The valuation industry has been infused with a host of regulations, standards and consequently, scrutiny. Of course, these regulations were implemented to bolster a sector of origination riddled with challenges. Quality was suffering; independence lines were crossed within a lending institution at the cost of the appraisal report, and ultimately the loan itself.
The appraisal independence requirements within the Dodd-Frank Act go a long way to shedding more light onto an issue that needs to be solved, but it doesn’t go quite far enough. The regulatory bodies that govern our space—CUNA, FDIC, CFPB, etc.—have jointly issued a statement, “The Interagency Guidelines,” that incorporates all of Dodd-Frank as well as additional, critical guidelines on achieving true appraisal independence and the methods/steps an institution should take in order to be truly compliant. Within the guidelines, it is illustrated how an institution can gain not only complete compliance, but also satisfy their safe and sound banking practices as well. This is critical to an industry that is struggling to regain footing. If addressed appropriately, a lender can overcome some of these most common industry hurtles with ease.
There are several takeaways that lenders can implement to strengthen their compliance posture and ensure a high quality appraisal report: focus on compliance, instill higher levels of quality control, support reasonable and customary appraisal fees and appropriately use appraisal management software. Should a lender choose to outsource appraisal independence to a third party, most of that burden will be alleviated.
Compliance concerns are excessively burdensome on the banking industry. So much so that most banks have separate compliance departments working meticulously through ever-changing compliance applications and modifications. These departments can certainly interpret the applicable regulations, create the necessary operating procedures and apply to the individual department segments, but there are weaknesses in implementation and day-to-day management of the proper compliance procedures. This is most commonly the result of unqualified and/or uneducated staff.
As required by the regulations, “the individuals working in the department must at a minimum, be trained, qualified and understand the AIR and Dodd-Frank Act, appraisal regulations and enforcement, as well as the Uniform Standards of Professional Appraisal Practice.”
One of the main hurdles in today’s lending environment is maintaining appraisal quality levels. To overcome these challenges, all completed appraisal reports should pass through a multiple-stage quality control review process prior to delivery. When the appraisal report PDF is delivered it should be reviewed extensively for completeness, correctness, consistency, compliance, and cross-checks so that the lender’s processing department can use it most efficiently as an aid for underwriting and pre-underwriting. A visual review is crucial in this process. Technology alone cannot uncover common appraisal mistakes, such as missing photos, signatures, location map flags and sketches.
Higher fees to appraisers will result in higher quality reports and reliable service. The interagency guidelines recommend compensating appraisers according to reasonable and customary fees in the specific area or market of the service. A higher-paid appraiser will result in a higher quality appraisal report; a win-win for the lender since the cost is passed directly on to the borrower. This is crucial in the selling process of a loan product. Often, HUD-1 fees can be a breaking point in negotiating a loan for a borrower. Appraisers and banks know their market and borrowers better than anyone—this is why it is crucial to work closely with both the appraiser and the lender to develop a market-specific pricing schedule for the particular region.
Technology plays a large role in all facets of banking, including appraisal management. There are several providers of appraisal management processing platforms, including loan origination system providers, all of which tout a compliant solution for internal appraisal management.
Unfortunately, this simply is not the case. Automated software can’t manage compliance, the main component of any successful appraisal. Software satisfies only a portion of the solution, while not at all fulfilling a lender’s safe and sound banking practices. In reality, the following resources are needed to effectively manage appraisal compliance and processing: appraisal compliance officer/manager, appraisal processing manager, appraisal processor(s) and appraisal management database.
Keep in mind, the staff associated with the appraisal management department cannot be considered loan production staff. A lender will need to prepare the loan production staff to attain the necessary training and qualifications to manage the process—a task that many smaller institutions cannot dedicate resources to. There is more on the table than Dodd-Frank in today’s appraisal independence in lending. Of the challenges in the industry, many can be overcome by appropriate allocation of resources in order to ensure compliance as well as fulfillment of safe and sound banking practices.
