Appraiser's Liability: An Overview

Article excerpt

As many accounting firms now offer appraisal as an auxiliary service, this may add to the liability problems the accounting profession already faces. In response to the bank and insurance crises, states are now regulating real estate appraisers. Prior to this, there was so little regulation that an individual could enter the business virtually by hanging out a shingle, with little more than a business license. The entry of the big six accounting firms into the appraising service in the 1980s increased competition and probably helped raise educational standards.(1) Originally, appraiser's liability was primarily rooted in contractual privity--which is the relationship between contracting parties--with very little responsibility to the public. Courts are now applying the concept of negligence and increasingly eroding the privity barrier. Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) establishes guidelines for state certification and licensing of real estate appraisers. Under these guidelines, states are encouraged to establish independent regulatory agencies to license and certify appraisers, with the ideal system being independent of other sectors of the real estate industry. According to the guidelines, an appraiser is required to pass an appropriate state examination and to meet the certification standards of the Appraiser Foundation's Appraiser Qualification Board. States are encouraged to recognize licenses or certifications already awarded under standards meet the Title XI requirements, but are not allowed to grandfather existing appraisers into the system. Due to conflicting state regulations, problems of reciprocity and multiple engagements are now surfacing.(2)

This article examines the current federal and state regulation of real estate appraisers. It explores various aspects of appraiser's liability and examines some current cases. Finally, some implications for the accounting profession are noted.

FIRREA Regulation

Title XI of the Financial Institutional Reform, Recovery, and Enforcement Act of 1989 requires that any real estate appraisal made in connection with a federally related transaction after July 1, 1991 be prepared by an appraiser who holds a state certification or license, issued according to a state-enacted law conforming to standards set forth in the FIRREA statute.(3) Furthermore, FIRREA enacted a concept of due diligence and vicarious liability which can subject appraisers to civil and criminal liability. Section 1121 defines federally related transactions as follows:

{any} real estate-related financial transaction which:

a. a federal financial institution's regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates; and

b. requires the service of an appraiser.

The term real estate-related financial transaction means:

{any} transaction involving:

a. the sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof;

b. the refinancing of real property or interests in real property; and

c. the use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.

The intent of Title XI of FIRREA is clearly set forth in its preamble in Section 1101:

{The} purpose of this title is to provide that Federal financial and public policy interests in real estate-related transactions will be protected by requiring that real estate appraisals utilized in accordance with uniform standards, by individuals whose competency has been demonstrated and whose professional conduct will be subject to effective supervision.

In view of this intent to protect the public interest, court decisions will probably continue to erode the privity barrier as they have in other professions, such as accounting.(4) These guidelines may soon apply beyond real estate. …