BLOG VIEW: The fourth anniversary of the signing of the Financial Regulatory Reform Bill, better known as the Dodd-Frank legislation, passed in late July. It included reform focused on the appraisal community, with some significant changes that have impacted lenders and appraisers, as well as appraisal management companies (AMCs).
One of those areas of change, as per the legislation, is the compensation of fee appraisers ‘at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.’
Dodd-Frank also directs government agencies that oversee federally regulated financial institutions to require those institutions to create and maintain audit processes with respect to the AMCs they work with. That means AMCs must be prepared for detailed and extensive audits and should demonstrate compliance and knowledge of all regulations that apply to AMCs and appraisals, at both the state and federal level. AMCs should expect lenders' audits to be far more comprehensive than previously, covering aspects like reputation, background, qualifications, financial standing and principals.
Financial institutions and AMCs must stay ahead of the curve in anticipation of further regulatory changes. How are AMCs doing so, while still effectively managing their business operations? From what we've learned, the areas impacting AMCs the most are the ‘customary and reasonable fee’ issue; higher costs associated with the increased reviews and background checks of appraisers; and growing technology costs. All three are putting pressure on AMCs' profit margins.
Customary And Reasonable Fees
‘Customary and reasonable fees are coming into play for sure,’ says Mark Lyons, senior vice president, national sales and marketing manager, at The William Fall Group. ‘The appraisers have provided AMCs with their fee schedules in the marketplace to develop a competitive fee, but also one that is fair and reasonable. Depending on the supply and demand for appraisals in a respective marketplace, [those fees] can move up and down.’
Dodd-Frank directs AMCs and appraisers to determine what constitutes customary and reasonable fees by looking at impartial and independent sources.
‘Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies and independent private sector surveys,’ Lyons adds. ‘Fee studies shall exclude assignments ordered by known appraisal management companies.’
Performing those surveys to determine what is customary and reasonable has raised costs slightly for AMCs, according to those interviewed.
‘In some cases, we had to raise our price to our [lender] clients, but it really hasn't been dramatic,’ Lyons says.
Increased Oversight And Compliance Requirements
Last year, the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) published specific guidance on their requirements for effective third-party oversight. That guidance covers lenders' oversight of AMCs.
The bottom line: Lenders want to be sure their AMC partners are taking compliance seriously.
One of the key takeaways from the OCC and CFPB bulletins is that financial institutions are responsible for ongoing, consistent monitoring of activities and performance of third-party providers. They are also responsible for their third-party vendors' compliance with regulations. As a result, financial institutions are now conducting reviews and audits of the AMCs they work with.
AMCs are completing mandatory background checks on appraisers as part of their quality assurance measures, which is also adding costs to the appraisal process. The state regulated registration fees for AMCs to do business in certain states and the internal cost of auditing for specific state requirements are other items that are increasing the cost of the appraisal process.
AMCs that promote safe and sound valuation practices – not the cheapest or fastest appraisals – will be sought after by lenders. Outsourcing is one solution increasingly utilized by AMCs in order to ensure compliance.Â
‘The key is to look outside the box and consider outsourcing to specialized third-party vendors,’ says Brandon Boudreau, chief operating officer at Metro-West Appraisal Company.
In the end, AMCs who look to outside service providers to help manage compliance and customer service may find it ultimately saves on costs.
‘AMCs should be competing on the things that really matter most to banks: quality and process,’ Boudreau said. ‘I would encourage AMCs to embrace technology and look at outsourcing some functions that aren't core to their business.’
Growing Technology Costs
Technology costs have increased as both AMCs and appraisers work together to develop improved USPAP-certified and investor-approved appraisals. To ensure that they are meeting increased regulatory requirements, AMCs should invest in the right technology.
‘Make sure that you have the right amount of technology to support processes like quality control,’ says Lyons. ‘Doing so will help reduce costs, as well as make the process more efficient.’
‘I believe that AMCs will need to compete on intense quality review, continual auditing of their vendor network, and paying customary and reasonable fees to the appraisers in the marketplace,’ Lyons adds. ‘That's really getting the emphasis back on a quality process to ensure meeting federal and state regulatory guidelines, along with USPAP guidelines.’
Contracting with a business process management (BPM) firm can create cost savings, Lyons notes.
‘It can also help AMCs compete on service levels and improve managing customer service inquires,’ he says. ‘Building an outsourcing solution for parts of the appraisal process – for example, data entry, quality control reviews, administrative reviews, typing reviews and compliance, and panel maintenance – will help with reducing costs associated with the additional industry requirements and compliance.’
Just as regulatory guidelines require that lenders oversee AMCs, the AMCs, in turn, need to make sure that they have the proper oversight on the third-party vendors they work with.
‘Outsourcing will not alleviate any responsibility from an AMC,’ says Boudreau. ‘AMCs are still 100% responsible for maintaining compliance. I just think that smaller AMC firms that may not be able to afford the legal fees to understand and implement Dodd-Frank and CFPB regulations will find it much easier to partner with a law firm or a business process management firm [to manage the compliance function].’
AMC executives predict there will almost certainly be some consolidation among AMCs. The ones that remain will be the stronger, more compliant vendors who will be able to meet the regulatory demands of the marketplace. Â
Corey Hulbert is assistant vice president and head of appraisal business at SLK Global, a BPM firm serving some of the top mortgage companies in the U.S.
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