Mortgage lenders and banks are ultimately responsible for the third-party companies they choose – including their selected appraisers – and should adopt risk-management processes, according to a bulletin released by the Office of the Comptroller of the Currency (OCC).
In its bulletin, ‘Third-Party Relationships: Risk Management Guidance,’ the OCC says it is ‘concerned that the quality of risk management over third-party relationships may not be keeping pace with the level of risk and complexity of these relationships’ and has provided guidelines toward managing these risks.
Banks and mortgage lenders that use third-party companies to manage appraisals are cautioned to choose these vendors carefully, as regulators will hold lenders responsible for any misdeeds by appraisers, as well as the quality of the appraisers' work, explains Keith D. Murray, member of the Appraisal Institute and president and CEO of PCV Murcor, a provider of real estate valuations.
The guidelines include the following: identifying inherent risks, performing proper due diligence in selecting a third-party provider, conducting ongoing monitoring of the third party's activities and performance, maintaining property document and reporting, and conducting independent reviews of the risk-management process.
The OCC says it will pursue enforcement actions to address violations of the law and unsafe practices by the lender or its third party – and has the authority to assess special fees against lenders when it finds transgressions in the activities of their third-party providers.
‘Too often, we hear of appraisers being chosen on the basis of just one of those factors – or just the lowest fee – which can actually be a recipe for disaster," Murray says. "Appraisal management companies (AMCs) should be looking at all these different data points and selecting appraisers based on how well they match up to a specific appraisal order. The simple fact is that not all appraisals or appraisers are alike. Every market and every property requires different competencies.
"There has been a lot of focus on appraisal compliance, fees and reviews – and clearly, these issues are important to making sound collateral decisions," he continues. "But everything starts with appraiser selection, and lenders should be questioning and auditing their AMCs to ensure they are with the right partner; the financial and reputational risks are just too great.’