There is a common misperception that, just because there is a mirage of separation between the lender’s loan production personnel and their appraisal management desk, they are compliant with current regulatory requirements. This could not be further from the truth … let me reiterate: This could not be further from the truth. The facts are that, based on the interagency guidelines, which were developed in response to the Dodd-Frank Act, lenders are now required to not only have processes in place to identify potential issues (including valuation issues), but to have processes in place to remediate those issues once identified. Fannie Mae has followed suit with their Selling Guide Announcement SEL-2013-5, which echoes the interagency requirements of having processes in place to identify potential valuation issues, along with processes to remediate those issues, but as specifically regards their valuation processes, the lender “ … must have a process for an annual review of an appraiser’s state licensing or certification status, a procedure for suspending or terminating business with individual appraisers, and a procedure for referrals of appraisers to the applicable state appraiser licensing and regulatory board.”
In addition to the requirements at the federal level, states are beginning to weigh in as well. Several states now require mandatory review of appraisal work done in their particular state(s). And in most cases, the quality control (QC) reviews must be performed by appraisers who are credentialed in that state. In other words, there is more and more pressure to have the valuation process managed by folks who are experts at just that–valuation. In most cases, lenders who “self-manage” do so with a bare bones group and sourced software solution. The reason for this is because an appraisal desk is a loss-center to a lender.
Because of the new appraisal management company (AMC) requirements, lenders are no longer allowed to collect an “administrative margin” without falling under the auspices of state AMC regulations. The net effect is that the appraisal desk function is a loss center, is generally managed by personnel without particular appraisal/valuation expertise, and is a function that is not the lender’s wheelhouse.
Can a lender be successful by self-managing the valuation function? Yes, but not as successful as they would be if they focused on their strengths and sourced the valuation management function to groups who are more efficient, more compliant, and ultimately, more effective. Self-managing the valuation function is the same as self-managing other settlement services. The industry has not seen significant horizontal integration of lender/title functions or lender/flood functions or lender/credit functions. Why? Because, generally speaking, lenders are good at loan origination and have trusted other settlement services groups to manage those ancillary functions. Why in the world would the valuation function be any different?
Okay, so there is a compelling argument for sourcing the valuation management function. Why have more lenders not done so yet? Simply put, because they have not yet been audited. Once the Consumer Financial Protection Bureau (CFPB) or the Office of Thrift Supervision (OTS) audits a lender who cannot establish “absolute lines of independence” between production personnel and appraisal management personnel, fines will be levied and the penalties will be stiff. Lenders who proactively engage third parties to manage their valuation function, however, not only stay ahead of the game with respect to compliance, but also reduce costs and increase loan production. All due to the fact that they are allowing the experts to do what they are good at … for the lender, originating loans, and for the vendor management groups, managing the valuation function. The upside to self-managing is limited to a mirage of control. The upside to sourcing the valuation management function is myriad, including higher levels of compliance, more consistent valuation services, QC functions, expert support from valuation professionals, reduced overhead and greater loan production.
Greg Reynolds, chief appraiser with A1 Closing Services, is a published author and nationally-recognized speaker on appraisal topics. He has more than 25 years in residential appraisal and 15 years in appraisal management. He is an AQB-Certified USPAP Instructor, TALCB Peer investigative committee member, and TALCB Appraisal Mentor. Greg has an MS in economics and is a licensed pilot.