Appraising the appraisal firm.
The Office of the Comptroller of the Currency's (OCC's) Bulletin 2013-29--as well as subsequent guidance from various regulatory agencies--has been keeping lenders hopping. As a result, lenders or their appraisal management companies (AMCs) have had to review and audit current vendors as well as establish new policies and protocols to ensure compliance when developing new third-party relationships. These vendors include sole proprietor appraisers as well as appraisal firms of varying sizes. The amount of human and capital resources being devoted to this endeavor is staggering. [paragraph] Regulated entities are right in asking their vendor partners to participate in the development and maintenance of policies and protocols designed to keep the institutions and their borrowers safe. [paragraph] In the real estate appraisal space, reliance on an AMC, an appraisal firm or a sole proprietor are all options for consideration by lenders. In terms of third-party oversight, the appraiser is subject to regulatory review whether engaged through an AMC or by the lender directly. While ultimately the responsibility and accountability for vendor compliance resides with the lender, AMCs are also expected to thoroughly understand and abide by these principles. The purpose of this discussion is to analyze the elements involved in engaging and overseeing appraisal firms.
Defining an appraisal firm
Whether it is a lender directly engaging the valuation assignment or a lender working through an AMC acting on its behalf, both will benefit from the inherent efficiencies of utilizing an appropriately structured appraisal firm.
For purposes of this article, we will adopt the definition of an appraisal firm--as distinguished from an AMC--that's presented in the Federal Register (volume 79; No. 68; April 9, 2014). Using that definition, the basic differentiation is as follows:
"Appraisal firms. An appraisal firm is a firm that is engaged to perform appraisals. Section 1473 of the Dodd-Frank [Wall Street Reform and Consumer Protection] Act appears to distinguish AMCs that contract with others to perform appraisals from appraisal firms that are comprised of groups of appraisers that perform appraisals as part of a single firm or partnership. For the following reasons, the agencies believe that appraisal firms should not be treated as AMCs under section 1473.
"One basic reason to distinguish between AMCs and appraisal firms is that the business models of AMCs and appraisal firms are different. AMCs provide appraisal management services to third parties, including retaining appraisers to perform appraisals, but AMCs do not perform appraisals. This is a core characteristic of an AMC that distinguishes its model from appraisal firms, given that appraisal firms perform appraisals using one of the firm's employees or partners.
"The text of section 1473 also reflects these differences in the business models of AMCs and appraisal firms. Section 1473 describes the duties of AMCs as including 'contracting with state-certified or state-licensed appraisers to perform appraisal assignments.' While Congress could have explicitly included 'performing appraisal assignments' in this list of business lines, it did not. Another basis for excluding appraisal firms from state AMC registration is that section 1124 uses the term 'appraisal management company,' which, again, is understood generally to refer to an entity that provides appraisal management services by retaining appraisers as independent contractors and not by performing appraisals.
"Given this statutory language, the proposal differentiates between entities that contract with appraisers to perform appraisals (such entities being AMCs), versus those whose employees directly perform appraisals (those entities being appraisal firms)."
Resources and scalability
A lender can capitalize on the resources already invested by an appraisal firm, in some instances allowing the lender to "oversee" multiple appraisal firm staff appraisers with one contact, rather than having to individually manage a multitude of relationships.
While the lender is still responsible for understanding the risks to the organization (down to the individual appraiser level), a well-structured appraisal firm has already consolidated all the necessary compliance information, policies and protocols for all of its employee-appraisers into one portfolio. As a result, the lender is able to audit all appraisers within the firm in a timely and efficient manner.
The time and resource savings can be very dramatic, as shown in the following examples of OCC expectations. Because appraisal firms may be organized in different ways and range in size from a few employee-appraisers to several hundred, inquiries should be made to determine if the appraisal firm has the policies, protocols and resources to support the required third-party oversight documentation. Such documentation should cover:
Contract negotiation: Developing a contract that clearly defines expectations and responsibilities of the third party helps to ensure the contract's enforceability, to limit the bank's liability and to mitigate disputes about performance.
Imagine the resources necessary to review and negotiate with hundreds or even thousands of individual appraisers. One negotiated contract with the appraisal firm binds it and its employee appraisers--and if future needs or regulations necessitate contract changes, it can be accomplished quickly for all of the firm's appraisers in one fell swoop.
Legal and regulatory compliance: Evaluate the third party's legal and regulatory compliance program to determine whether it has the necessary licenses to operate and the expertise, processes and controls to enable the bank to remain compliant with domestic and international laws and regulations. Check compliance status with regulators and self-regulatory organizations as appropriate.
A reputable appraisal firm will have ready documentation proving business compliance. It should be able to provide in one document the current licensing status of all of its appraisers as well as their approvals for working with the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA).
An appraisal firm's chief appraiser will have documentation as to the ongoing training given to a firm's appraisers to ensure compliance with the myriad appraisal regulations. Such regulations include the Uniform Standards of Professional Appraisal Practice (USPAP), the government-sponsored enterprises' (GSEs') Uniform Appraisal Dataset (UAD), FHA and VA protocols and generally accepted appraisal methodologies and techniques.
A firm's chief appraiser is the conduit for efficiently communicating the lender's appraisal expectations. This holds true whether it be for a particular assignment or a service-level expectation for all appraisals.
Reliance on subcontractors: Lenders need to evaluate the volume and types of subcontracted activities, and the subcontractors' geographic locations. Evaluate the third party's ability to assess, monitor and mitigate risks from its use of subcontractors and to ensure that the same level of quality and controls exists no matter where the subcontractors' operations are based.
It's important to evaluate whether additional concentration-related risks may arise from the third party's reliance on subcontractors and, if necessary, conduct similar due diligence on the third party's critical subcontractors.
This oversight issue, which could be quite burdensome to the lender--to have to assess the subcontracted parties used by the engaged vendor--becomes moot when engaging an appraisal firm. An appraisal firm (by definition) doesn't utilize subcontractors to perform the assignments--it uses W-2 employee appraisers. This is in contrast to appraisal companies that fulfill appraisal assignments via 1099 independent contractors. For this reason, it is imperative that lenders and AMCs understand the employment model of their appraisal vendors.
Impact on the consumer: In today's environment of technological communication, many consumers' first real-life contact with an institution's representative may be the appraiser at the time of the home viewing. The appraiser's conduct, from appearance to professional demeanor in answering the consumer's questions, may pose both a regulatory and reputational risk. An appraisal firm will have policies and protocols outlining dress and identification requirements so that consumers feel comfortable and safe with the representative in their private domiciles.
Fee structure and incentives: Evaluate the third party's normal fee structure and incentives for similar business arrangements to determine if the fee structure and incentives would create burdensome upfront fees or result in inappropriate risk taking by the third party or the bank. Customary and reasonable fees may be one of the most visible regulatory issues in the appraisal space.
When engaging an appraisal firm, the language from the preamble to the 2010 Valuation Independence rule published by the Federal Reserve Board states: "As discussed in more detail in the section-by-section of section 226.42(f)(4)(i) (defining 'fee appraiser'), TILA [Truth in Lending Act] section 129E(i)(2) defines 'fee appraisers' to which customary and reasonable fees should be paid to mean 1) individual state-licensed or state-certified appraisers (natural persons), and 2) companies or firms that employ individual state-licensed or state-certified appraisers and receive compensation for performing appraisals."
This provision addresses the fact that paying the appraisal firm customary and reasonable fees is the regulatory standard that must be met--thus the oversight of fee management is at the appraisal-firm level and may be a much more streamlined and less resource-intensive process than having to research and document the same information for hundreds of independently contracted appraisers. This applies equally whether it is the lender engaging the appraiser directly or via its AMC agent.
Strategies and goals: Review the third party's overall business strategy and goals to ensure it does not conflict with those of the bank. Consider how the third party's current and proposed strategic business arrangements (such as mergers, acquisitions, divestitures, joint ventures or joint marketing initiatives) may affect the activity.
Also consider reviewing the third party's service philosophies, quality initiatives, efficiency improvements, and employment policies and practices.
An appraisal firm's Fluman Resources department will have documentation on its employee appraisers' professional standing, including background checks; current and past licensing statuses; complete extensive application, including employment history with references; current resume listing appraisal courses completed within past three years; a signed acknowledgement agreeing to submit appraisals per USPAP and lender-specific guidelines; and proof of having undergone technology testing to demonstrate the ability to work within the required technology requirements.
Resilience: Assess the third party's ability to respond to service disruptions or degradations resulting from natural disasters, human error or intentional physical or cyberattacks. Determine whether the third party maintains disaster-recovery and business-continuity plans that specify the time frame to resume activities and recover data.
Review the third party's telecommunications redundancy and resilience plans and preparations for known and emerging threats and vulnerabilities, such as wide-scale natural disasters, distributed denial of service attacks or other intentional or unintentional events. You will want to review the results of business continuity testing and performance during actual disruptions.
An inquiry into an appraisal firm's business continuity plan will provide the necessary assurance that the regulated entity is reasonably protected should there be an event that might create an interruption in services.
Beyond the expected information technology (IT) protocols, an appraisal firm will also have the human resources to accommodate the gyrations of a mobile workforce. Plus, they will be able to accommodate the lender's immediate needs even when the original appraiser might not be available due to absences related to vacations, workload or simply no longer being involved in the profession.
Because an appraisal firm has many appraiser employees, it has the ability to coordinate the necessary professional activities in a timely manner, even in the absence of a particular appraiser originally involved in the assignment. This, along with the administrative support of answering client and consumer calls along with report preparation and delivery, the service-level expectations are not interrupted due to a specific appraiser being away from the office.
Regulatory compliance is perhaps the most significant topic for lenders in 2014. This is especially true as it relates to the oversight of third-party vendors. And this certainly is the case for those offering appraisal services to lenders.
Many lenders have come to the realization that there are compliant solutions offered by the nation's many highly effective, efficient, technologically proficient, customer-oriented, professional appraisal firms. These lenders have reached this conclusion either through their own more thorough review of the third-party oversight regulations or through additional education from some of their impacted appraisal vendors.
Alan Hummel is senior vice president and chief appraiser at Forsythe Appraisals LLC, St. Paul, Minnesota. Forsythe Appraisals is the nation's largest independent residential real estate appraisal firm. He is a past national president of the Appraisal Institute and is also a representative member on the Appraisal Subcommittee Advisory Committee for Development of Regulations (ASCAC). He can be reached at email@example.com.
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|Title Annotation:||REGULATORY COMPLIANCE|
|Date:||Jul 1, 2014|
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