Emeka Madu: AMCs Must Perform Third-Party Due Diligence, Too

PERSON OF THE WEEK: With the constant regulatory changes impacting the appraisal industry – and the mortgage industry at large – some appraisal management companies (AMCs) are starting to consider outsourcing their compliance responsibilities to third-party compliance specialty firms. But such a decision should not be taken lightly. In order to find the right compliance partner, AMCs should follow certain key due diligence guidelines.

MortgageOrb recently sat down with Emeka Madu, director of compliance at LRES, to discuss what some of the main considerations are that go into effective third-party due diligence when selecting the best partner. Although these best practices apply to AMCs, they can be adopted by virtually any firm operating in the mortgage industry in need of proper checks and balances for third-party due diligence/oversight.

Q: Why are more and more AMCs looking into outsourcing their compliance departments to third-party specialists?

Madu: With the influx of state legislators introducing bills to regulate AMCs in their respective states, AMCs will have the need to either ramp up their internal compliance departments or outsource their compliance needs to third-party compliance firms. The need for compliance firms is to assist in preparation for the looming state registrations and compliance requirements, which can be arduous and time-consuming. It is important to actually identify industry experts in order to have peace of mind that the AMC’s compliance needs are met while also remaining in compliance with requisite third-party due diligence standards as promulgated by the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau.

To paint a clearer picture of the need to outsource compliance requirements, there are currently 12 states without AMC legislation, and nine states are currently working on proposed legislation to regulate AMCs, which include the following: Massachusetts, New Jersey, New York, Ohio, South Carolina, Wisconsin, Idaho, Maine and Iowa. Due to the Dodd-Frank and the Federal Reserve Final Rule, all states will be required to set up AMC registration and supervision systems, and all AMCs are subject to regular audits and may be fined or suspended if they do not meet a state’s standards. The rule’s minimum requirements for all states ensure that AMCs register in the states and subject themselves to their supervision, they contract only with state certified or licensed appraisers for federal transactions, and their appraisers have the independence and qualifications to competently complete appraisals within the market area.

Though this law was passed in April 2015, it gave states up to 36 months from the release of the rule to enforce. Therefore, AMCs must make sure they have adequate compliance units, either internally or outsourced, as very soon, the industry may have AMC regulation nationwide, which can ultimately prove daunting if an AMC is not prepared to handle the flood of rules and regulations.

Q: In the event that an AMC decides to outsource compliance services, what does it need to look for in a qualified partner?

Madu: A compliance firm of choice should have the requisite experience, operational processes and safeguards to enable its AMC partner to have peace of mind that the third party will effectively handle compliance needs. During the selection process, AMCs should make sure certain key parameters are met during any thorough due diligence process with a potential third party. First, AMCs should only consider approaching companies with a solid reputation in the industry. A positive sign AMCs should look for during the initial vetting process is the company’s longevity and experience operating in the industry by determining how long the firm has been in existence and reference checks.

Proof that the potential partner’s financial strength is up to par is important in selecting a third-party compliance firm in order for the firm to handle the costs associated with employing a full-time staff dedicated to the day-to-day monitoring and interpreting of the latest legislation on a local, state and federal level.

AMCs must also ensure the compliance firms have sufficient safeguards, such as insurance coverage, to protect against losses attributable to negligent acts, loss of data and protection of documents. Furthermore, according to OCC guidance regarding due diligence, the amounts of coverage should be commensurate with the level of risk involved with the compliance firm’s operations and the type of activities to be provided.

The AMC should also reserve the right to audit the third party and obtain proof of contractual compliance. The third-party compliance firm should be comfortable in regularly tracking performance against service levels and producing detailed documented processes toward its compliance measures. The AMC should understand how its potential partner handles its day-to-day processes, down to how its employees keep case-sensitive information confidential to how employees manage their emails.

Q: If a firm is to be selected, what are the appropriate initial next steps?

Madu: The appropriate initial steps for selecting an appropriate compliance firm include contractual obligations that explicitly cover areas in which the AMC deems appropriate based on its regulatory requirements. AMCs should develop contracts with third parties that clearly define the expectations and responsibilities of the compliance firms with the right to audit compliance functions to ensure productivity by monitoring performance. The contract should also address what would constitute a breach and provisions for remedies, dispute resolution and a contingency plan to ensure the AMC can transition compliance functions in-house or to another third party and the timely return or destruction of AMC data when the contract expires.

Although conducting a thorough vetting process when considering a compliance partner can be very time-consuming, AMCs will quickly make up that time spent when off-loading the intense day-to-day compliance activities that go into the job, which will leave AMCs valuable time to concentrate solely on their core competencies.


Please enter your comment!
Please enter your name here