PERSON OF THE WEEK: Jennifer Miller is president of the mortgage solutions division at a la mode inc., a provider of software solutions to the valuations, real estate and mortgage banking industries. More specifically, she oversees the company's Mercury Network service, a suite of Web-based solutions used by more than 600 of the nation's largest lenders and appraisal management companies (AMCs), as well as by numerous community banks, credit unions, and wholesale and correspondent lenders. Since 2002, more than 200,000 mortgage professionals have used Mercury Network technology to power tens of millions of appraisals.
MortgageOrb recently interviewed Miller to learn more about how new quality control (QC) requirements for appraisals are affecting AMCs and lenders, as well as how AMCs are dealing with the new regulations pertaining to third-party oversight.
Q: Appraisal quality and compliance are at the forefront of the industry now. How has this impacted Mercury Network's operations?
Miller: About two and a half years ago, we noticed a big technology gap in the industry in regards to appraisal QC. Many organizations had no processes or procedures in place. The organizations that were performing QC weren't doing it consistently and probably weren't leveraging it in terms of improving the closing process.
We knew that standardizing the QC process could result in higher-quality loans and quicker closings. It could eliminate the back and forth between underwriting and valuation operations. It could protect the lender in regards to buybacks because of valuation issues.
So, we started building our appraisal quality management system with the goal of providing a standard interface for conducting appraisal QC, a set of built-in valuation rules that should be verified for every appraisal, and a risk score indicating to the lender the collateral risk associated with the loan.
Q: How are the new QC requirements affecting lenders and AMCs?
Miller: Lenders are realizing that they need an appraisal QC system in place. First of all, it's a regulatory requirement. Second, and most importantly, it will protect the lender from buybacks.
The government-sponsored enterprises have most of the valuation data from loans going back to 2012, and I'm sure they are performing internal QC in terms of the loans they're purchasing. If a loan fails and there were quality issues with the appraisal or the collateral that wasn't identified by the lender, this could trigger a buyback that cannot be refuted.
Now, the debate seems to be where this QC process should take place. Should it be on the front line, done by the appraiser, or done by the AMC, or done by the appraisal desk? Or should it be done as a part of underwriting? And what type of QC is enough? Is it enough to just run the new Fannie Mae Collateral Underwriter (CU)? What happens when CU shows issues? How does a lender get them resolved?
Obviously, there are still a lot of questions in terms of how appraisal QC fits in and the best practices a lender should adopt. Luckily, there is now technology that a lender can purchase to plug in where the lender sees fit.
Q: How are lenders and AMCs dealing with the new third-party oversight requirements?
Miller: Lenders have stepped up their due diligence of all their third parties, including their AMCs and technology providers. Many vendors have created standard due diligence packages to provide to their lenders. But we're seeing many lenders with special one-off requirements that seem excessive. It would be better for the industry if there was a standard set of documentation required as a part of due diligence rather than the custom requests we're seeing.
In terms of lenders and AMCs, we've seen a big move toward having multiple AMCs instead of just one. We've also seen a move toward technology platforms that provide a firewall between the production staff and the AMC – similar to the role technology played between production and the appraiser starting in 2009. This technology allows a lender to plug in multiple AMCs as needed so that the lender isn't dependent on one vendor. It also allows the lender to comply with the mandate that commissioned staff cannot select the AMC.
Q: Any advice for simplifying this due diligence process for third parties?
Miller: I think a standard set of documentation required by vendors is the first step. Guidance around what a lender should require and then how a lender should evaluate the information provided. An SAE-16 is great, but are lenders reading it and evaluating the controls the vendor is providing? Does the vendor do enough to protect the lenders' and consumers' interest? Is the vendor truly PCI compliant, and what does that mean? Getting documentation is just the tip of the iceberg.
Q: What key components should lenders and AMCs be looking for in appraisal solutions?
Miller: A lender needs to first evaluate their current process and document their weak areas as well as their ideal process. Making this checklist and using it when evaluating software vendors and AMCs will provide the best possible outcome. The checklist should be shared with potential vendors, and each vendor should prove how their solution will solve the problem.
I think it's a bad idea for the lender to outline exactly how the problem should be solved. That's the job of the vendor. The lender should evaluate all the different possible methods and choose the vendor that solves the problem with the least room for error and the best user experience. Picking a vendor that solves problems elegantly and with thought means that the lender can be assured that future problems will be tackled in the same way.
Another key aspect in evaluating a vendor is their response time. Ask the vendor for specific examples where they've been forced to respond. Ask for references and focus on the quality of the solution and the response times that existing customers have experienced.