A recent bulletin from the Office of the Comptroller of the Currency (OCC) recommends new guidelines for national banks and federal savings institutions regarding their third party vendors, including appraisal management companies (AMCs). Banks and mortgage lenders are cautioned to choose their appraisers and other vendors wisely, as regulators will hold lenders accountable of the quality and accuracy of their vendors’ work.
Concerned about the increasing reliance of financial institutions on third-party vendors for critical tasks, theOCC stated that it “expects more comprehensive oversight and management of third-party relationships that involve critical bank activities.” The OCC bulletin, “Third-Party Relationships: Risk Management Guidance,” laid out steps lenders should take to manage risk with their vendors. These steps included:
- Performing proper due diligence in selecting a third-party provider.
- Conducting ongoing monitoring of the third-party’s activities and performance.
- Maintaining property document and reporting.
- Conducting independent reviews of the risk management process.
The OCC said it will pursue enforcement actions to address violations of the law and unsafe practices by the lender or its third party, and has the authority to assess special fees against lenders when it finds transgressions in the activities of their third party providers.
Following the release of the bulletin, in a panel discussion hosted by the Collateral Risk Network (CRN), an industry group comprised of lenders, government agencies, Wall Street firms, and appraisers, panelists made it clear that selecting the right appraiser is the single most important part of the appraisal process.
Keith D. Murray, MAI, president and CEO of PCV Murcor,shared his thoughts on the issue: “Regulators will hold lenders responsible for any misdeeds by appraisers as well as the quality of their work. As a company that has made appraiser selection and assignment a core component of everything we do, we agree with the OCC’s new recommendations. Appraisal quality begins with the appraiser, and when the right appraiser is selected, the downstream risk is minimized tremendously.”
Also according to Murray, AMCs should be using a blend of technology and licensed appraisers to analyze every appraisal before sending it on to their client. This continual monitoring makes sure the appropriate appraiser is selected for every order. He suggests three critical factors in matching the proper appraiser to the assignment: the appraiser’s knowledge of the property type, knowledge of the neighborhood, and the appraiser’s record of performance.
Murray said, “Too often, we hear of appraisers being chosen on the basis of just one of those factors, or just the lowest fee, which can actually be a recipe for disaster. The simple fact is that not all appraisals or appraisers are alike. Every market and every property require different competencies. As an example, appraising a $200,000 tract home versus a $500,000 custom home in a gated community may require two different appraisers with specialized knowledge and specific skill sets.”
Murray closed his remarks with a somber warning to all AMCs: “The federal government is serious about the issue. As an appraisal provider, and for the benefit of our clients, we are giving this our full attention. And, frankly, we think the industry as a whole should as well. There has been a lot of focus on appraisal compliance, fees and reviews, and clearly these issues are important to making sound collateral decisions. But everything starts with appraiser selection, and lenders should be questioning and auditing their AMCs to ensure they are with the right partner—the financial and reputational risks are just too great.”