In the past year, we’ve seen several announcements and compliance deadlines on the same topic: The importance of appraisal quality assurance. In an environment with so many new requirements and market challenges, it’s not surprising many lenders are afraid they’re not keeping up with all the regulations. In the chaos, some choose a “wait and see” approach and haven’t yet addressed the new appraisal requirements.
Waiting is a bad idea for several reasons. Risk of penalties and buybacks aside, there are operational benefits to the new investor appraisal quality requirements, and delaying action could put your institution at a disadvantage. An effective appraisal quality assurance strategy is critical to your success, and it’s not as tough to implement as you may think.
First, get a technology-powered infrastructure in place
Instead of trying to keep up with the constant flood of new guidelines and requirements, your organization can implement an infrastructure that gives you agility and flexibility. With the market’s rate of change, it’s daunting for a mid-size or smaller lender to effectively maintain their compliance without a software system for structured, consistent evaluation of collateral. Whether it’s regulatory changes or opportunities to adjust your risk threshold, the deck is stacked against an institution that can’t make changes on the fly.
For agility and compliance peace of mind, you need intelligent technology. Every time the market changes or new requirements come from investors, you can either change software settings, or you can train staff and hope for the best.
Agility is a powerful competitive advantage, too. A successful collateral quality assurance strategy gives you the power to make smarter, more profitable lending decisions.
A brief overview of the new requirements
It started in late July with an announcement from Fannie Mae, but regulatory agencies have chimed in since then.
July: Fannie Mae adds new requirements for a pre-funding quality assurance process with documentation
The Selling Guide Announcement issued July 30 focuses on quality assurance requirements to reduce repurchases. More than 600 lenders and AMCs use Mercury Network, so we talk with lenders every day about Fannie Mae’s requirements, which gives us a unique perspective on the industry’s readiness overall. The full list of quality assurance requirements is lengthy, but we’ve isolated a few of the issues that we’ve heard many lenders don’t have in place already:
- Your program must be documented and incorporate systems and processes for achieving your QC standards.
- Your program must specify the location of QC findings and all related QC documentation. This requirement eliminates the mental checklist or spreadsheets option. In repurchase requests or exams, they’re looking for a documented audit trail.
- You must develop severity levels to categorize defects. They’re requiring this type of scoring, but it’s a good idea to implement anyway. QC scoring with severity levels is useful to streamline your internal operations since you can more effectively triage files to the appropriately experienced underwriters for each score range. In addition, as risk profiles adjust, you can adjust your process with settings. Remember, changing software settings is more reliable than training staff.
- You must report on quality assurance findings monthly to senior management. Without a consistent process and system, meaningful reporting will be difficult and could require an additional full-time employee. Trends and overall findings across all your QC staff can’t be quickly and reliably determined without a standard process that eliminates as much subjectivity as possible.
These rules will eventually be enforced through the submission platform, Uniform Collateral Data Portal, or UCDP. Some very interesting quality assurance-related warnings were added to UCDP in early December, and while they won’t prevent a “successful” UCDP submission, they can trigger automatic additional review. I’ve included a sample of the new messages below:
FNM0189: The appraiser indicated a condition rating for the subject property of C3 or greater. However, the age and update history of the subject property appear to support a condition rating of C1 or C2. Verify that the reported condition rating and actual age of the property are accurate.
This warning goes far beyond missing fields or incorrect UAD abbreviations, and could be easily caught prior to portal submission with an effective quality assurance process.
December: Fannie Mae issues Lender Letter LL-2013-10
On Dec. 10, Fannie Mae issued Lender Letter LL-2013-10. The purpose of the letter was to remind lenders of the appraiser selection requirements and to share several data quality issues. This letter is very important to the overall discussion because it includes two specific examples of inaccuracies and inconsistencies they found during appraisal reviews. Here’s the first example:
“An appraiser used the same property and sales transaction as a comparable sale across multiple appraisals. In one report, the appraiser showed a sales transaction of $400,000 for a property with 2,354 square feet of gross living area. In 10 other reports, the appraiser listed the sales price of the same property at $375,000 and the size as 2,034 square feet. Those 10 other reports were consistent with Fannie Mae’s verification of public records as well as sales price and square footage reported in 13 other appraisals that included information on the sale of this property under the same transaction. Fannie Mae’s Selling Guide requires appraisers to report property data accurately and consistently.”
The other example is linked in the Resources List. From these, it’s clear the analysis of the appraisal data will include appraisals across the entire submission platform, and it will go far beyond what we’re used to from investors.
January: Fannie Mae’s Appraisal Quality Monitoring program launched
On Jan. 7, Fannie Mae launched its Appraisal Quality Monitoring program, along with a new web resource with instructions for accessing the appraisal quality monitoring lists. The lists, only accessible to approved Fannie Mae sellers and servicers and not to be shared, contain appraisers whose appraisals are subject to 100% review or whose appraisals are no longer accepted by Fannie Mae.
Based on what we’ve heard, there aren’t very many appraisers on that list so far, but it’s clear Fannie Mae is working quickly to enforce its pre-funding quality assurance requirements.
Regulators have issued guidelines, too
Several regulatory guidelines dictate the appropriate quality assurance strategies as it relates to appraisal. Some of the CFPB rules are still being decided, but many of those still left unresolved may be announced by the time this writing is published. The FDIC also requires consistent quality control procedures for appraisals. The rate of change is truly astounding.
Compliance is the biggest motivator, but it’s also good business
Regulations aside, the lack of a transparent quality assurance strategy results in unnecessary expenses, reputational risk and poor lending decisions. A consistent process can recapture the money you’re leaving on the table, and dramatically strengthen your overall portfolio.
Appraisal quality assurance sounds complex at first, but the solution is in mastering your vendor relationships. Whether you sell beer at the stadium, baskets at the market or mortgage loans to homebuyers, your vendor relationships are critical to your success. Without good vendor management, you won’t get a high-quality product. In the case of mortgage lending, where the verification of the value of the collateral is your vendor’s product, the relationship can have a tremendous impact on your overall operation. Appraisals can help you build a solid, profitable mortgage lending company that lasts hundreds of years, or they can put you out of business.
Anyone who tries to sell you a quality assurance process or vendor management system, but doesn’t understand the importance of the vendor relationship, is out of touch with your success. To provide the value you require, your technology partners must maintain excellent relationships with every participant in the supply chain. The quality of the product you provide your client depends on it.
