Pub. 3 2013 Issue 1

10 www.azbankers.org The Tricky Relationship Between Banks, Borrowers and Appraisers By ZACHARY L. LAPRADE , Ryley Carlock & Applewhite or during deficiency litigation, a big mess. So, what remedies do banks and borrowers have against the appraiser if he provides a faulty appraisal? The answer depends. Generally speaking, an appraiser’s liability is limited to damages caused to “the person or one of a limited group of persons for whose benefit and guidance [the appraiser] intends to supply the information or knows that the recipient intends to supply it” and extends only to those transactions “that he intends the information to influence or knows that the recipient so intends.” Further, the appraiser does not need to know the identity of the third-party at the time he supplies the appraisal, as long as the third party falls within a distinct group or class of persons the appraiser intends to reach and influence with the ap- praisal. Conversely, the appraiser has no duty to a third party who is just a member of the larger class who “might reasonably be expected sooner or later to have access to the infor- mation and foreseeably to take some action in reliance upon it.” Similarly, if the circumstances show that an appraiser and the named recipient of the appraisal regard the identity of the recipient as “important and material” and that the appraiser “understands that his liability is to be restricted to the named person” only, the appraiser owes a duty toward the named indi- vidual. Here are a couple examples of how this rule plays out. In one case, an appraiser was re- tained by a bank to appraise a home in connection with the granting of a purchase-money mortgage. The court held the appraiser liable to the pro- spective buyer for failure to exercise reasonable care in performing the appraisal, even though the bank en- gaged the appraiser. In another case, an appraiser was hired by a lender to determine the value of a residential parcel “for use by [the lender] for a mortgage finance transaction only” and did not owe a duty to the home- A P PRAISALS ARE TRICKY IN LITIGA- TION. OVER THE LAST COUPLE OF YEARS, A BORROWER IN LITIGA- TION WITH A BANK typically makes two different argu- ments related to the bank’s appraisal. A borrower often asserts that “the bank’s appraiser overvalued the col- lateral at origination of the loan,” or that “the bank’s appraiser undervalued the collateral when it sold at a foreclo- sure.” From the bank’s perspective, the most frustrating part about these arguments is the bank is not providing an opinion of value. The appraiser is an independent third-party providing an opinion of value. There are strict federal regulations, including the Fi- nancial Institutions Reform, Recovery, and Enforcement Act, that separate the bank from the appraiser. Usu- ally, the borrower’s argument about the appraisal is a delay tactic. But in some cases, the appraiser is negligent, and a faulty appraisal makes all the hard work during loan origination, COUNSELOR’S CORNER