In business and in life, you're much more likely to reach your destination successfully if you know the pitfalls along the way. In the mortgage industry, the road to closing and selling safe, compliant loans is full of obstacles.
Regulations are stricter, and guidelines are tighter – not to mention the frequent and rapid changes that often leave lenders at an impasse, wondering which new rules will result in an unsalable loan on their books and which actions will assure a successfully completed mortgage transaction. As if the market wasn't challenging enough, lenders are now faced with ensuring Home Valuation Code of Conduct (HVCC) compliance for any loan that's targeted for sale to Fannie Mae or Freddie Mac.
The HVCC is a set of guidelines designed by the Federal Housing Finance Agency in collaboration with the New York attorney general's office to lend greater impartiality to the appraisal process. As of May 1, 2009, both Fannie Mae and Freddie Mac have agreed to adopt the code's policies, which means that if lenders want to sell loans to the government-sponsored enterprises, they'd better make sure they're in compliance with every detail of the code's guidelines.
In many cases, the issue isn't with HVCC's most publicized requirements, but rather with the lesser-known details – ones that can make the path to compliant, salable loans fraught with potentially dangerous hidden obstacles. While the code was designed to enhance the integrity of the home appraisal process, it also contains stipulations that aren't directly related to objectivity and neutrality in ordering and processing appraisals – and it's these stipulations that can be the hidden pitfalls that impede HVCC compliance.
The good news is that by learning the most common HVCC pitfalls, lenders can avoid the tricky details that can lead to buybacks and rejected loans, and move smoothly and safely toward compliant and salable loans.
The first major obstacle to HVCC compliance is in the area of borrower disclosure. The HVCC requires that all appraisals be delivered to the borrower no less than three days prior to closing, unless the borrower has waived that right.
The Truth in Lending (TIL) guidelines, which became effective July 30, 2009, also dictate that an appraisal cannot be ordered until three calendar days after the TIL documents have been mailed to the borrower by the lender; Sundays and federal holidays do not count because there is no mail delivery. These two timing restrictions can be big pitfalls for lenders, which are often so focused on ensuring objectivity in ordering appraisals that they overlook details that don't have anything to do with ensuring neutrality in the transaction.
When it comes to the three-day delivery rule, lenders should address two issues. First, they must provide the appraisal to the borrower within the allotted time frame. Second, although it is not mandated by the HVCC, it would also be wise for lenders to log their due-diligence efforts to deliver those appraisals to their clients. That way, if delivery ever comes into question, the lender can demonstrate that attempts were made to ensure successful delivery. It may seem like a lot of extra legwork, but it doesn't have to be, as long as the lender is diligent in setting up its appraisal process from the very beginning.
Lenders that use appraisal management companies (AMCs) should make sure that the AMC understands the nuances of HVCC and has a definitive process in place for making sure appraisals are delivered to the borrower within this three-day time frame. Those AMCs should also keep in close contact with the lender, as well as know the exact date that the borrower's TIL documents have been sent.
The AMC should have a system in place that reminds the AMC of delivery deadlines, as well as have a trackable delivery method for providing the borrower a copy of the appraisal. A haphazard approach to meeting these deadlines could result in a buyback. When it comes to appraisal delivery and HVCC compliance, one day can make the difference between a salable loan and hundreds of thousands of dollars in lost warehouse capacity.
If lenders are managing their appraisal processes in-house, they can avoid this pitfall by using an appraisal management technology that combines automatic reminders for approaching deadlines with a trackable delivery system that shows when the appraisal was sent to the borrower, and when or if the borrower ever accessed the appraisal.
Another potential pitfall involves the issue of payment. In the past, most appraisals were paid on a cash-on-delivery (COD) basis. HVCC guidelines now dictate that appraisers can no longer accept any funds directly from borrowers. Lenders usually address this issue either by allowing brokers to collect payment directly by check or by using an AMC that will collect payment from the borrower.
While this may sound good in theory, there are two issues that are still causing problems for lenders. First, many lenders may not be equipped for credit card transactions. Establishing a merchant account to accept credit card payments isn't as easy as it sounds, especially in this day and age, when every Internet cottage-sized company seems to have one.
The other – and perhaps riskier – issue is that some AMCs operate as one-man shops or as owner/appraisers of the business. In these cases, when the borrower pays the AMC, that borrower is quite possibly transferring money directly to the appraiser and, therefore, falling right out of HVCC compliance.
In order to address the issue of merchant accounts, lenders may want to consider bringing their appraisal processes in-house and using an appraisal management technology that can help safeguard against all types of HVCC violations. This way, lenders can keep the appraisal process under their control – whether it's in collecting payments or ensuring that all delivery deadlines are met.
Most appraisal management technologies are set up to facilitate credit card transactions, so lenders do not have to go through the trouble of getting merchant accounts on their own and will not have to rely on COD transactions. Additionally, by using an integrated credit card payment method, lenders can maintain a record of the financial transaction in the borrower's file.
When evaluating AMCs, lenders should always ask how many people are on staff and how payments are handled. AMCs should be familiar with HVCC guidelines for handling payments. Once a borrower pays an appraiser directly, that loan's salability is immediately jeopardized.
It may be expedient to randomly approve AMCs in your service areas and assume you have your HVCC compliance handled, but in the long run, that can be a dangerous practice. Remember, any HVCC violation ultimately rests on the shoulders of the lender, not the AMC.
Furthermore, if there are delays and problems, you not only run the risk of losing a transaction and exposing the company to noncompliance penalties, but you also may lose a future borrower and put a Realtor relationship at risk. If you're a wholesale lender, you could also alienate the broker by virtue of delays, payment mix-ups and disputes over appraisal accuracy.
The industry continues to face ever-changing regulations in the area of disclosures, transparency and objectivity, but with proper due diligence, lenders can avoid pitfalls that could have potentially led to buybacks, preserve their profitable relationships and more safely navigate the road to more salable, compliant loans.
Vladimir Bien-Aime is president and CEO of Global Data Management Systems LLC, based in Landsdale, Pa. He can be reached at (877) 693-8722.