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.
SUBJECT: Clarification of the Client in a Federally Related Transaction
APPLICATION: Real Property
THE ISSUE:
The appraisal rules adopted by the Federal Financial Institutions Regulatory Agencies 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…….” 1
In some cases, however, a property owner might directly engage the services of an appraiser for one intended use, but later desire to use the appraisal report in a federally related loan transaction. This and other similar scenarios lead to the question: “Does an appraiser have an obligation to ensure that his or her services are directly engaged by a federally insured depository institution?”
ADVICE FROM THE ASB ON THE ISSUE:
Relevant USPAP & Advisory References
DEFINITIONS, specifically those of “client,” “intended user,” and “intended use.”
The Confidentiality, Conduct, and Management sections of the ETHICS RULE.
SUPPLEMENTAL STANDARDS RULE, which requires an appraiser to ascertain whether any supplemental standards apply to the assignment.
Standards Rules 1-2(a) and 1-2(b), which require an appraiser to identify the client, intended user, and intended use.
Standards Rule 2-1(a), which requires an appraiser to clearly and accurately set forth the appraisal in a manner that is not misleading.
Statement on Appraisal Standards No. 9 SMT-9), which addresses intended use and intended users in an assignment.
Statement on Appraisal Standards No. 10 SMT-10), which describes the applicability of USPAP in federally related transactions.
Advisory Opinion 26 AO-26) which covers readdressing (transferring) a report to another party.
Advisory Opinion 27 AO-27) which addresses appraising the same property for a new client.
USPAP requires an appraiser to identify the intended use and intended users in an appraisal assignment. USPAP also requires that an appraiser not be misleading in the marketing of their services (see Management section of the ETHICS RULE). Statement on Appraisal Standards No. 10 (SMT-10) provides clarification, interpretation, explanation, and elaboration on the appraiser’s USPAP obligations when performing assignments for use by a federally insured depository institution in a federally related transaction. SMT-10 discusses supplemental standards issued by federal financial institution regulatory agencies for appraisers, as well as requirements imposed on lenders that the lender or their agents directly engage the appraiser in such assignments.
In order to not be misleading when contacted by a prospective client the appraiser’s obligation is one of proper disclosure. Before an appraiser accepts an assignment knowing the intended use of the appraisal is, or may be, for a federally related transaction by a federally insured depository institution, it is that appraiser’s responsibility to disclose to the prospective client that the lender or its agent is required to directly engage the appraiser. The appraiser should also disclose to the prospective client that it is unethical for the appraiser to later “readdress” or otherwise change the report to indicate a federally insured depository institution was the client when the appraisal was performed for another party (see AO-26 titled “Readdressing [Transferring] a Report to Another Party” and AO-27, titled “Appraising the Same Property for Another Client” for related advice on this issue).
If the client still wishes to proceed with the appraisal after the appraiser has properly fulfilled these disclosure obligations, the appraiser can accept the assignment. It would be prudent to recite disclosures in the engagement letter and in the report. (Also refer to SMT-9 for additional information relating to intended use and intended users).
Homeowner Susan Daly contacts appraiser John Hunt to perform an appraisal of her residence. She is considering refinancing and wants to determine the amount of equity in the residence before completing a loan application. Assuming the refinancing would be a federally related transaction at a federally insured depository institution, what is John’s responsibility to this potential client?
A buyer of a commercial building contacts appraiser Jane Johnson about appraising the property for financing. The buyer explains that he will likely be providing the report to an insurance company that is interested in financing the property. The insurance company has no problem with the buyer being the client, as long as the insurance company is identified as an intended user in this assignment. However, the buyer says that he may also make application to his local bank, a federally insured depository institution. Can Jane accept this assignment? If so, does she have any disclosure obligations?
This Advisory Opinion is based on presumed conditions without investigation or verification of actual circumstances. There is no assurance that this Advisory Opinion represents the only possible solution to the problems discussed or that it applies equally to seemingly similar situations.
Approved June 27, 2003
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National Credit Union Administration – 2 CFR 722.5(b) Federal Reserve System – 12 CFR 225.65(b) Federal Deposit Insurance Corporation – 12 CFR 323.5(b) Office of the Comptroller of the Currency – 12 CFR 34.45(b) Office of Thrift Supervision – 12 CFR 564.5(b) |
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