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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2012

Don’t Get Blown Off Course by AIR Misconceptions

Harp 2.0 can provide a surge of new business for originators — and help homeowners rise above the tide

Don’t Get Blown Off Course by AIR Misconceptions

Appraisals are one of the most important aspects of the loan process. A high-quality appraisal can make closing a transaction a breeze, but a low-quality appraisal can have the opposite effect, taking the wind straight out of a deal.

The importance of appraisals is exactly why many mortgage bankers and lenders prefer to keep their appraisal processes close to home. And, thanks to Fannie Mae and Freddie Mac’s Appraiser Independence Requirements (AIR), as well as amendments to the Truth in Lending Act (TILA), mortgage institutions can do just that.

These rules allow mortgage lenders and their agents — including correspondent lenders — to retain and pay appraisers in an independent manner. Even so, many mortgage institutions have certain misconceptions about AIR rules, which can complicate compliance and operations. In terms of independently retaining and paying appraisers, what does your institution need to know?

First and foremost, when it comes to appraisal independence and quality, mortgage bankers and lenders should be sure to take AIR rules seriously, as violations can result in repurchase requests, as well as TILA penalties and fines. At the same time, however, misconceptions abound in the marketplace as to how lenders can comply with these requirements, and certain issues cast doubt on whether the intent of these rules is to protect appraisal independence or skirt important safeguards and risk-management processes. Clarifying some of the most common misconceptions can help mortgage bankers and lenders determine if independently retaining and paying appraisers is the right choice for their organizations.

Who can manage appraisals?

One of the common misconceptions about AIR rules is one of the most fundamental: Many mortgage professionals believe that AIR rules require the use of appraisal management companies (AMCs). This is not true, however. Lenders can manage the appraisal process internally; they simply must ensure that the appraisal function is not reporting to their organizations’ loan-production departments, a fundamental requirement of appraisal independence.

Many bankers and lenders maintain an active role in appraisal management by establishing appraisal departments, hiring appraisers or delegating these responsibilities to someone already within a risk-management position. Some bankers prefer this approach to outsourcing the appraisal function for the simple purpose of staying close to the process. Being able to actively see how appraisals are engaged and reviewed can strengthen an institution’s risk-management operations.

To support this, several software programs have been developed by mortgage technology firms to enable lenders’ staff to manage the appraisal process efficiently with their own qualified appraisers. Regardless, mortgage bankers should know that there are several options for conducting sound appraisal management outside of using AMCs.

AMC rules are changing

For those who do opt to utilize AMCs, mortgage bankers and lenders should know that certain pertinent industry rules have changed — and may continue to change — and these changes often can result in misconceptions about AIR rules.

For one thing, lenders should know that AMCs now are required under the Dodd-Frank Wall Street Reform and Consumer Protection Act to be registered by state appraiser regulatory agencies. Federal agencies currently are developing a joint proposal to establish minimum operating requirements for AMCs, a proposal that eventually will be released for public comment. One issue likely to be addressed in these proposals is what exactly constitutes an AMC, examining whether this should include traditional appraisal firms, those with a full-time staff or those that may have a mixture of full-time staff members and subcontractors.

"Being able to actively see how appraisals are engaged and reviewed can strengthen an institution’s risk-management operations."

Dodd-Frank currently defines an AMC as those with 15 or more contractors in a state or 25 or more contractors nationwide. To a large extent, it seems as though Congress doesn’t intend to impose registration requirements on appraisal firms — i.e., those with full-time employees — or small-business appraisal operations.
In the meantime, however, certain states have moved quickly to establish registration requirements for AMCs despite the lack of minimum operating requirements from federal agencies. Currently, 34 states have enacted state registration and regulatory oversight requirements for AMCs and several other states are close to considering it in their respective state legislatures. As of press time, legislation is pending in Massachusetts, Michigan, New Jersey, Ohio and South Carolina. There are now more than 400 AMCs registered with at least one state appraisal board.

It should be noted that these state-registration and Dodd-Frank provisions are not intended to be punitive to AMCs. Instead, these requirements merely aim to bring AMCs within the regulatory purview of state appraiser boards. Until recently, AMCs were not overseen by any state agencies, and as a result, consumers who had a problem with an AMC had few avenues to pursue for remediation.

In brief, these new requirements are intended to give state regulators the ability to sanction an AMC if they’re found to have violated certain legal or appraisal standards. Mortgage bankers and lenders should stay up-to-date with such standards, as these can drastically affect their internal operations or the operations of the companies with whom they do business.

Exercise caution

On a related note, mortgage bankers and lenders should have no misconceptions when it comes to the quality — or potential lack thereof — of some AMCs’ business. Mortgage professionals should be wary if an AMC seems to operate on the basis of avoiding state registration entirely, and they should take caution if a company only operates in states that do not have registration requirements for AMCs. Why would any truly qualified AMC undertake this kind of strategy? All things considered, it wouldn’t be far-fetched for a lender to wonder if such a company has something to hide from regulators.

Rest assured that state AMC oversight laws are not overly burdensome on the AMCs that must comply with them. In most cases, the process simply is filling out a few forms to identify various parties who have oversight of the company’s day-to-day operations and can certify that the AMC has certain policies and procedures in place. If an AMC — even a small AMC — cannot comply with the registration requirements in the states in which it operates, that fact should give outside parties pause as to whether or not they should do business with the AMC in the first place.

Mortgage institutions also should be aware of exactly how their correspondent lenders are handling appraisal functions. Although AIR rules prohibit mortgage brokers from ordering appraisals or paying appraisers, correspondent lenders are allowed to maintain these functions on the logic that they’re using their own funds to do so, if only for a short period of time and if only as an agent of a lender.

As a result, loan correspondents still are active in today’s market. In fact, some former mortgage brokers may now be back in the appraisal management business as correspondent lenders. To help build the perception of responsibility around the appraisal process, some correspondent lenders may be working with or establishing their own AMCs. These AMCs, however, may have one controlling party and only one approved appraiser — and this person may be one and the same.

Although there isn’t anything within state registration requirements that seems to prohibit such an arrangement, this kind of organization does potentially raise some questions about meeting the spirit of the AIR rules, especially if a lender only has one approved AMC and that AMC maintains an approved client list of just one correspondent. This kind of arrangement may have the potential to cause compliance issues later on, as collusion on the part of an appraiser is restricted under TILA and nearly all states have basic prohibitions against appraiser coercion by both mortgage lenders and mortgage brokers.

Know who’s supervising

Finally, all mortgage organizations should be aware that Fannie Mae and Freddie Mac now are monitoring the work of all lenders, appraisers and AMCs through the Uniform Appraisal Dataset (UAD) requirements. The UAD is a set of protocols that Fannie Mae and Freddie Mac jointly established to capture basic information from an appraisal report electronically. Fannie Mae and Freddie Mac have admitted that their business operations failed in the past, as they previously never saw an appraisal report unless a loan went into foreclosure.

Until the UAD was established earlier this year, the only items Fannie Mae and Freddie Mac saw within an appraisal report were the date of the appraisal, the property’s address and the property’s market value estimate. With the UAD, Fannie Mae and Freddie Mac can get a wide range of information within the appraisal report under prescribed definitions. This enables both enterprises to do quality control checks on appraisals before making a loan decision.

Mortgage institutions also should know that the UAD is being used to monitor the performance of lenders, appraisers and AMCs. The establishment of the UAD allows for scoring appraisals and comparing that work to appraisals completed in the past — taking comparable sales used in past appraisals, for instance, and then checking them against future appraisals. If the quality of work changes from one appraisal to another, Fannie Mae and Freddie Mac could hold that against the given lender or AMC. The UAD also captures information on any AMC that is used, allowing Fannie Mae and Freddie Mac to perform analytics on their performance.

• • •

When it comes to AIR rules, mortgage bankers and correspondent lenders should know that Fannie Mae and Freddie Mac are watching — and with due cause. Poorly performed appraisals can result in repurchase demands, or even worse, disbarment from Fannie Mae and Freddie Mac loan purchases. This is just one more reason to make sure that your organization has a thorough and well-designed risk-management program that supports and protects appraisal independence and appraisal quality.


 


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