Prior to the publication of the Interagency Appraisal and Evaluation Guidelines in December of 2010, many lenders passed off the responsibilities to what were referred to as “Vendor Management Companies (VMCs)” believing the VMC would be on the hook for any regulatory compliance issues.
Originations require collateral valuations and an increasing number of lenders were engaging appraisal management companies (AMCs) as a result of the Home Valuation Code of Conduct (HVCC) also in the belief that engaging an AMC would relieve the lender of management responsibilities relating to the oversight of the valuations within the collateral underwriting process.
That all changed with the inclusion of Title XVI-Third Party Arrangements within the Guidelines.
Within the Interagency Appraisal and Evaluation Guidelines (hereafter referred to as Guidelines), the Agencies included very specific language to facilitate compliance, such as “An institution that engages a third-party to perform certain collateral valuation functions on its behalf is responsible for understanding and managing the risks associated with the arrangement.”
The Guidelines further state, “An institution should use caution if it engages a third party to administer any part of its appraisal and evaluation function, including the ordering or reviewing of appraisals and evaluations, selecting an appraiser or person to perform evaluations, or providing access to analytical methods or technological tools.”
The lender/institution’s responsibility relating to third-party oversight is stated very clearly: “An institution is accountable for ensuring that any services performed by a third party, both affiliated and unaffiliated entities, comply with applicable laws and regulations and are consistent with supervisory guidance. Therefore, an institution should have the resources and expertise necessary for performing ongoing oversight of third party arrangements.”
The scope of the Guidelines goes beyond just compliance risks when the Guidelines state: “An institution should have internal controls for identifying, monitoring, and managing the risks associated with using a third-party arrangement for valuation services, including compliance, legal, reputational and operational risks.”
Realizing third-party vendors provide more than just valuation services, the Guidelines specifically refer to oversight requirements relating to appraisers and those who provide valuation services to complete an evaluation by stating the following: “An institution also is responsible for ensuring that a third party selects an appraiser or a person to perform an evaluation who is competent and independent, has the requisite experience and training for the assignment, and thorough knowledge of the subject property’s market. Appraisers must be appropriately certified or licensed, but this minimum credentialing requirement, although necessary, is not sufficient to determine that an appraiser is competent to perform an assignment for a particular property or geographic market”.
So how can you manage the risk and remain compliant when you engage a third-party? The answers are found within the Interagency Guidelines and state regulations that provide specific language that can be incorporated into a compliance program.
Specifically, Chapter XVII-Program Compliance provides the following “should” examples of a compliant process:
►Maintain a system of adequate controls, verification and testing to ensure that appraisals and evaluations provide credible market values. A compliant program will include clearly written policies and procedures within the institution that include quality control / audit functions of internal staff to ensure the valuation products meet the minimum standards for collateral risk
►Insulate the persons responsible for ascertaining the compliance of the institution’s appraisal and evaluation function from any influence by loan production staff. Appraiser independence violations can seriously impact the credibility of the collateral valuation program, the loan portfolio, and the reputational risk of the institution. It is therefore essential to have a written policies and procedures protocol that insulates the collateral valuation functions from influence by loan production staff.
At several conference presentations, including a recent national conference in Dallas, Texas, Robert L. Parson, Appraisal Policy Specialist, Credit and Market Risk, for the Office of the Comptroller of the Currency (OCC), repeatedly stated that the selection of the appraiser is the single most important function within an institution’s collateral valuation program and is reflected in the Agency’s directive noted in the next bullet point.
►Ensure the institution’s practices result in the selection of appraisers and persons who perform evaluations with the appropriate qualifications and demonstrated competency for the assignment. Although this backdrop of third party oversight regulations is directed toward the institutions’ valuation functions, it can be applied to any third-party arrangement especially given the overall broad nature / absence of specificity in the language.
There is also much to be gained by analyzing the parallel between the valuation function and other third party activities where the oversight responsibilities overlap. Excellent examples of this can be found in the language contained within the various state legislation and regulations directed toward Appraisal Management Companies.
Business Practices, Business Records, Prohibitions of Conflicts of Interest, Selection criterion, review and audit processes and procedures are just a few examples. Rather than regulations directed at the individual level, the state AMC regulations are directed toward the activities of the business entity and provide an excellent outline for operational compliance.
Among the 38 states that have thus far passed AMC registration legislation and regulations, there is a common thread applicable to the registration requirements of virtually any Third-Party Vendor, beginning with the character makeup of the officers, managers and any investor owning 10 percent or more of the AMC. Most states require a background investigation to ensure the officers, management team and owners are of good moral character and do not have a pattern of behavior that would call into question public trust which should be a paramount criteria in the selection of any third-party vendor.
Additional AMC registration requirements include certain written certifications that provide a level of credibility to the compliant nature of the program. Examples include:
►A certification that the third-party vendor has a system and process in place to ensure the appraiser being added to their panel meets the competency requirements for the geographic market, the property type and analytic methods;
►A certification that the third-party vendor requires that appraisals are conducted independently and free from inappropriate influence and coercion pursuant to the appraisal independence standards established under section 129E of the Truth-in-Lending Act (TILA);
►A certification that the third-party vendor has a system in place to verify that the appraiser receiving the assignment holds a credential in good standing in the state where the property to be appraised is located;
►A certification that the third-party vendor has a system in place to perform an appraisal review on a number or percentage of appraisal reports submitted by each appraiser who is performing appraisals for the third-party vendor on a periodic basis to ensure compliance with required federal and state standards;
►A certification that the third-party vendor has a document retention system in place to maintain the detailed records of each transaction for a period of time dictated by applicable laws and regulations;
►A certification that the third-party vendor compensates appraisers at a rate that is customary and reasonable for the geographic area and property type;
►A written irrevocable consent to service of process; and
►Designation of a primary contact between the vendor and the board or lender.
Such certifications must be incorporated into written policies and procedures program that are incorporated into the contractual documentation between the institution and the third party vendor.
This article provided guidance into third party oversight through direct references to the Third Party regulations contained within the Interagency Appraisal and Evaluation Guidelines as well as providing language contained in some of the state appraisal board regulations specifically addressing requirements related to the oversight of third parties engaged by a financial institutions.
The examples provided can form the basis of a compliance program that should be reduced to writing, and should be a living document that is periodically reviewed and updated as new regulations and guidance become available.
Greg Stephens is chief appraiser, senior vice president of compliance at Metro-West Appraisal Company LLC. His professional credentials include Certified General Appraiser, SRA Designation from the Appraisal Institute, AQB Certified USPAP Instructor through The Appraisal Foundation, and CDEI certified distance education instructor through the International Distance Education Certification Center.
This article originally appeared in the September 2015 print edition of National Mortgage Professional Magazine.
