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AMCs offer lenders an easy way to stay compliant while conducting arm’s length valuation transactions
- It requires substantiating and documenting communication. Compliance with appraisal independence must be substantiated by careful documentation, which includes full records of all communications during the appraisal process.
- It prevents those who might financially benefit from the mortgage from influencing the appraisal process. Anyone who may financially benefit from the loan: the ordering, origination, reviewing, appraisal acceptance and evaluations, must not influence the appraisal process. This goes for the borrower as well. If an appraiser is recommended by a borrower, the appraisal process might be considered influenced.
- Independence should not be theoretical, but applied by the entire organization. Assessment of reviewer independence should include an examination of the loan approval process that identifies reporting lines, document flows and decision points between the valuation reviewer and supervisor. These distinctions must not simply be positions on a chart, but represent real-world practices within the organization. The issue of independence should be a major consideration within the organization and regularly reviewed and discussed by executive management and credit review staff.
- The lender’s business structure should support independence requirements. A key element in following Appraisal Independence Requirements (AIR) guidelines is the lender’s organizational structure. With a compliant organizational structure, the chief loan officer sits “between” relevant parties. The valuation review staff should serve under the direction of the board or loan committee and not hold the same relation to the chief loan officer as do residential or commercial loan officers.
- The appraiser engagement process should protect the client and appraiser from falling out of compliance. It is the responsibility of the AMC to vet the appraiser and assign a file to them in a fashion that is based on performance, proximity, geographic competency and availability while protecting the appraiser from direct communication with the client and protecting the client from potentially falling out of compliance. Engagement letters provided to an appraiser will generally indicate that communication should be passed through the AMC on both the client side and appraiser side, thus upholding the spirit of appraiser independence along with public trust.
Paul Prentice, Senior Managing Appraiser at PEMCO Limited, underlines the importance of appraiser engagement in the bigger appraiser independence picture.
“Appraisal independence can be drilled down into a variety of factors, but generally the first measure is the appraiser engagement. It is important for the appraiser to be an unbiased party with no influence from outside sources which stand to benefit from the appraisal conclusion. This is one of the main roles an AMC plays in assisting with this. By utilizing a panel with several hundred appraisers, and several in one area, they can engage an appraiser who performs at a high level but also was selected based on performance and likely proximity and not chosen by the lender, or another entity related to the transaction. When this is done correctly, the system becomes streamlined and AIR remains intact and beyond reproach.”
- AMC organizational structure should ensure and maintain independence. AMC organizational structures, systems, and documentation must ensure appraisal independence further supported by the way in which lending institutions and their strategic partners conduct themselves in a practical, real-world sense.
- Some AMCs pay closer attention to compliance than others. A premium is placed on AMCs that know and maintain appraisal independence and who closely supervise their panel appraisers, have a great tech platform and resources and is committed to regulatory compliance. This all makes for a solid marketplace and serves the best interests of lenders, homeowners, sellers, communities, real estate agents and investors.
- Several entities, legislation and guidelines create the Appraisal Independence Requirements. Appraisal Independence Requirements are born out of wide-ranging factors: government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, state licensing and AMC oversight, appraisal licensing, federal legislation and regulatory guidelines and the legislative mandates of the Consumer Financial Protection Bureau.
- Smaller lenders are not exempt from independence requirements. Although smaller lenders have less staff and may find it more difficult to be completely independent, they must still show that collateral review or mortgage origination is isolated from influence.