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Premiums for insured-value-opinion coverage are affordable, in part because of the low default rate on small commercial loans nationwide. Typically, that rate is between 1 percent and 1.5 percent. This provides positive results for lenders and appraisers, as their conventional E&O premiums should
decline as the insured-value opinion gains acceptance in the marketplace. Through an insured-value policy, a lender may file a claim at several stages:
After the loan has been foreclosed upon;
When all efforts to collect any portion of the balance owed on a default loan have been exhausted;
When the lender has made every reasonable attempt to collect or mitigate the deficiency; and/or
When there is a written determination that the loan is “commercially uneconomic” to foreclose upon and the lender has charged off the loan.
The appraisal firm is expected to prepare an accurate appraisal/evaluation that complies to Uniform Standards of Professional Appraisal Practices (USPAP) and/or regulatory guidelines for evaluations as of the effective date of value and within a stated nominal percentage allowance or variance. If the valuation is not compliant, a lender may file a claim based on the nominal allowance or the difference between the original value opinion and the value established by a retrospective appraisal, less the deductible — whichever is less. A claim also can be based on the lender’s actual financial loss, minus the nominal deductible, or by a set limit that the lender selects and pays for.
The lender must still obtain a retrospective appraisal of the property. The appraisal must reflect the same date of value and physical condition as on the original valuation. Additionally, the lender is required to submit proof of loss. The appraiser can dispute the claim or the retrospective appraisal.
There also are provisions for the selection of a mutually acceptable appraisal firm to perform a second retrospective appraisal. Unlike many E&O claims, the value opinion of the second retrospective appraisal is binding upon both parties. The insurance company must pay the appropriate claim within 30 days.
Insured-value opinions give small-business and small-property lenders the opportunity to reduce their risk greatly at a nominal cost. Another major benefit is the prescribed, simple means to process claims on eligible loans that have been foreclosed upon to regain considerable portions of financial losses. This kind of coverage is beneficial to the lender and the appraisal firm.
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