By George Opelka
Those doing business in the U.S. mortgage lending industry are operating in an extremely complicated environment. Those working on the collateral valuation side of the transaction know it all too well. New rules and the regulatory changes being implemented under the Consumer Financial Protection Bureau have made it far more difficult for banks to manage their appraisal processes in-house. Fortunately, the valuation industry has a well-developed system of vendor management companies that have traditionally served lenders with complex title- and appraisal-related processes.
While the advent of the appraisal management company (AMC) has created some friction in the professional fee appraiser community, AMCs are far better equipped to manage large professional fee panels than banks. And the new federal mandates for state-level AMC registration are also playing a part to strengthen the overall quality of AMCs in general. As AMCs see their business increase and their role become more complex, the quality-control (QC) departments within AMCs find they are fighting a war on two fronts — against both the speed and affordability requirements of lender clients and the shifting regulatory landscape.
Recently, AMC QC departments confronted another hurdle. Any loan with an application date on or after December 1, 2011, that will be sold to Fannie Mae or Freddie Mac must have an appraisal report delivered in a format compatible with the new Uniform Appraisal Dataset (UAD). Some AMCs are looking at the UAD as an opportunity to improve quality-control processes. AMCs that are not taking advantage of this opportunity should be.
It's obvious the new rules will change the way AMCs perform quality control. The degree to which this change occurs will depend upon the individual shop, but the first step for every vendor manager will be to ensure that QC processes are fully aligned with the new UAD requirements. While this appears straightforward, the new rules require a fair amount of reconciliation to be fully compliant.
UAD is more than just a formatting change in the report. Both manual checklists and automated systems must be updated to ensure that reports will be acceptable to investors under the new rules. The most difficult hurdle for AMC QC departments will be dealing with further changes or refinements that will undoubtedly be handed down for UAD policy by the former government-sponsored enterprises (GSEs) in the days ahead.
Compliance with UAD is just one aspect of a fast-changing regulatory landscape. Once-optional reporting of changes related to USPAP (Uniform Standards of Professional Appraisal Practice) violations is now mandatory. Additionally, the states have implemented programs for licensing and tracking AMCs. And AMC lender clients may have changes of their own that they would like to see implemented.
The new UAD preferred delivery medium is an XML file, which is not intended for humans to read. AMCs hoping to conduct due diligence on the newly required XML file will need some kind of reader to make sense of it. There are a few in the marketplace that are now readily available.
The XML file contains an embedded PDF copy of the appraisal. The PDF can be extracted but requires special technology to do so. Actions by AMCs that alter the compliant XML file when performing due diligence render the file incompliant and introduce unnecessary risk. The form-filling software that appraisers use today creates a compliant document sent directly to the portal. Even AMCs that employ IT professionals would be better served by requesting a stand-alone PDF or by using an XML reader to access the report.
The latest automated review software is already equipped to read and perform due diligence on the new UAD XML files, scanning for compliance with more than 1,000 appraisal report rules and 300-plus UAD-specific rules. One of the most significant benefits of review technology in the QC process is that workflow can be initiated as soon as a problem is identified, automatically sending the job back for corrections or on to further human review.
It's important to remember that not every compliance problem will result in a UAD-related buyback request. Many problems are much less serious, though still important enough to require human attention. Lender clients don't like to hear about problems, but they appreciate being notified immediately so they can manage the loan approval process or closing schedule accordingly.
If the problem will potentially create high risk or invalidate the use of the appraisal report, communicate this to the client immediately. Also provide the appraiser's revision plan or the timeline for a new appraisal. Once the lender receives the appraisal report, it is typically routed to the underwriting department. If a problem is uncovered at that stage, it can usually be resolved through revision or discussion. Problems that necessitate a buyback request are rare if the AMC's quality-control department is vigilant. Even with a bad report, quick action and open communication can prevent the error from becoming critical.
George Opelka is senior vice president of ACI, a provider of software for real estate appraisal and valuation.