Banks and mortgage lenders that use third-party companies to manage appraisals are cautioned to choose their vendors carefully, as regulators will hold lenders responsible for any misdeeds by appraisers as well as the quality of their work. This comes on the heels of an Office of the Comptroller of the Currency (OCC) bulletin recommending new risk management guidelines for national banks and federal savings institutions regarding relationships with third-party vendors, including appraisal management companies (AMCs).
Concerned about the increasing reliance of financial institutions on third-party vendors for critical tasks, the OCC stated in a press release that it “expects more comprehensive oversight and management of third-party relationships that involve critical bank activities,” and laid out steps for doing so. 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, AMCs and appraisers, panelists made it clear that appraiser selection is the single most important part of appraisal assignment and completion. The panelists further warned that the lender is ultimately responsible for an appraiser's work.
The OCC bulletin, “Third-Party Relationships: Risk Management Guidance,” laid out steps lenders should take to manage risk with their third-party relationships, including identifying inherent risks; 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; and 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.
“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,” said Keith Murray, MAI, president and chief executive officer of PCV Murcor, a provider of real estate valuations. “Appraisal quality begins with the appraiser, and when the right appraiser is selected, the downstream risk is minimized tremendously.”
According to Murray, AMCs should be using a blend of technology and licensed staff appraisers to thoroughly analyze and score every appraisal before sending it on to their client. This continual monitoring provides the foundation to ensure they have the best appraisers on their panels and the appropriate appraiser selected for every order. Critical factors in the assignment process include the appraiser's knowledge of the property type, knowledge of the neighborhood, proximity to the subject property and the appraiser's record of performance.
“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,” Murray said. “AMCs should be looking at all these different data points and selecting appraisers based on how well they match up to a specific appraisal order. The simple fact is that not all appraisals or appraisers are alike. Every market and every property requires 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.”
“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,” Murray said. “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.”