WE’RE HEARING a recent Office of the Comptroller of the Currency bulletin puts a spotlight on regulated lenders’ counterparty risk in ways that will likely increase scrutiny of appraisal management companies.
AMC relationships are a potential risk that mortgage-backed securities investors as well as home finance market participants in general should be increasingly aware of as they size up originators in transactions. Third-party provider violations can lead the OCC to pursue enforcement actions and assess special fees against lenders, real estate valuation provide PCV Murcor warns.
“The bulletin was a response…by the OCC [to the] perceived increased level of risk in lending,” says Richard Owens, senior marketing manager at PCV Murcor. “It’s a framework the banks are going to use to review third-party oversight.”
The OCC bulletin, “Third-Party Relationships: Risk Management Guidance,” rescinds a previous one. It lays out steps that include 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, according to PCV.
“This one really got into details,” says Owens. “It’s all bulleted out there and it really gets into the meat of what the examiners are going to be looking at [in terms of ] how you manage your risk with regards to third parties.”
Examiners will be scrutinizing things like financial condition risk management and information security and it puts a particular focus on “critical activity” in lending such as AMC relationships, Owens says.
AMCs as a result are going to face more scrutiny and asked to answer questions such as how long been they have been in the business, what their reputation is like, and whether are they capitalized enough to withstand shakeup.
“They talk about background checks of subcontractors/third-party providers, and policies around things like licenses, processes to control and remain compliant, and training,” Owens says.
The scrutiny of sub-contractors makes appraisal management companies a focal point, he says.
“We have to be responsible for all of our sub-contractors, that [means] monitoring assignments/who gets the appraisal, and what the risk is in how we do the assignment,” says Owens. AMCs also have to establish an audit trail to prove how they went about assignments and monitor performance, he says.
The selection process in particular is the most important part of the appraisal assignment and completion process that is likely to come under review, according to PCV. A recent Collateral Risk Network panel reinforced this view, according to the company.