Liability Concerns
When Smith realized her report was altered, she called
her E&O provider with concerns about her potential
liability. Her question is valid: What happens
when a loan goes bad due to a questionable appraisal if the
report used to underwrite the loan is altered? So far, no
one knows the answer. Discussing the issue in FNC vs.
Appraisers, Robert Coop speaks for many appraisers when
he says, “If my report changes in any way (during the
conversion/delivery process), it’s no longer my work. I’ll
stand behind what I do; if they want to change or strip
something out, it’s their responsibly. It’s no longer mine.”
While the
liability issue is unresolved with respect to altered
reports, the notion that an appraiser’s professional
responsibility ends when he or she sends the report, seems
to be answered, according to a September 2007 Q&A issued by
the
Appraisal Standards Board (ASB), part of the Appraisal
Foundation. The question asks: “When I transmit my
residential form report electronically I have heard that
some of my clients are opening the appraisal file and
removing my signature file, reformatting the data, and in
other ways altering my appraisal report for the client’s
use. What are my responsibilities under USPAP
if I know or believe such actions are occurring after my
report is delivered to the client?”
The ASB’s response:
“USPAP does not specifically address who ‘owns’ an appraisal
report, the research necessary to produce that report or the
report’s supporting documentation. Once an appraisal report is
delivered to a client, a client may do a variety of things,
including redacting or removing the appraiser’s signature, or
converting data from the report into a format more functional to
the client, etc. Once the appraisal report has been transmitted
to the client, USPAP does not place further responsibility on
the appraiser for the client’s use of that report.”
Quality Control
A third explanation
for altered reports, besides willful fraud and a clunky
conversion/ transmission process, takes place behind the scenes
for review and quality control purposes. Insiders explain that
software is run on appraisals that reads PDF files and extracts
relevant information into a quality control form. A set of rules
is applied to the extracted data. If a report gets through the
electronic review, it does not need manual attention and the
loan is processed. If something is flagged, the quality control
specialist takes a closer look. The rest of the report passes
and can be ignored. Insiders explain that this process creates a
workfile that typically is truncated or altered in some way. But
they make clear that these “workfiles” are not passed off as
appraisals; they are for in-house purposes only. Occasionally, a
workfile finds its way back to the original appraiser, who
assumes their report has been altered intentionally.
Smith says this explanation does not add up either. “I realize
that workfiles are created, however, if you look on the photo
pages of my original PDF report and photo pages on the altered
PDF, data has been added on the side of each photo,” Smith says.
“Also, the cover page, cover letter, summary of salient
features, additional listing grid page (with active listing)are
not present on the altered report but included are the listing
photo page and location map showing three comps and two
listings. The signature on the signature page of the URAR has
been removed. However, a copy of the original signature page
with the signature is retained. Now I realize that the value
isn’t changed but if this was for a ‘workfile’ only, why add
data on photo pages? What reason or right do they have to alter
reports? If I affix my digital signature to a report then that
is the report that the lender should receive, not an altered
report with added data from the AMC. It appears that they
have retained the original signature page of the URAR with my
signature to use and/or include in the altered report,” Smith
said.
Lender Slicing
and Dicing
Appraisers object to
the notion that the “end user” is not getting an unaltered
version of their report. However, this behind the scenes
“slicing and dicing” of appraisal data by AMCs/lenders, as part
of underwriting, is not so black and white according to some.
For one thing, insiders say, defining the end user is not so
easy. They say in some instances appraisals go through several
underwriting steps, at an AMC or lender, before reaching the
“decision maker.” This person may never see the complete report
but only data points on a spread sheet, from which he/she makes
a decision along with other data, such as credit worthiness of
the borrower.
When an original
appraisal is received, a “snapshot” of it may be taken with
certain data lifted and put into a workfile without the original
appraisal being altered. Only certain data may be selected for
removal and some might be scrambled along the way, due to
formatting or other software-related issues. These workfiles,
which can resemble an appraisal, are “marked up” by underwriters
and circulated to various departments for review; sometimes they
find their way back to the appraiser. This insider says that in
this scenario the sanctity of the report is not violated.
Further, he says what lenders do with the reports once they
receive them should be of no concern to appraisers, especially
given the USPAP guidance that an appraiser’s responsibly ends
when they send the report. Many appraisers, of course, don’t
agree.
Reviews
Another reason why a report
may wind up in an “altered state,” is as a result of the review
process. Arizona Certified Appraiser Mark A. Heitzinger has been
reviewing appraisals since 1980. He says the only legitimate
reason to remove a signature or exclude pages from an original
report is for review purposes. Listings, photos, maps, etc. may
not be germane to the scope of work of the review and may not be
sent to a reviewer. “It is good practice to remove the identity
of the appraiser for a review but I have never seen the
signature actually removed, usually it is blacked out with magic
marker,” said Heitzinger. “Alteration, removal or addition of
any specific information contained in the report is not
permitted.” He says blacking out the signature
protects the identity of the appraiser being reviewed to prevent
any bias the reviewer may have towards the appraiser.
Industry’s Best
Kept Secret?
According to Pamela
Crowley, who runs
MortgageFraudWatchList.com, there is
plenty of evidence of appraisal tampering. "Hundreds have
contacted me, many appraisers and others involved in the
mortgage business have provided me with numerous examples of
appraisal reports that have been altered in various ways. Some
were through major AMCs and some were through mortgage
brokerages. We are working on a massive RICO (Racketeer
Influenced and Corrupt Organizations
Act)
suit to
be filed against lenders, AMCs and others involved in the
unlocking and altering appraisal reports,” Crowley said.
Michele D. Kennison, a
State Certified Appraiser in Oregon, says she has proof. She
says it involves an appraisal on a new construction project that
had many serious problems, including safety issues, which she
expressed to a loan officer at a large national bank during a
telephone conversation. Even though she was dealing with an AMC
intermediary, she says she was in direct contact with the loan
officer because she was not the original appraiser and needed a
copy of the first appraisal. She expressed to the loan officer
the numerous problems with the property in that conversation and
noted them in the addendum of the report she sent off to the AMC.
“The loan officer called me and said, ‘What are you talking
about? I don’t see any of the problems we discussed,’” said
Kennison. “When I looked at the report she had been sent by the
AMC, most of the addendum where the problems were noted was
missing,” Kennison said.
Data Mining
While changing a
report may be criminal in certain circumstances, data mining is
not. The question is unresolved and may hinge on the copyright
issue: lenders feel the contents of appraisal reports are their
property to do with as they please. Many appraisers disagree, of
course, including Tim Vining, MAI, the appraiser who several
years ago “won” damages for the unauthorized use of his
copyrighted reports (Appraiser Wins Copyright Suit,
Library, Vol. 12). Unauthorized data mining is one issue that
may be examined in the class action suit again FNC (Library, Vol
17;
Federal Suit Alleges Misuse of Appraisers' Data by FNC).
Alfonso V. Torres, a Certified Appraiser in Texas, echoes what
many appraisers believe when he says, “There is no doubt that
they are taking our information and reusing and reselling
it.” He’s not exactly certain who is lifting data- it could be
lenders, AMCs, loan brokers or other middlemen but his own
experience is compelling.
Torres says that once he began using a national data service he
noticed that subject data from his previous appraisals, such as
square footage and other descriptions, were showing up in the
provider’s data sheets, even when it differed from public
records. He became suspicious that his proprietary appraisal
information was being lifted without his knowledge or
permission. One appraisal stands out involving a law enforcement
officer where no public records were available because of a
Texas law protecting the anonymity of law enforcement personnel.
Because the owner of the property is in law enforcement, Torres
had to call him to gather specifics on the property and to get
his written permission to use the data for the appraisal
assignment. Torres says one year later the national data service
had listed all the still-confidential data on the property,
including the owner’s identity!
In sworn testimony Anthony Merlot, President and CEO at the time
of First American eAppraiseIt, a national AMC,
admitted that for a short time his firm did unlock appraisals (PDFs)
but only to add a watermark for the company’s own security
purposes. He testified the PDFs were locked back up before they
were sent on to the banks and that nothing was added or changed
other than the security watermark. The firm soon stopped the
practice because of appraiser objections to Merlot testimony
(read Merlot’s testimony in
Pamela
Crowley's First Trial Transcript, at
WorkingRE.com, Sidebar).
Covering your
Assets
Until this issue is addressed by regulators the way
appraiser independence is, “securing” appraisal reports amounts
to documenting what is sent. To protect themselves, appraisers
are encouraged to preview all reports that pass through
conversion software to verify the accuracy and completeness of
the report before sending it. A second step is to make
complete and secure backups, preferably using a time and
date-stamped method, such as burning a CD or using an
independent third-party vendor set up to store reports in a way
that ensures that you will be able to prove the contents of your
original report should you need to. No method and especially not
PDFs, can be made secure from tampering. The best defense is to
be able to prove the contents of your original report.
The issue of preserving the integrity of appraisal reports
against unauthorized or inadvertent tampering is emerging as one
of the most important for appraisers. Many, like Smith, say they
will not back down because the integrity of their work product
is paramount. “I’m angry. I've read about this practice
(altering appraisals) taking place but to actually have the
proof of it happening is something else. I can't let go without
fighting for a once respected and trusted profession,” said
Smith.
