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Slashing Risk With Collateral Data

Housing outlooks are optimistic and we’re all entering the busy season. Every lender is focused on borrower experience while getting deals done, and the collateral valuation process is a critical part of your overall success. Make a mistake there, and someone will end up paying the price.

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With the appraisal process — and evaluating collateral in general — there is no such such thing as a zero cost mistake. Whether an error results in the need for re-disclosure, a returned appraisal or a compliance violation, each time a lender, AMC or appraiser takes action on incorrect property information, everyone risks lost time, lost money, or both.

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The problem is, mistakes are understandably prevalent when it comes to evaluating residential property. While some properties may seem similar, each has a distinct footprint. Each property you’re evaluating is surrounded by different neighborhoods and may have modifications or unique characteristics like lot size and views. These details can make a dramatic difference in the value of a property, and if they’re not recognized in the collateral valuation process it can mean losing a deal or making risky lending decisions.

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Fortunately, in the age of big data, the vast majority of properties have a unique data set consisting of thousands of pieces of data. If you want to make the right decisions, you need to be certain your information is correct. If you don’t have access to reliable, relevant data, it’s virtually impossible to understand a property well enough to avoid decisions that lose money.

You can get the data to verify your collateral valuation decisions very easily. Several providers offer software, property reports, and automated valuation models (AVMs). The technology is advanced enough today that you can integrate these systems and pick and choose the valuation verification methods you prefer.

Before you choose the collateral valuation and verification methods best for your lending institution and risk profile, make sure you ask the vendor these questions:

>>What makes this data or verification solution better than alternatives?

>>Can this solution be integrated with your overall process software so the entire collateral valuation workflow is easy to manage?

>>How is the data or solution verified? For example, if you’re using AVMs to verify appraisal report data, do you have a way to choose the best AVM for each individual property?

When you have a data verification solution in place, remember that collateral valuation is just one way to leverage your insights. Many lenders use the same solutions across the entire mortgage chain. With collateral data, you can determine borrower equity and LTVs in seconds. Before you disclose appraisal fees to the borrower, you will have a better idea of the complexity of the assignment. In post-closing, you can use the data to discover a property or neighborhood’s footprint for better due diligence during audits. Finally, in the loan servicing stage, the same data can be used to ascertain your portfolio’s value direction and determine ideal outcomes for properties in your portfolio.

The data you need to make the right lending decisions is out there, and it’s easy to integrate with your overall process. The cost is pennies on the dollar compared to the risks of proceeding blindly, so it’s time to take a step into big data to verify your collateral valuations.

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A Checklist To Find The Right Partner

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The CFPB, OCC and investors all require due diligence on your third party service providers, including your vendors in appraisal operations. The OCC published a bulletin in 2013 with specific mandates for your vendor selection process, as well as the ongoing performance reporting expectations.

Vendor due diligence is part of your compliance, but what should you really look for when it comes to technology partners in appraisal operations? What are the risks, and how can you effectively monitor performance over time? As compliance exams kick into high gear, here’s a list of recommendations:

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Consider a site visit. As stated in the OCC Bulletin, if the relationship is critical to your operations, you are required to minimize that risk for your borrowers. For relationships as important as your primary appraisal management companies (AMC) or vendor management software platform, we recommend a site visit. Take a tour of the facilities, meet the technology experts charged with powering your collateral valuation pipeline, and investigate their reliability first-hand.

Check client lists, referrals and experience. When you’re choosing an AMC and a technology platform, look at their client base. Are they handling significant order volumes every day? Is it a proven solution that can handle your volume? Choose a tested partner that’s endorsed by other industry leaders.

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Automate audit trails on every transaction for compliance. All the compliance safeguards in the world are irrelevant if you can’t prove it later. With any appraisal service provider, make sure you can get a full audit trail on the entire transaction, automatically stored so you can get it later if needed. Record when it was ordered, when it was assigned and completed and when the borrower was provided copies, with time and date stamps. In the case of an exam, these verifications of your due diligence on every file will be invaluable.

With vendor management software, choose enterprise solutions over custom-built, one-off implementations. Many lenders use multiple AMCs and need a software platform to manage the pipeline across all channels. Beware of a fully customized solution and place higher priority on your own risk mitigation in this regulatory climate. While software developers may offer to build you a custom application, you may be at a distinct disadvantage with that method for several reasons. ?First, if you have a custom software build, you’re not as likely to leverage the industry and compliance knowledge of your peers. Lenders and AMCs across the country are implementing intelligent quality and compliance safeguards every day, and without exposure to those enterprise-level platforms, it will be difficult to keep up with the latest innovations that help you with compliance and enhance your profit. Your appraisal operations unit isn’t an area of your business where any lender can afford extra risk, especially considering the penalties and consequences of non-compliance. For this reason, it’s always prudent to choose a solution that other industry leaders are also using. Another disadvantage of a custom software build is that it’s difficult to make changes or effectively scale your operations as your company grows. Development costs will always be unpredictable, and compliance deadlines will likely be difficult to manage without dedicated technology project managers on your staff.

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Rely on technology companies for software. Several appraisal management companies have introduced vendor management platforms, but their primary business is full-service appraisal management and report review, not technology development. Think about it this way: If you’re placing appraisal orders on your AMC’s corporate website, are you sure the AMC is protecting the non-public information of your borrowers? Is its website truly secure and compliant with Gramm-Leach-Bliley, PCI Payment Card Industry Data Security Standards, and the other privacy regulations???This doesn’t mean you shouldn’t use those same AMCs for the high-quality appraisal reports you need.  However, you should deploy a secure technology solution that integrates with their system, so you can rest assured your data is secure regardless of the AMC’s technological capabilities or vulnerabilities. In accordance with the OCC’s requirement of being able to switch vendors easily, deploying your own technology platform allows you to quickly change vendors should the need arise, because your internal systems aren’t entangled with the vendors’ technology.

Verify that your vendor’s tools are compliant.  Make sure your solution has automated tools to help you with compliance.  Here are a few common pitfalls we’ve seen. ??The new Equal Credit Opportunity Act (ECOA) Valuations rule:  We’ve seen many lenders and AMCs skipping the critical step of Electronic Signatures in Global and National Commerce Act (E-SIGN) compliance where they must obtain acknowledgements from borrowers before electronic delivery of the report.  Verify your solution is handling this in compliance with the new regulations.??Gramm-Leach-Bliley Act:  As specifically mentioned in the OCC Bulletin, the most common violation of the consumer-privacy safeguards in the Gramm-Leach-Bliley Act that we hear about in appraisal operations is the attachment of appraisal reports to unencrypted e-mail messages.  In other words, if an AMC or service provider attaches your appraisal as a PDF or XML in a simple 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. PCI compliance: If your platform or AMC accepts a borrower’s payment information, verify his or her PCI compliance. Is the borrower’s payment information secure?  We’ve seen popular platforms with serious security lapses when it comes to borrower credit card information.

Choose good solutions for production, but maintain compliance. Some lenders have sacrificed loan officer access for compliance, but you can still maintain appraiser independence while giving your production staff the tools they need. You can give originators permission-based access to tools that make entering orders easy; give them instant status updates; and give them the ability to send messages and revision requests, edit borrower contacts and even place appraisal orders on hold or cancel them. Another key to loan officer happiness with appraisal operations is a tight integration with your originator’s loan origination system (LOS) that will reduce errors and hassles from re-keying data, and lessen the work your production staff has to do to get the appraisal ordered.

Demand vendor-performance reporting. Whether you use AMCs, individual appraisers or a combination of both, the third-party oversight requirements mandate that you have the ability to monitor and report on the performance of all your vendors. ??When looking at platforms, this should be a priority — not only to satisfy regulators, but also to guide operations in vendor selection.  You should have access to vendor-performance statistics such as quality, turn time and revision rates.

Consider integrations and partner lists. Is your third-party provider integrated with your existing systems and other software companies in the industry?  Even if you don’t need an integration yet, readily available software integrations will enhance your operations, reduce delays and errors, and streamline your compliance.  Integration partners also reveal a great deal about the provider’s technological reliability and industry reputation.  If integrations are publicly announced but don’t yet exist, if they take too long to implement or they’re generally lacking, you have warning signs that your provider may not be as agile and modern as you need it to be. ??When you find technology that easily integrates with other software systems, it’s a sign that the company is customer-driven and innovates according to its user base.  In this industry, all of us need to use a variety of technology solutions and no one has a magic box that will solve all your challenges, so the ability to work well with others is critical to the success of your operations.

Ask for great support, uptime statistics and disaster-recovery plans. Get the support and service your team will need. If the relationship is critical to your operations, as most appraisal service providers are, it’s important that you select a provider that can answer your questions, and provides you with the service you need to avoid delays and deliver superior service to your borrowers.

More checklists like this to help lenders comply with regulations and optimize their internal operations are available as free downloads at www.MercuryVMP.com/Resources.

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