Danielle Rodabaugh is the editor of the Surety Bonds Insider, an online publication that takes a critical look at developments within the surety industry. As a part of the publication's educational outreach program, Danielle has recently taken an interest in writing about appraisal management bonds since they are new to both the surety and real estate industries. I thought the information Danielle offers below would be of interest to readers of this Real Estate Law Blog.
It's no secret that the housing market and its professionals have been under scrutiny as a result of business practices that took place throughout the past decade. The housing bubble burst, mortgage professionals committed fraud, and let's not forget the AppraiserLoft fiasco that stiffed so many real estate professionals. Ever since, state agencies have been looking for ways to regulate the market and protect consumer investments. As such, 10 states have set surety bond requirements for appraisal management companies. Although surety bond requirements have been used to regulate a number of industries for hundreds of years, professionals and consumers alike often remain uneducated about the legal protection provided by bonds. There are two fundamental ways that surety bonds provide legally enforceable protection to those who have a stake in the housing market.
1) Each appraisal management bond issued is a legally binding contact.
When an AMC purchases an appraisal management bond, it binds itself to two other entities in a legally enforceable contract.
- The principal is the company that buys the appraisal management bond. As a principal, an AMC promises to fulfill whatever stipulations are found within the bond's legal language.
- The obligee is the government agency that requires the AMC to purchase a bond. When an obligee requires a surety bond, it's doing so for two reasons: to regulate companies that work in a specific industry and to protect consumer interests.
- The surety is the agency that issues the appraisal management bond. By executing the bond, the surety becomes legally obligated to pay for any claims made against a bond.
Each surety bond that's executed functions as a line of credit that guarantees a principal will adhere to industry regulations. As such, surety bonds aim to keep AMCs from participating in unethical business practices. For this reason appraisal management bond regulations are on the rise in today’s real estate industry.
2) Appraisal management bonds provide real estate appraisers and their clients with legal recourse.
The exact protection provided by an appraisal management bond depends on the legal language found within the bond. Most bonds allow claims to be made by any party harmed as a result of an AMCs inability to meet the bond's terms. However, bonds in some states specifically dictate that consumer claims are given priority in recovering losses (i.e. claims made by homeowners rather than real estate appraisers). The main goal of appraisal management bonds ensures AMCs are held financially accountable for their business practices. If a bonded AMC fails to meet the bond's expectations, harmed parties can make a claim on the bond to recover their losses. Appraisal management bonds essentially give harmed parties a means of legal recourse should all other recovery methods be exhausted. However, since appraisal management bonds are so new, their effectiveness remains to be seen. States that currently enforce AMC bonding requirements include Arkansas, Arizona, Georgia, Kentucky, Missouri, Nebraska, New Mexico, Oregon, Tennessee and Washington. A few of the laws don't require appraisal management companies to post a surety bond until some point in 2012. If you're a real estate appraiser or homeowner in one of these states and you believe an AMC failed to follow industry protocol, contact the company's surety bond provider to explore the claims process.
