4th at 1238.
since many lenders will not give assignments 28 Home Valuation Code of Conduct, available at
Deborah Kelly to appraisers with a record of a state board http://www.freddiemac.com/singlefamily/docs/030308
Directing Attorney complaint. A state board complaint also _valuationcodeofconduct.pdf.
29 Dodd-Frank Wall Street Reform and Consumer
costs money to defend, and the stakes are
tel 213.896..6491 Protection Act, Pub. L. No. 111-203, §1471, Property
high, since an unsuccessful outcome can Appraisal Requirements (2010).
e-mail email@example.com cause a civil action to be ﬁled against the 30 Id. at §1472, Appraisal Activities, adding §129E(e),
appraiser. Mandatory Reporting, to the Truth in Lending Act, 15
Although it is unknown how exactly the U.S.C. §1601, ch. 2.
26 Los Angeles Lawyer January 2012