Appraiser-Client Confidentiality AO-10

This communication by the Appraisal Standards Board (ASB) does not establish new standards or interpret existing standards. Advisory Opinions are issued to illustrate the applicability of appraisal standards in specific situations and to offer advice from the ASB for the resolution of appraisal issues and problems. They do not constitute a legal opinion of the ASB.

ADVISORY OPINION AO-10

SUBJECT: The Appraiser-Client Relationship

THE ISSUE:

The appraisal rules adopted by the Federal Financial Institutions Regulatory Agencies (FFIRA) in August 1990 to comply with Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) impose a requirement on regulated institutions that "If an appraisal is prepared by a fee appraiser, the appraiser shall be directly engaged by the regulated institution or its agent..." ^Many times a property owner will directly engage an appraiser, then later decide to obtain a mortgage loan. This leads to two questions:

Question 1: Does an appraiser have an obligation under the Uniform Standards of Professional Appraisal Practice (USPAP) to ensure that his or her services are directly engaged by a regulated institution?

Question 2: What is the responsibility of the appraiser when requested to provide a new cover letter or appraisal transmittal letter indicating a lender as the client when the appraisal was originally performed for another party?

In addition to issues related to borrower and lender clients, appraisers are often faced with a request to perform an appraisal on a property that was previously appraised for another client. This leads to an additional question:

Question 3: How long does the appraiser-client relationship last?

ADVICE FROM THE ASB ON THE ISSUE:

Relevant USPAP References

The ETHICS RULE emphasizes the personal obligations and responsibilities of the appraiser. The SUPPLEMENTAL STANDARDS section requires an appraiser to ascertain whether standards in addition to USPAP apply to the assignment being considered. Standards Rule 1-2(b) requires an appraiser to identify the intended use of the appraisal.

Response to Question 1:

Does an appraiser have an obligation under the Uniform Standards of Professional Appraisal Practice (USPAP) to ensure that his or Her services are directly engaged by a regulated institution?

A: Before the appraiser accepts an assignment knowing the intended use of the appraisal is for a mortgage loan from a federally regulated institution, it is the appraiser's responsibility to disclose to the prospective client that the lender or its agent is required to directly engage the appraiser. If the client still wishes to order the appraisal after this disclosure, the appraiser should inform the client of the implications to Question 2.

Response to Question 2:

What is the responsibility of the appraiser when requested to provide a new cover letter or appraisal transmittal letter indicating a lender as the client when the appraisal was originally performed for another party?

A: The appraiser has a personal obligation and a professional responsibility to avoid any action that could be considered misleading and to protect the confidential nature of the appraiser-client relationship. Simply changing the title page or transmittal letter of an appraisal report without full disclosure of the original appraiser-client relationship is misleading. Appraisers should be aware that the same FFIRA appraisal rules cited above, as updated in 1994, state:

A regulated institution may accept an appraisal that was prepared by an appraiser engaged directly by another financial services institution if:

1) The appraiser has no direct or indirect interest, financial or otherwise, in the property or transaction; and

2) The regulated institution determines that the appraisal conforms to the requirements of this part (of the FFERA rules) and is otherwise acceptable.

Response to Question 3:

How long does the appraiser-client relationship last?

A: The end of the appraiser-client relationship cannot be stated as a definite time frame. One potential limit for the appraiser-client relationship is the completion of the intended use of the original appraisal.

When an appraiser is contacted to appraise a property and reasonably believes that a prior appraiser-client relationship is still in effect, the appraiser should request a release (preferably in writing) from the prior client before accepting the new assignment.

This Advisory Opinion is based on presumed conditions without investigation or verification of actual circumstances. There is no assurance that the Advisory Opinion represents the only possible solution to the problems discussed or that it applies equally to seemingly similar situations.

Approved March 23, 1993
Revised March 26, 1996
Revised September 16, 1998
Revised September 15, 1999
Revised June 11, 2002

^Federal Reserve System                       12 CFR 225.65(b)
Federal Deposit Insurance Corporation     12 CFR 323.5(b)
National Credit Union Administration        2 CFR 722.5(b)
Office of the Comptroller of the Currency 12 CFR 34.45(b)

WARNING!

(ARM) Adjustable Rate Mortgage Holders!

New credit reporting criteria!

A new credit-scoring system that rates borrowers based on the type of mortgage they have could cause people with adjustable mortgages to pay higher interest rates on everything from credit cards to car loans.

Some financial experts, however, say this system bears a close resemblance to so-called universal default, which allows a credit card company to raise a customer's interest rate if he makes a late payment with another creditor.

"This is pretty much going to be all that credit card companies, student loan companies, auto lenders and other banks need to charge customers higher rates solely based on the kind of mortgages they have," said Lynnette Khalfani, a former reporter for t e Wall Street Journal and CNBC, and author of "Zero Debt." "Folks who were teased and seduced to sign up for ARMs just two years ago are paying for that decision in ways they never imagined," Mrs. Khalfani said. "You could never fathom it would cause higher rates on credit cards and higher payments too. That smacks of unfairness to the consumer." Not everyone with ARMs is struggling to make ends meet.