Collateral management platform provider FNC, Inc. has been battling appraisers on a number of fronts lately. From federal court, to state appraisal boards, to the court of public opinion, the company behind appraisal delivery system AppraisalPort has been on defense against appraisers concerned about the integrity of their work product and their potential legal liability. Examining the facts and probing the causes of FNC's travails can help us understand today's mortgage market and your business climate better.
A class action lawsuit filed by appraisers against FNC in 2007 will proceed in federal court, a judge ruled last month. FNC had sought to have the case removed to private arbitration.
Appraisers say that the data in reports transmitted to clients via AppraisalPort is being stripped, and used to populate a competing collateral database. In essence, the lawsuit alleges that FNC is using appraisers' own work - which appraisers pay to have delivered on AppraisalPort - to build a competing product with the goal of eventually putting appraisers out of business.
Many lenders require appraisals to be transmitted through AppraisalPort, so simply boycotting the system is not always a realistic option. But the crux of the appraisers' legal claim is that FNC falsely represented that appraisal data sent via AppraisalPort would be secure, and seen and used only by appraisers' lender clients.
This representation would convince appraisers, concerned about the integrity (and USPAP compliance) of their work and about the future of their profession, to use the system under false pretenses, the argument goes. The merits of this argument have not been reached, but last month a federal judge denied FNC's motion to have the claims thrown out of court and into arbitration.
FNC pointed to terms of service AppraisalPort users were required to agree to, some iterations of which said that disputes would be handled in arbitration and kept out of court. Remarkably, FNC argued that it tried to amend its terms of service in such a way as to remove the mandatory arbitration provision, but that it botched the change and that the mandatory arbitration provision in a previous version of its terms of service thereby survived.
In rejecting FNC's position and allowing the case to proceed in federal court, Judge Roger W. Titus noted that if its latest (arbitration clause-free) terms of service were advantageous to it, FNC would be making the opposite argument, and trying to enforce the terms it said the court should ignore. Titus wrote that "FNC's actions are like a man standing with one foot on a dock and one foot on an untethered boat drifting away and unable to choose whether to stay on land or shove off to the sea.
"When this case was filed, FNC's time to choose ran out and it ended up in the water. As FNC's predicament is wholly of its own making, the Court will not now throw it a life preserver."
According to Roanoke, VA-based appraiser Mark White, after the federal lawsuit was filed, FNC "went from clandestine conversion of the [appraisal] forms to putting up a disclaimer no one had seen before." According to White, the disclaimer alerted appraiser users of AppraisalPort that "once you convert your report, you might not recognize it - and your signature will be re-attached to the report you've never seen."
White and other Virginia appraisers brought their concerns over this disclaimer and the process it described to the Appraisal Board of Virginia, urging it to prohibit the use of systems like AppraisalPort that altered reports. The Board established an Electronic Portal Committee which according to sources familiar with the meetings determined that AppraisalPort itself - that is, the delivery mechanism - is not "at fault" if reports are being altered. Rather the conversion of reports into a format accessible by AppraisalPort prior to transmission is the problem.
The Committee is now investigating AIReady, AppraisalPress has learned. AIReady is a data format used by FNC through an arrangement with the Appraisal Institute, which licenses the use of its logo for FNC's marketing and which has a significant ownership stake in the company, insiders say.(pq)
As the Virginia committee's attention has switched from AppraisalPort to AIReady, the Appraisal Institute has already been proactive. It will publish in its 3rd Quarter 2008 edition of Valuation Magazine excerpts from a letter by Danny Wiley, SRA, former chair of the Appraisal Standards Board (ASB), to the Virginia Board defending AIReady.
To the charge that appraisers send reports converted to AIReady format without knowing how they will turn out, Wiley wrote that it is possible to preview a report converted to AIReady format before transmission. "It is true that some appraisers have apparently been skipping this step," he wrote. "One must learn the proper way to use any software employed to create reports."
As to the charge that AIReady reports are easy to alter on the other end, Wiley writes that any report format can be altered, and that too few appraisers are correctly digitally signing their reports. "The answer is not to restrict report formats or delivery mechanisms. The answer is for appraisers to use real digital signatures," Wiley wrote. Wiley argues that electronic signatures which comply with USPAP do not offer enough security. Wiley served three years as chair of the ASB, which promulgates USPAP.
The Appraisal Institute has not been represented formally at Board and Committee meetings investigating the alteration of reports converted to AIReady format and sent via AppraisalPort. The publication of Wiley's letter in a medium available to appraisers all over the country is undoubtedly a preview of its argument that any problems with report alteration or integrity are the fault of the appraiser user.
The dual specters of a federal class action lawsuit and a possible state-level prohibition against the use of AppraisalPort come at a time when FNC, like all appraisers and vendors providing appraisal-related services, are trying to square their activities with the upcoming Home Valuation Code of Conduct (HVCC). FNC is trying to carve out a space in the new market where lenders' quality control reporting requirements can be automated.
But in a climate where mortgage lenders that heavily relied on automated collateral management or AVMs, such as Washington Mutual, IndyMac and Countrywide, have gone under or been sold for pennies on the dollar because of bad loans, FNC faces a public relations problem before it even makes its next appearance in federal court or before the Virginia Appraisal Board.
It exacerbated that public relations problem by developing a new user agreement that experts said would have made users - appraisers - liable for any damages or losses caused by FNC. E&O insurance generally does not cover an appraiser's implicit promise to pay damages incurred by other parties. White solicited the opinion of Liability Insurance Administrators (LIA) when he saw the new AppraisalPort user agreement, and his fears were at least partially confirmed by the company. A comment posted to an article titled "The End Is Just The Beginning" on AppraisalScoop.com by Peter Christensen of LIA, is a restatement of the response Christensen sent to White.
The new end user agreement was scheduled to be implemented September 13, but was postponed. Appraisers agitated against the new agreement because they would be liable for third party costs in litigation, and according to sources, lender clients expressed their displeasure with not having an appraiser's E&O insurance available to make it whole after losses.
At a September 11 meeting of the Virginia chapter of the Appraisal Institute, Institute President Wayne Pugh announced that after legal review of the proposed user agreement the Institute had convinced FNC to postpone its implementation. It is likely, according to attendees of that meeting, that broader concerns, detailed above, had a more direct role in FNC's scrapping the agreement. As of this writing, the proposed new user agreement is still not in place for AppraisalPort users.
The possibility that litigation and regulation could significantly harm FNC is illustrated by its attempt to put the burden on its appraiser customers to cover damages. In a hyper-regulatory climate, the integrity of an appraiser's work product is more important than ever, and it is more important than ever that appraisers know what they are sending their clients and that it accurately reflects their analysis and conclusions.
If FNC's delivery systems fall out of favor with lenders which want appraiser E&O insurance as a buffer against liability, its business model fails. Like Lighthouse, AppraisalPort has not been sold to appraisers as a benefit to them, but rather to lenders as a way to get reports and data they can use and re-use as they see fit. Should FNC lose in court or take a hit at the state level in Virginia, there are many other, arguably better, ways for clients to receive secure, accurate appraisal reports.
But even if FNC (and the Appraisal Institute, in the case of Virginia) wins individual battles, the war may be lost. Even if a company is not selling appraisers on its systems, if appraisers perceive them as unreliable, and the company as antagonistic to their profession and livelihood, they will "vote with their feet" and FNC's user base will dry up. New (or old) companies will fill the void and demand for reliable reporting and quality assurance.
The current regulatory climate is arguably the best chance a company like FNC has to sew up market share by delivering lenders accurate, reliable appraisals with automatic quality control and reporting. If it fails, it will be because it overreached (in the case of data stripping) and alienated the other end of its customer base - appraisers, like you.