By: Steve Greenfield
The loan origination process involves numerous parties, including the Appraisal Management Company (AMC)–a vendor that plays a vital role in the lending process.
Whether your organization is a bank, non-bank, credit union or other type of financial institution, chances are if you are lending on collateral, you’ll be engaging an AMC to obtain a valuation of the property in order to close on the transaction—and therefore oversight of your AMC is critically important.
After the Great Recession, guidance was written under Dodd Frank, outlining the HVCC rules that took effect on May 1, 2009. This was a code of conduct, that was later replaced by the law known as Appraisal Independence Requirements.
Succinctly put, the rules stated that loan originators (among others) could not have any influence in the selection or outcome of an appraisal order.
Historically, lenders self-managed the valuation process–and the lines of communication may have been somewhat blurry. Over time, the AMCs became a product of the need for a separation between production staff and the boots on the ground appraisal professional.
In effect, the AMC:
- Acted as a firewall between both parties.
- Was tasked with managing the assignment process, including selection, ongoing communication and payment processing.
- Served as a “middle man” between lender and borrower
Hence, a new third party was born—and another vendor type added to the long list of mortgage fulfillment vendors requiring oversight.
Today, appraisal independence remains an issue of regulatory concern, and the AMC model offers a practical solution; still, with as many as 500 AMCs, not all are created equal and some are prone to an occasional regulatory violation.
In order to understand the risk of partnering with an AMC, a good vendor management professional should:
- Work closely with their internal appraisal department or senior leadership.
- Understand the day-to-day operations of managing AMCs
- Look deep–and work through an in-depth checklist of audit questions
AMCs vary in size, and even a regional AMC may have a minimum of 1,000 appraisers on their panel, while a large national AMC may have upward of 10,000 appraisers.
As a lender, that means that on any given day, you have no idea who the appraiser might be representing you at the time of the appraisal inspection; oversight of AMCs is all the more important.
AMC oversight, by its very nature, must be an ongoing practice; it is necessary to monitor oversight on a monthly, ongoing basis for the life of the vendor partnership. This can be achieved by using a performance scorecard, which offers a great feedback loop both for your internal stakeholders and the AMC partner.
The reality is that an AMC may present various risks to your operation. Being aware of these will help in your oversight approach.
Transactional risk: Review Service Level Agreements (SLA); does the AMC perform and deliver reports within a mutually agreed upon turn-time? Define turn time so that the SLA is consistent and your expectations are measured.
Reputational risk–Two key areas of concern:
- Does the AMC have a good reputation in the industry with the appraisers?An AMC with a less than stellar reputation may find it difficult to recruit appraisers to assist with an increase in appraisal orders. In turn, this may impact you, the lender, as extended turn times or poor quality reports may follow.
Remember, the borrower has agreed to apply for a loan with your company. When the appraiser visits them, for all intents and purposes, the appraiser is you!
- Reputational risk may also be expressed by litigation activity, if the AMC has– or is currently in–any form of litigation, a deeper review of the cases should be examined to ensure that controls are in place to keep the lender updated for any fall out, which may in turn impact your operation. Due diligence failure could turn into fair lending or regulatory compliance pain points, which may slow down your lending operation. Controls should be in place enforcing the need for the AMC to notify the lender of any such occurrences.
It’s also critical to assess vendor oversight of their third parties (your fourth parties). This requires ensuring they have diligent:
- Onboarding process
- Background checks
- Compliance with policy and procedures regarding identification
- Performance to the agreed upon SLAs
There are also many appraisal software systems available to internal appraisal departments and AMCs. These systems, while helpful in the assignment process, cannot be relied upon to verify who is performing the appraisal assignment.
An AMC without their own internal vendor management department and relying on software doesn’t have a robust enough operating system. Therefore, pre-due diligence, ongoing monitoring and annual assessments are key to ensure that the AMC has a strong platform for vendor validation.
Bottom line: Fourth parties carry many risks and variables; that is an unavoidable fact.
However, fully understanding the lending process, engaging with the line of business, and being proactive with the AMC partner will help manage risk better than simply including the AMC in an annual audit schedule.
Steve Greenfield is Director of Third-Party Risk with Venminder, Elizabethtown, Ky. He is an experienced vendor risk executive with more than 20 years of management experience in the financial services industry. His expertise covers the full spectrum of mortgage, lending with an emphasis on risk oversight and consumer lending regulatory compliance, as well as advising lenders on vendor software integrations to boost operational efficiencies and vendor consolidation opportunities. He joined Venminder from loanDepot llc where he served as Director of Vendor Oversight for its retail division, Mortgage Master. He is a regular contributor to MBA Insights; Steve can be reached at firstname.lastname@example.org