When Is The Lender Out Of Bounds On Appraisals?
By Charlie Elliott, Jr., MAI, SRA

If you have not heard the numerous cries from appraisers lately, accusing some in the lending profession of going beyond the pale by exerting pressure on the appraiser to appraise properties for more than their market value, please check your pulse to make sure that you are still with the living. Those in our profession who are not aware of these cries are expected to have assumed room temperature due to the many complaints from appraisers and regulatory agencies.

In recent days and months there have been numerous congressional testimonies, articles, letters, appraisal petitions and many news articles alleging that loan officers are pressuring appraisers to appraise properties for more than their market value in order to make loans and collect commissions.

Some will say that it is the appraiser’s responsibility to prepare an objective appraisal free of bias. As an appraiser myself, I will be the first to admit that this is true. There is no shortage of training, education and experience among those whom have qualified as certified appraisers, which should not lead them to the preparation of an objective and unbiased appraisal.

Beyond the above statements, it is necessary to carry the issue a step further. At least in our country it is not only illegal to accept bribes but it is also illegal to participate in a transaction by offering a bribe. This is especially true when bribe money is being offered on the condition that illegal services are performed. Some may say even if the lender exerts pressure on the appraiser that this is not a bribe, but merely a request of the appraiser to insure that the appraised value is as high as the appraiser is willing to make it; after all, in most cases, there is no money being offered in connection with the request. This statement is superficial, in that there is a deeper issue involved within the equation.

In order to get to the bottom of this, we must ask ourselves who selected and contracted with the appraiser to perform the service. In years past in many, if not most, lending organizations, the appraisal-selection process was performed at a higher level than that of the person originating the loan and the large majority of loan originators worked on a salary basis. As a result, there was no financial incentive for the loan officer to become creative in the acquisition of appraisals.

We live in a different world today, whereby the large majority of lenders pay their loan originators a commission based upon the closing of the loan. Since the loan is probably going to be resold on the secondary market anyway, lending companies are not as concerned about collateral assessment as they do not consider themselves risk jeopardized.

Circumstances in today’s environment open the door for lenders to become involved in fraud. Yes, a lender pressuring an appraiser to appraise a property for an amount different than its market value under circumstances whereby the lender may benefit financially is fraud. This coupled with the fact that the appraiser was selected by the lender and that the appraiser’s future business from that lender is contingent upon the appraiser delivering an inflated value on the property is a case of fraud, with bribery thrown in for good measure.

When are the loan officer’s actions out of bounds? After all there is always the potential that an appraisal could be flawed, producing a result lower than the actual market value of the subject property. Can the loan officer not even legally talk to the appraiser about the results of the appraisal without being criticized? This is a valid concern, and the loan officer’s right to communicate with the appraiser must be protected for the benefit of everyone concerned.

Listed below are a few examples of statements by lenders to appraisers which are improper or at a minimum offer the appearance of impropriety. In most cases they are not only unethical, but also probably examples of fraud.

• “Please call before the property is inspected if you cannot meet the estimated value of $200,000.”

• “We got to have $150,000 to make the deal."

• “We cannot pay for the appraisal if the loan goes south.”

• “Please call before you start the appraisal if the appraised value will not be at least as much as much the contract sales price.”

• “We have a lot more business for you if you can hit our numbers.”

• “Would you be willing to charge us only for the deals that close?”

The following statements are considered not only ethical and legal but also necessary if the circumstances warrant.

• “The appraised value is $20,000 less than the contract price. Could there be a mistake in the appraisal?”

• “The Realtor has reported that there was a comparable sale down the street almost identical to the subject which sold for $30,000 more than your appraised value on the subject property. Can you discuss this with me?”

• “My underwriter has stated that there are mathematical errors in the comparable adjustments on the appraisal. Could you please review them and give me a call?”

The above should be of concern to us today more than ever as more and more loan officers and appraisers are finding themselves the subject of ethical complaints, civil lawsuits and criminal lawsuits.

The Federal Housing Administration (FHA) recently announced that it is not only holding appraisers responsible for improperly prepared appraisals but it is also holding lenders responsible.

A Fannie Mae representative recently stated that Fannie has special a division to handle foreclosure properties where fraud is expected. The representative reported that the agency is doing investigative work on these transactions in attempt to gather the information necessary to bring appropriate actions against appraisers and lenders suspected of fraud. One of the tools used is a follow-up review appraisal by an independent appraiser for the property which is foreclosed upon, and where fraud is suspected. The representative revealed that the appraiser is expected not only to do a review appraisal but an investigation into whether the appraisal contained evidence of fraud.

So what is considered out of bounds or in foul territory? When the loan officer’s intention or apparent intention is to pressure the appraiser to appraise a property for an amount other than its market value, the lender is out of bounds. When instructions or inquiries demonstrate an honest attempt to assist in insuring that the appraisal is properly prepared even it requires constructive criticism, the lender is within his or her right. The interest of the property owner, lender and appraiser are best served when the appraisal is free of defects.

Charlie W. Elliott, Jr., MAI, SRA, is President of ELLIOTT® & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or at charlie@elliottco.com or through the company’s Web site at www.appraisalsanywhere.com.