Appraisal Management Company Vendor Oversight

The Appraisal Management Company (AMC) is a vendor which plays a vital role in the loan origination process. Regardless if your organization is a bank, non-bank, credit union or other type of financial institution, chances are if you are lending on collateral, you’ll be engaging an AMC to obtain a valuation of the property in order to close on the transaction. So, you’ll need to do proper oversight of them.

Regulation

After the financial crisis of 2007–2008, guidance was written under Dodd Frank, which outlined the HVCC rules. HVCC became effective on May 1, 2009. This was a code of conduct which was later replaced by the law known as Appraisal Independence Requirements.

In a nutshell, it said loan originators (among others) could not have any influence in the selection or outcome of an appraisal order. 

History of AMC’s

Historically, lenders self-managed the valuation process and the lines of communication may have been somewhat blurry. In fact, many appraisers suggested that lenders and mortgage brokers had tried to influence the outcome of an appraisal order during the housing boom. This would seem to be an era of both loosening standards of credit and collateral guidelines.

The AMC’s then became a product of this need for a separation between production staff and the boots on the ground appraisal professional. The AMC:

• Acted as a firewall between both parties.
• Was tasked with managing the assignment process which included selection, ongoing communication and payment processing.
• Would be the middle man. The appraiser and lender would not communicate directly and simply pass information to each other via the AMC.

Hence, a new third party was born and another vendor type added to the long list of mortgage fulfilment vendors which needed oversight.

Fast forward 10 years and Appraisal Independence remains to be a regulatory concern for many lenders and the AMC model does offer a solution, however with as many as 500 AMC’s nationwide, it is fair to assume that AMC’s are not created equally. AMC’s are just as prone to land on a state regulatory violation list as their financial institutions counterparts albeit for different reasons.

Understand AMC Risk

To understand the risk of partnering with an AMC, a good vendor management professional will:

• Work closely with their internal appraisal department or senior leadership.
• Understand the day to day operations of managing AMC’s – it’s imperative before even considering any oversight function.
• Look deep. Working through a checklist of audit questions will not look deep enough under the covers to determine if the AMC is operating efficiently and compliantly.

AMC Size

AMC’s vary in size with a small AMC consisting of perhaps a handful of appraisal coordinators and management up to the larger national AMC firms which have many staff in the hundreds. 

However, the bulk of the AMC headcount is made up of fourth parties, that is, the appraisers themselves. For an AMC to provide adequate coverage at the zip code level in any given state requires multiple appraisers to be signed up to receive appraisal orders. 

Based on personal experience, even a small regional AMC may have a minimum of 1,000 appraisers on their panel, while a large national AMC operating in all 50 states may have upward of 10,000 appraisers.

What does this mean for the lender?

As a lender, the above example means that on any given day, you have NO IDEA who the appraiser might be who is representing you at the time of the appraisal inspection. Therefore, it’s important that you’re managing the oversight responsibilities of the AMC to ensure that they have a robust vendor oversight department of their appraisal panel.  

Having the mindset that the lender is immune to this requirement because they are only working with the AMC is short sighted. By helping to validate the AMC’s operations, you can avoid many headaches later on. There is a cycle at play when it comes to appraisal assignments which begins at the loan origination stage – through to delivery of the appraisal report.

AMC Oversight by its very nature must be an ongoing practice. While it may be acceptable to audit certain aspects of the AMCs operations on an annual basis, such as BCP, DR, InfoSec, Policy and Procedures, it is necessary to monitor oversight on a monthly ongoing basis for the life of the vendor partnership.

This can be achieved by using a performance scorecard, which offers a great feedback loop both for your internal stake holders and the AMC partner. While this provides a great performance management tool, it also helps develop a strong working relationship between all parties.

Risks Associated With AMC’s

The AMC may present various aspects of risk to your operation. Being aware of these will help in your oversight approach. They are:

Transactional: Review Service Level Agreements (SLA). Does the AMC perform and deliver reports within a mutually agreed upon turn-time? Define Turn Time so that the SLA is consistent and your expectations are measured. 

Reputational: Reputations matter. This is two-fold.

1. Does the AMC have a good reputation in the industry with the appraisers? An AMC with a less than stellar reputation may find it difficult to recruit appraisers to assist with an increase in appraisal orders. In turn, this may impact you, the lender, since extended turn times or poor quality reports may follow.

How the fee appraiser assigned to the order represents themself during the appraisal inspection may also become a reflection of the lender. Remember, the borrower has agreed to apply for a loan with your company. When the appraiser visits them, for all intents and purposes, the appraiser is YOU.

The reality is that the lender sent an appraiser to inspect their property. For right or wrong, you are guilty by association. As a general rule, any bad experience from being tardy at the set appointment time to maybe a report with errors will reflect on the lender and their seemingly inability to work with a quality conscious vendor to perform the duties they were tasked.

2. Reputational risk may also be expressed by litigation activity, if the AMC has or is currently in any form of litigation, a deeper review of the cases should be examined to ensure that controls are in place to keep the lender updated for any fall out which may in turn impact your operation.

This could quickly turn into fair lending or regulatory compliance pain points, which may slow down your lending operation. Controls should be in place enforcing the need for the AMC to notify the lender of any such occurrences, no matter how trivial or embarrassing they may seem.

Watch for Fourth Parties

Until recently, vendor management departments viewed AMC’s as low risk vendors since they might not have access to a lot of data. However, the main flaw in this approach was that this was a third or fourth party who had physical access and could play a detrimental decision in the collateral valuation. Therefore, it’s critical to assess their vendor oversight of their third parties (your fourth parties). Ensure they have a diligent:

• Onboarding process
• Testing
• Background checks
• Compliance with policy and procedures regarding identification
• Performance to the agreed upon SLA’s

Software

There are many appraisal software systems available to internal appraisal departments and AMC’s. These systems, while helpful in the assignment process, cannot be relied upon to verify who is performing the appraisal assignment.

Any AMC who doesn’t have their own internal vendor management department and is relying on a software to simply check the ASC.gov site or that the appraisers license hasn’t expired doesn’t have a robust enough operating system that I would comfortably recommend exposing my client to.

Therefore, pre-due diligence, ongoing monitoring and annual assessments are key to ensure that the AMC has a strong platform for vendor validation.

Be Proactive With Your AMC’s

There are simply too many variables and too many risks associated with a fourth party which might play an instrumental part of the overall lending process. As vendor management programs mature and become increasingly engaged directly with the lines of business, the AMC model is proving itself to present many levels of risk both in terms of performance and regulatory compliance.     

By fully understanding the lending process, engaging with the line of business and being proactive with the AMC partner, a vendor management professional will be able to manage this risk with a far better grasp than simply including the AMC in an annual audit schedule.

Also learn some tips on doing proper oversight for your contract mortgage underwriter. Download our infographic now.