Compensation dilemma

A letter from Ron Phipps, president of NATIONAL ASSOCIATION OFREALTORSยฎ, to federal regulators on a seemingly obscure question has attracted widespread attention from the residential appraisal community. In a letter dated August 11, Phipps urged regulators to prohibit assessment management companies from using compensation clauses in their independent contractor agreements with assessors. This is an important issue not only for appraisers but also for sales partners and brokers. What’s surprising is that AMC (which now controls 70% to 80% of home purchase loan evaluations) is increasingly using unilateral compensation clauses in contracts, requiring appraisers to sign contracts in order to accept evaluations.

A compensation clause is a contractual commitment by one person or an enterprise to demand compensation or to pay compensation for monetary losses or damages suffered by another person or an enterprise. According to a typical AMC contractor agreement, the compensation clause usually requires the appraiser to compensate the AMC or lender for any loss or damage related to the appraisal-the most unfair approach is to require the appraiser to compensate the AMC or the lender, or even the asset management company (AMC). Negligence, such as instructing the appraiser to assess the wrong property. (A salesperson who consults with AMC for brokerage prices may agree to similar terms.)

Most of the current liability claims made by lenders and their asset management companies to appraisers are due to allegations that the appraisers overestimated the property value of a loan that has now defaulted several months or years later. The lender or AMC will usually claim that the appraiser’s so-called overvaluation will result in loan losses or mortgage repurchases. When asset management companies add unilateral compensation clauses to the portfolio, the possibility that the appraiser will be liable for compensation will increase, and the fear of such compensation will increase.

Mortgage loss or unconstrained financial liability for repurchase is a lot of personal risk for the appraiser in exchange for AMC to pay a typical fee of several hundred dollars. Therefore, it is understandable that some evaluators will get the response identified by Phipps.

Due to the combination of unfair contract terms and low fees, experienced and well-trained appraisers often choose not to work for large asset management companies. I see this situation every day. This means that some AMC’s assessor panels are of low quality, which may hinder transactions.

If you are an appraiser and face a contractor agreement that includes a compensation clause, I suggest you take some common sense steps to protect yourself:

Read and understand the regulations; they are not all the same. Although some clauses may require the appraiser to compensate for any and all claims related to the appraisal, other clauses more fairly tie the compensation to the appraiserโ€™s actual negligence.

If the system requires you to sign a new agreement for AMC that has been used for many years, please determine whether the compensation clause applies to your previous work or only to future work.

Call AMC and ask the decision maker whether to agree to modify or modify the language. Explain your objections professionally. In fact, some people will listen and agree.

If you think the risk is not worth it, please say “no” to the asset management company (AMC) with the worst terms, because the asset management company with the worst terms may lose many of the best and smartest appraisers.