ACI’s 2016 Compliance Series
As we develop new products for appraisers, compliance with industry standards is always front and center. Our objective is to help improve appraisal quality and provide efficiencies to the process. Everybody wins by connecting industry needs with appraisal reporting techniques through technology, industry guidance, and practical advice. This is ACI’s contribution to the industry – and we hope you find it informative and helpful. Enjoy.
Appraisers frequently use the term “misleading.” Whenever I hear or read the word used in any sort of appraisal-related context, my first reaction is to ask “Misleading to whom?” The answer to that question is usually something along the lines of “Well, the reader of the report.”
Many appraisers are unaware of the fact that USPAP imposes no obligation to avoid misleading a “reader” or any other party unless that party is an intended user(s). The second sentence of the PREAMBLE to USPAP states: “It is essential that appraisers develop and communicate their analyses, opinions, and conclusions to intended users of their services in a manner that is meaningful and not misleading.” Note the reference is to “intended users” and not to “readers” or any other parties.
The word “misleading” is found many times in USPAP. Nowhere in USPAP does it state that appraisers have responsibilities to ensure any and all “readers” are not misled. It’s logically impossible for an appraiser to communicate assignment results in such a manner that no “reader” of the report might possibly be misled. The appraiser, when reporting assignment results, has no way of knowing who may eventually “read” those results, and there is no USPAP responsibility for the appraiser to attempt to “foresee” who, beyond intended users, might come into possession of and read an appraisal report. The only “readers” of the report that the appraiser must not mislead are the client and any other parties the appraiser has identified as intended users.
The Appraisal Standards Board is clear that a party in possession of a report does not become an intended user. Advisory Opinion 36 (formerly Statement 9) states: “A party receiving a report copy from the client does not, as a consequence, become a party to the appraiser client relationship. Parties who receive a copy of an appraisal or appraisal review report as a consequence of disclosure requirements applicable to an appraiser’s client do not become intended users of the report unless they were specifically identified as intended users by the appraiser at the time of the assignment.”
However, be cautioned that some State Regulatory Agencies may have appraiser members who don’t understand this issue as well as they should and may try to enforce vague doctrines that do not distinguish between parties who must not be misled (intended users) and parties to whom the requirement does not apply (any party other than an intended user). Also, some State Boards have expressed that they view their role as a consumer protection agency, which panders to the notion that reports should be written at a level that all “readers” can understand.
Some time ago, I came across what was labeled as a “USPAP Standard 3 Compliance Review Report” completed by an appraiser who was a member of the State Appraisal Board. The review report was precipitated by a complaint filed with the Board.
The term “misleading” appeared a number of times in the review report, and often in conjunction with “reader” as in “misleading to the reader” or in general terms such as “considered misleading overall.” There were no instances of the term “misleading” used within the context of “client” or “intended user(s).” It was clear the reviewer did not understand this important aspect of USPAP and was imposing his own ideas of what should be included in an appraisal report.
This does not mean it’s a bad business decision to “broaden” an appraisal report by including information that may not be necessary for the intended user but make it easier for other parties to understand the report. Doing so may make life a little easier for your lender clients in that there will be fewer questions from borrowers, who generally receive a copy of the report. It may also enhance your reputation as a thoughtful and thorough appraiser, and lead to referrals from real estate agents, who are not entitled to a copy of the report, but who often are given copies by the borrower. The old adage about “you never know where your report will end up” is still sound advice.
One final thought. Understand that the term “intended user” applies only to those parties who have been identified by the appraiser as intended users. In most jurisdictions, a typical mortgage finance transaction typically has only one intended user; the lender/client identified as such on the report.