Today’s mortgage origination environment is one where the focus is on avoiding regulatory hassles and eliminating potential buybacks – and for good reason. With new regulation like Dodd-Frank, restructuring the FHFA, the creating of CFPB, and new zeal in the Treasury’s OCC examiners, lenders have been threatened and fined into a corner. Mortgage credit is tight, the markets are reluctantly coming back and mortgage revenues are down. In times like this, the key is to focus on efficacy, the ability to produce the desired result.
To succeed in this environment, most lenders will need to implement a rock solid collateral valuation process. In addition to an efficient, accurate appraisal management pipeline, lenders will also need a quality assurance strategy, plus the compliance documentation required to keep the regulators at bay. To produce the desired result of no regulatory hassles and no buybacks, a lender needs all three features.
The quality assurance of appraisals is under the spotlight now, with several investors and regulators emphasizing their pre-funding QC requirements. Fannie Mae in their seller guide states there is a “[r]equirement that the lender develops and implements a QC program that provides a structure for identifying deficiencies and for implementing plans to quickly remediate those deficiencies and underlying issues.”
According to the OCC Bulletin 2010-42 a lenders “is responsible for adopting and reviewing policies and procedures that establish an effective real estate appraisal and evaluation program.”
The bulletin in section four describes aspects of an “effective” program. To highlight a few of these, a program should:
- Provide for the independence of the persons ordering, performing, and reviewing appraisals or evaluations.
- Establish selection criteria and procedures to evaluate and monitor the ongoing performance of appraisers and persons who perform evaluations.
- Ensure that appraisals comply with the Agencies’ appraisal regulations and are consistent with supervisory guidance.
- Provide for the receipt and review of the appraisal or evaluation report in a timely manner to facilitate the credit decision.
- Develop criteria to assess whether an existing appraisal or evaluation may be used to support a subsequent transaction.
- Implement internal controls that promote compliance with these program standards, including those related to monitoring third party arrangements.
In section five, the OCC reiterates the desire for lenders to create a process that provides for independence throughout the appraisal process. “The collateral valuation program is an integral component of the credit underwriting process and, therefore, should be isolated from influence by the institution’s loan production staff.”
Size is not an excuse: “[f]or a small or rural institution or branch, it may not always be possible or practical to separate the collateral valuation program from the loan production process. If absolute lines of independence cannot be achieved, an institution should be able to demonstrate clearly that it has prudent safeguards to isolate its collateral valuation program from influence or interference from the loan production process.” Implementing a platform with these functions built in is the most effective way for a small mortgage lender to comply.
In further compliance with the bulletin, a modern appraisal management platform provides a standard communication function that is automatically recorded in the audit trail.
For efficiency and seamless documentation, it’s good practice to have your QC process integrated with your appraisal management platform. Many platforms have some QC functions, but choose one that has a wide variety of options since all lenders have different QC requirements in addition to the regulatory minimums. Mercury Network’s platform also offers AQM as a risk assessment and review platform. The AQM platform provides native and third party reports and tools so lenders and AMCs can choose the best approaches for their institutions. For example, the native AQM report, called an AQI, automatically reviews an appraisal for completeness, UAD compliance, GSE and USPAP guidelines, and risk. This report produces a score to direct workflow and an action item list.
Integrating your QC process with your appraisal management platform provides consistent documentation of the appraisal ordering and review for regulators, makes the appraisal review process more efficient by highlighting issues and establishes a consistent framework for the review (a big plus with regulators). Including this documentation of your QC due diligence in your overall process reduces the chance of a buy back request and, if there is one, makes it more defendable.
About The Author
Kevin Golden is Director of Analytics at a la mode, inc. With over 25 years of experience consulting, developing and managing risk in the mortgage collateral world, Kevin is an acknowledged domain expert having provided custom solutions to Government Sponsored Enterprises, multi-billion-dollar investment funds, top-ten lenders, and Fortune 500 companies. He can be reached at Kevin.Golden@alamode.com.