Mortgage Broker

appraisals & transmittals CmB magazine cmba-achc.ca spring 2017 | 21 Circumstances Sometimes a lender will, instead of ordering a current appraisal, depend upon an existing one. e existing appraisal is oen included by brokers in the mortgage application package. An appraisal almost always includes disclaimer clauses that it is not to be used without authority from the appraiser: n by anyone other than the party for whom it was prepared; or n for any purpose other than the one stated in the appraisal. e appraiser's authority for a lender to use an existing appraisal is indicated in a transmittal letter. Recommendation It is recommended that a lender either: n obtain a new appraisal prepared for the lender and the contemplated loan; or n obtain a transmittal letter from the appraisal to use the existing appraisal for the present loan. Not following one or the other of these options can result in the lender suffering significant losses and court costs. Rationale e Supreme Court of British Columbia in Kokanee Mortgage M.I.C. Ltd. v. Vogelsang, 2017 BCSC 768 has said there is a two- step process in determining whether it is reasonable for a lender, without obtaining a transmittal letter, to use an appraisal containing such disclaimer clauses. e Court relied on the BC Court of Appeal decision in Micron Construction Ltd. v. Hong Kong Bank of Canada, 2000 BCCA 141 (leave to appeal to the Supreme Court of Canada dismissed [2000] S.C.C.A. 193). e two-step process is: 1. Would it have been reasonable for the lender to rely on the appraisal in the absence of the disclaimer? [is involves looking at the surrounding circumstances, including how the lender learned about the information it relied on and what other sources of information it had at the relevant time.] 2. If the answer to the above question is yes, was it reasonable for the lender to rely on the appraisal with knowledge of the disclaimer? In the Kokanee case, the lender made a loan of $560,000 behind a first mortgage of no more than $890,000. It relied on an appraisal of $2,210,000 made about one-and-a-half months earlier. While the case does not expressly say so, the appraisal must have been prepared for a person other than the lender and for a purpose other than the lender's loan. Approximately a year later, the lender replaced its earlier loan with one for $700,000. It relied on an appraisal of $2,550,000 made about two-and-a-half months earlier by a second appraiser. e appraisal was prepared for another person and another purpose. e appraisal contained the disclaimer clauses, le the intended user section blank and indicated the intended use as being for first or second mortgage financing. e lender in neither instance obtained a transmittal letter. e borrower defaulted and foreclosure proceedings resulted. Appraisals obtained in the foreclosure process valued the property from $1,345,000 to $1,500,000. e property sold in the foreclosure process for $925,000. A later retroactive appraisal indicated the value of the property at the time of the mortgage as $1,565,000. e lender sued the two appraisers who had prepared the appraisals that existed at the time the two loans were made. e lender claimed the existing appraisals were negligent misrepresentations as to the true value of the security property. e Court ordered a full trial, as it could not in a summary trial determine whether the lender was reasonable in relying on the appraisals, based on the aforementioned two-step process. e result is that, even in the best-case scenario, the lender has to incur significant legal costs to recover its losses. e lesson is that it would be prudent for lenders to order new appraisals or obtain transmittal letters concerning existing ones. Relying on an out-of-date valuation can open you up to a costly court battle | BY RAY BASI, LL.B., STAFF, EDUCATION AND POLICY REVIEW Yesterday's News "It would be prudent for lenders to order new appraisals or obtain transmittal letters concerning existing ones."

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