A 10-Point Checklist

You Can Download This Article As A PDF HERE

Jennifer-MillerTackling the new third-party oversight requirements in your appraisal operations can seem like an insurmountable task. Whether you’re using multiple AMCs, or you let branches select their own regional AMCs, or you order directly from appraisers, there are now multiple parties you’ll have to monitor for compliance.

The OCC and CFPB recently issued third-party oversight requirements, so the issue is at the forefront of everyone’s mind. We all know you already have enough on your plate, but really digging into vendors is always good practice and with technology, it doesn’t have to be as difficult as it may seem.

Regulatory and Investor Requirements

We won’t go into a full discussion of all the relevant regulations here, but you can find more information in a full white paper at www.MercuryVMP.com/TPO. As of this writing, these are the three critical recent announcements driving the push for strengthened oversight of all third party service providers:

>> CFPB’s Third-Party Oversight Bulletin 2012-03, March 2012: http://files.consumerfinance.gov/f/201204_cfpb_bulletin_service-providers.pdf

>> OCC’s Third-Party Oversight Bulletin 2013-29, December 2013: http://www.alamode.com/download/occ2013-29.pdf

>> Fannie Mae’s Lender Letter LL-2013-10, December 2013:

From investors and regulators, it’s clear the demand for third-party oversight is increasing and the burden will be on lenders to maintain safeguards and to select the highest quality vendors that can comply with the requirements set forth. But how do you do that? What should you look for in a reliable valuation service provider?

A 10-point checklist for the oversight of valuation providers

Most lenders we work with at Mercury Network use a variety of either a single AMC, a panel of AMCs, or order directly from appraisers using a vendor management platform. This checklist is meant to help you with a starting point for your oversight efforts, regardless of the entity you’re overseeing. An expanded version of the checklist is also included in the download mentioned above at www.MercuryVMP.com/TPO, but these ten key points will help you get started.

  1. Consider visiting your vendor operations in person. If the vendor is critical to your institution, especially if they are a technology provider like a vendor management software platform, I always recommend touring their facility. With an on site tour, you’ll see first hand how security and redundancy are handled, how they’ll handle your software development requirements and the support of your staff. You will also be able to verify if they can handle your transaction volume in compliance with all the regulations.
  2. Ask for client contacts for references. If you’re involved in hiring internal staff for your own institution, you already know the importance of references. With all the vendors you’re considering, go the extra step and actually call the references. I’ve been surprised many times by what a reference will tell me about a candidate, so don’t always assume the contact given to you by the vendor will offer a glowing endorsement. A page with a long list of big lenders is impressive, but call them and find out what they really think first hand.
  3. Get full audit trails on every valuation product you order. It won’t matter how compliant you are if you can’t prove it to examiners later. With any valuation service provider, make sure you can get an end-to-end audit trail on the full transaction from initial order to completion and sending to the borrower, and make sure it’s stored so you can provide it to regulators and investors later if needed.
  4. Avoid relying on a company to provide technology if that’s not their primary business. If your valuation service provider’s primary business isn’t technology, consider a technology platform to simplify your oversight burden. You can still use the same valuation service providers, but we recommend you handle the technological backend from one source. That way, you’re only overseeing one technology platform and the burden for integration is on your service provider. Otherwise, you’ll be auditing the technology capabilities of several vendors, instead of just your sole technology vendor.
  5. Don’t give up your essential quality control in exchange for compliance. For appraiser independence requirements, you don’t necessarily have to randomly round robin your appraisal assignments. There are compliance concerns with round robin assignment in that it can sometimes be easily predicted. Instead, you can assign orders based on your own business requirements, and distribute to AMCs or appraisers based on percentages of your overall business, their regional or product expertise, and even their turn times and load levels. If you have a documented and consistent process for appraisal order assignment, you don’t have to sacrifice quality for compliance.
  6. Verify that your vendor’s tools are compliant. Make sure your vendor’s tools have automated compliance safeguards. Here are a few common pitfalls to avoid:
    1. The new ECOA Valuations Rule: Make sure your AMC or platform is delivering the valuation to borrowers within the time frame required, but don’t skip the critical step of E-Sign Act Compliance. To send an appraisal report electronically, you must first get the borrower’s acknowledgement that they can receive a PDF and open it, so check that your solution is handling these acknowledgements if you’re delivering electronically.
    2. Gramm-Leach-Bliley Act: If an AMC or service provider attaches your appraisal as a PDF or XML in an unencrypted e-mail message, they could be in violation of GLB. The steep penalties for non-compliance with GLB are calculated on a per-occurrence basis, so this risk should be avoided by selecting service providers with built-in safeguards for consumer non-public information.
    3. PCI Compliance: If your vendor handles a borrower’s payment information for the valuation services ordered, you must verify their PCI compliance. Are credit cards handled in a PCI compliant fashion or are they vulnerable to hacks?
    4. Pre-funding appraisal quality control measures: Make sure your vendor can leverage quality control technology and that it’s consistently applied to all appraisal reports you receive. If you use multiple AMCs, you can institute a QC process that you’re your service providers adhere to, so your reports are checked thoroughly and consistently, regardless of their origin.
    5. Make your LOs happy, but still maintain your compliance: Your sales team wants to have some control over the appraisal process, and you can give originators secure, permission-based access to tools that give them peace of mind. Make sure they can log in and get status updates, and send messages and requests for changes. You can also make sure your valuation service providers are integrated with your loan origination system (LOS) so your sales staff doesn’t have to rekey data or log into different programs. This will eliminate mistakes and helps keep your sales staff focused on originating rather than data entry.
    6. Have vendor performance reporting at your fingertips: Whether you’re using a single AMC, multiple AMCs, or managing your own fee panel, the third-party oversight requirements mandate that you monitor and report on the performance of all vendors. With a single technology platform, you can monitor performance across all channels and you’ll have the infrastructure to quickly make vendor changes as you need to.
    7. Choose a partner with a history of innovation and customer-focused evolution. The one constant in this environment is change. Your service providers should have a history of successful and rapid innovation, as well as a solid history of releasing new compliance or efficiency features or services as requested by their customers. With compliance deadlines, there’s very little room for error so choose a company with a history of meeting those deadlines for their clients.
    8. Get the support and service your team will need: If the relationship is critical to your success, as most valuation solutions are, it’s important that your vendor is accessible to you any time (24x7x365) and that they provide the training your staff will need to ensure compliance and efficiency. Good support will help you avoid underwriting and closing delays, and help you deliver excellent service to your borrowers.

It’s painful, but in the end you’ll be glad you checked into your partners.

The new vendor oversight requirements can be seen as a hassle, adding extra problems to an already challenging industry. But examining your valuation vendors can also have a dramatic effect on your bottom line.

With better vendors, you’ll find efficiencies that will reduce your overhead.  You can deliver better service to your borrowers, reduce underwriting and closing delays, and make loan originators happier. Your report quality and turn times can dramatically improve, too. Plus, with vendor performance comparisons, you can easily and quickly make operations changes so you can grow when origination volumes pick up again. Compliance may be the reason you dug in, but unreliable vendors are definitely affecting your profits. Vendor reviews are time consuming, but you’ll get far better results in the long run.

As more lenders start their third party oversight initiatives, we’ll uncover more warning signs and best practices, and we’ll continue to add to this checklist. You can download a full version anytime at www.MercuryVMP.com/TPO.

About The Author


Jennifer Miller

Jennifer Miller is president of Mercury Network, a web-based software platform used by more than 600 lenders and AMCs to manage compliant collateral valuation workflow. Jennifer can be reached at Jennifer@MercuryVMP.com.