Careful Selection of an Appraisal Management Company Partner Can Help Lenders with Regulatory Compliance BY MICHAEL DRESDEN

38 July 2016

The home appraisal is a key process and document in loan origination and mortgage lending.

In the conduct of that assignment, the appraisal management companies that work with lenders are subject to federal rule making subsequent to the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173) of 2010, as well as a system of state registration and regulation.

Moreover, as the Consumer Financial Protection Bureau (CFPB) has said, “supervised banks and nonbanks are expected to oversee their business relationships with service providers in a manner that ensures compliance with Federal consumer protection law,”1 which means that these entities must have an effective process for managing the risks of service provider relationships.

Even though we are now several years removed from the most recent financial crisis, regulatory surveillance and enforcement remain intense.

Thus, in today’s regulatory environment, appraisal management company (AMC) partners play an increasingly important role in overall regulatory compliance, especially as lenders of all sizes consider the benefits of outsourcing appraisal management.

In this article, we will review the regulatory and licensing environment under which AMCs now operate, as well as how the careful selection of an AMC partner can help lenders with regulatory compliance.

Complex regulatory environment. The regulatory or compliance demands placed upon the mortgage industry have grown substantially in the wake of the 2007-2009 crisis in residential mortgage lending.

This journey started in March 2008, when the Home Valuation Code of Conduct (HVCC) was initiated: a joint agreement made among Freddie Mac; Fannie Mae; the Office of Federal

Michael Dresden

in today’s regulatory environment, AMC partners play an increasingly important role in overall regulatory compliance, especially as lenders of all sizes consider the benefits of outsourcing appraisal management. ∆

40 July 2016

Housing Enterprise Oversight (OFHEO), now the Federal Housing Finance Authority (FHFA); and the New York State Attorney General “to enhance the independence and accuracy of the appraisal process.”2, 3

HVCC, which became effective May 2009, imposed strict requirements on lenders with respect to appraisals in many areas. These include ensuring “absolute independence within a lender’s organization between the appraisal function and loan production;” lender’s use of any in-house produced appraisal reports; and specified audit functions. Freddie Mac also stipulated that it would no longer purchase mortgages from sellers that do not adopt the code with respect to single-family mortgages.

While HVCC has been superseded or expanded upon by Dodd-Frank and its mandated rule making, it remains an important document historically and in principle.

State by state. Dodd-Frank also requires that states enact AMC oversight and registration programs.

At present, 38 states have comprehensive state AMC laws, along with a registration or governing board. AMCs do not go through the Nationwide Mortgage Licensing System (NMLS) to register and license with states as do loan servicers, mortgage brokers, and related entities. An AMC must apply for and be licensed in each state through its registration system. While AMCs are not part of NMLS, the Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC) is planning to create a national registry of AMCs.

In April 2015, the Federal Reserve and five other federal agencies issued the “Final Rule on Minimum Requirements for Appraisal Management Companies," which became effective August 10, 2015.4,5 This requirement is in accordance with amendments to Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 that were made by Section 1473 of Dodd-Frank.

The Final Rule specifies that state appraiser certifying and licensing agencies have broad authority in a number of areas, including AMC registration and credentials review, verification of

PROGRESSION of APPRAISER and AMC REGULATIONMarch 2008Home Valuation Code of ConductImposed new standards and scrutiny over all parties involved in the appraisal process.

July 2010Dodd-Frank Wall Street reform and Consumer Protection Act (HR 4173)Sets guidelines for supervision of third party providers of appraisal management services; appraisal management company minimal requirements, including the sub-group of appraisal management companies that are subsidiaries of federally regulated financial institutions; and state appraiser certifying and licensing agency authority. Defines an appraisal management company. (SEC. 1473.)

March 2014Interim AMC RuleConsumer Financial Protection Bureau and other federal agencies propose minimum requirements for states electing to establish an appraiser certifying and licensing agency with the authority to register and supervise AMCs.

April 2015Final AMC RuleSix government agencies, led by the Board of Governors of the Federal Reserve System, issue Final Rule on minimum requirements for appraisal management companies. Also, established a federal register of appraisal management companies, which does not replace, but complements, individual state licensing and regulation.

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AMC appraiser panels, and the investigation and discipline of AMCs for any violations of appraisal-related laws. States retain prosecutorial discretion. The Final Rule also spells out what participating states must require of AMCs in such areas as processes and controls and ownership. Furthermore, states may adopt requirements for AMCs that are in addition to the Final Rule.6

OTHER CONSIDERATIONS. For any state not establishing a regulatory

structure within 36 months from the rule's effective date (August 2018), non-federally regulated AMCs would not be able to provide appraisal management services for federally related transactions.

The new requirements also stipulate that any federally regulated AMC (AMCs owned by federally regulated banks) must register with the AMC National Registry, meet minimum state requirements, and report directly to any state in which it operates. Overall, there is no relationship between federal and state regulation other than that states must meet federal minimums of the Final Rule just discussed.

AMCs and the appraisal community are still reviewing the new Home Mortgage Disclosure Act (HMDA) to determine how, or if, it might impact our professional practice. The CFPB’s TILA-RESPA Integrated Disclosure (TRID) rules will impact AMC operations with respect to appraisal pricing, quoting, and the re-disclosure process. (The discussion of TRID is best reserved for a separate article.)

What makes for a successful lender-AMC partnership? Clearly, regulatory compliance is an important factor in choosing an AMC partner. Several other key areas to consider include:

The entity and how they work with you. Consider the AMC’s leadership, financial strength, and degree of national coverage. Have there been any regulatory or compliance issues? Are the leadership and account executives accessible, and does the AMC have a strong management team to oversee both production and compliance?

The value of experience. How long has the

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NOTES1 CPB Bulletin 2012-03. April 13, 2012. Subject: Service Providers.

2 Freddie Mac. May 2010. Home Valuation Code of Conduct (Publication Number 746).

3 Fannie Mae. January 7, 2009. Amends these Guides: Selling: Home Valuation Code of Conduct. Announcement 09-01.

4 Federal Reserve System, et al. April 30, 2015. Agencies Issue Final Rule on Minimum Requirements for Appraisal Management Companies. (http://www.federalreserve.gov/newsevents/press/bcreg/20150430a.htm)

5 Federal Register. 06/09/15. Minimum requirements for Appraisal Management Companies. (https://www.federalregister.gov/articles/2015/06/09/2015-12719/minimum-requirements-for-appraisal-management-companies)

6 Presentation sponsored by Association of Appraiser Regulatory Officials on “New AMC Rule.” http://www.aaro.net/docs/Final_Guidance_on_AMC_Rules-_Ritter_and_Metcalf_final.pdf

In particular, the extensive requirements of final rule making on state registration of AMCs, as required by Dodd-Frank, as well as the broad authority retained by individual states, puts a premium on AMC experience, close supervision of appraisers and being “adept” within individual jurisdictions.

Working together, lenders and their AMC partners will be able to achieve an efficient, cost-effective, quality work product that passes regulatory scrutiny.

Michael Dresden is the executive vice president of DartAppraisal.com, an independently owned, nationwide AMC. He can be reached at MDreseden@dartappraisal.com.

MCM

AMC worked exclusively in appraisal management? What is the breadth and depth of their professional practice in such areas as annual volume of appraisals; numbers, types and average length of lender relationships; contributions to professional organizations; and operational systems?

With respect to the latter, does the AMC have advanced systems in place to identify and resolve problems in an appraisal report before it goes back to the lender? An example would be an AMC that has created its own UCDP hard stop matrix, complete with recommended actions, to resolve the many hard stops that can be generated by Fannie Mae’s Collateral Underwriter.

How the AMC works with appraisers. It is incumbent upon appraisal managers to cultivate positive relationships with appraisers, especially those agile, experienced appraisers with great local knowledge and insights—the ones that we don’t want to lose.

An experienced, best practices AMC can be helpful in this regard through having an established panel of such quality, veteran appraisers across necessary geographic areas and property types; established skills in managing and supervising appraisers; and the resources to pay them in a timely manner.

Quality control. Compliance begins with training. Does the AMC’s staff receive initial and ongoing training on regulatory issues? Are they USPAP (Uniform Standards of Professional Appraisal Practice) certified? Do the AMC’s audit and quality control programs satisfy the demands of both lenders and regulators? Also, does the AMC have proven information security and disaster recovery capabilities?

Meeting the challenge. The proliferation of AMCs since appraiser independence regulations came about has brought many “newcomers” to the industry. These entities often lack the resources to effectively manage and comply with ever-increasing regulatory scrutiny. As a result, lenders open themselves up to increased risks and having to do more audit work to ensure regulatory compliance.