How are new surety bonds requirements impacting AMCs?

GUEST AUTHOR: 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.

Since the inception of appraisal management companies, real estate appraisers and their consumers have complained of flaws they believe the business structure to have. As a result, government agencies in 10 states have established surety bond requirements as a way to ensure these companies fulfill their duties according to law.

But what are surety bonds, and how do they affect AMCs? (http://www.suretybonds.com/appraisal-management-bond.html)

1) Surety bonds are legally binding contracts.

When an AMC purchases a surety bond, it's being bound to a legally enforceable contract among three parties.

• The AMC acts as the bond's principal, which buys the bond as a financial guarantee of its ability to follow industry regulations.
• A government agency acts as the bond's obligee, which requires the bond as a way to regulate the industry and protect consumer interests.
• An insurance company acts as the bond's surety, which issues the bond as a financial guarantee of the principal's ability to fulfill professional obligations according to law.

The legal stipulations that an AMC agrees to depend on the exact language used on the bond form. Depending on the state, the legal language will require compliance with certain laws that the appraisal management bond form will refer to. Although the surety bond form itself is usually only one or two pages, the contractual obligations the AMC agrees to are actually much more extensive. As such, AMCs should fully understand not only industry regulations but also the contractual language found on the bond.

2) Appraisal management bonds aim to eliminate fraud.

The surging increase in mortgage fraud during the past decade has inspired government agencies to take any means necessary to reduce instances of fraud among AMCs. If an AMC should commit fraud during the appraisal process, whether it be negligence or misleading the consumer, the bond could be used to reimburse any harmed person. By issuing an appraisal management bond, the surety guarantees it will pay claims an AMC might owe if it fails to fulfill obligations under state law. Surety bonds are not insurance, however, so the surety would then seek reimbursement from the AMC rather than assume the losses.

3) Appraisal management bonds protect industry professionals and consumers.

The idea behind appraisal management bonds is to keep companies from misusing their power. Generally speaking, an appraisal management bond guarantees the faithful performance of a company by requiring them to provide proof of financial responsibility. However, the bond amount can be used to benefit claims against the company if necessary. Real estate appraisers who have a problem with an appraisal management company's tactics can make a claim on the bond, though the bond's legal language typically states that consumer claims are given priority in recovering the bond's funds. To date, the following states enforce surety bond requirements for appraisal management companies.

• Arkansas
• Arizona
• Georgia
• Kentucky
• Missouri
• Nebraska
• New Mexico
• Oregon
• Tennessee
• Washington

Real estate appraisers and consumers working in these states should contact the appraisal management company's surety provider if they believe their appraisal management company failed to follow industry protocol.

4) The effect of AMC surety bond requirements remains to be seen.

So far there's not much claims experience in regard to AMC bonds. Of course the goal of these new surety bond requirements is to curb problems with AMCs. Conclusions will not be able to be drawn until claims have been made on bonds, these claims are upheld in court and surety providers pay those harmed by unethical AMCs. The fact that claims have yet to be made on appraisal management bonds works in favor of AMCs that need to be bonded, as their premiums are currently calculated at the same low rates used for other generic license and permit bonds. The real estate industry will have to wait a few years to determine just how effective the new regulations are.

GUEST AUTHOR: 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.