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Comment on Financial Reform Implementation

Proposed Interagency Appraisal and Evaluation Guidelines

Appraisal Management Companies (AMC's)

Workgroup Leader John G. Ferguson

August 16, 2010

This paper is submitted to provide a better understanding and possible guidance for regulatory oversight of AMC's. I included a brief description of different types AMC's, their function, the pros and cons of their actions, and a summary of possible regulatory oversight.

AMC's have been around for several decades and performed an important function for the mortgage industry. There are several types of AMC's with the two most recognized being the Captive AMC and the Independent AMC. The Captive AMC such as Countrywide's Landsafe employs directly or through an affiliate company with people that compile a list of approved independent fee appraisers. An independent AMC is not in any way affiliated with the lender. They both provide the same service; engage the appraiser, tract the appraisal progress, receive and review the appraisal, submit the appraisal to the lender, act as a go between if the lender has issues with the appraisal, bills the client, and pays the appraiser. This process is complex and is best handled by people that have the experience. The unintended consequence of this process became a factor in the degradation of the appraisal profession and not protecting the consumer by placing the emphasis on low fees to the appraiser and fast turn around times.

Typically, AMC's compile and maintain a list of approved appraiser's. The problem is that these lists have been restricted to appraisers that will do the appraisal at a reduced fee and fast turnaround time while in many cases overlooking experience and geographic competency. Many competent appraisers are excluded from the list quite often just because the appraiser cannot comply with the turn-time and low fee, or because the more experienced appraisers refuse to work for AMC's due to these sometimes-unrealistic service agreements. The process promotes a lack of competence not only in knowledge of the appraisal process but more importantly in the geographic competency. I have reviewed many appraisals where the appraiser has a good grasp of the appraisal process but he was out of his area and was not aware of the nuances of the local market.

In summary, regulatory oversight is long over due for the AMC's. Appraiser competency and independence is key in correcting appraisal abuses and gaining confidence in our work product. All licensed and certified appraisers meet the minimum standards to be able to provide real estate appraisals. Eliminate the approved appraisers list and focus more effort on identifying and compiling an exclusionary appraiser list, and enforce the existing rules by disciplining the offending appraisers. The geographic competency issue would be easy to solve if an appraiser appraises property more than x miles from his office then, he should be required to follow USPAP and gain that local knowledge or more simply use an appraiser from that or close to that zip code. Wouldn't it be nice if whoever needed an appraisal could be assured that the appraiser he contacts is qualified to take the assignment and is geographically competent. I think that we can all see how faster and cheaper appraisals have much greater costs than we ever imagined when the tide goes out.

Additional Guidance suggestions:

Appraiser fee -
  • Establish requirements for transparency of appraiser fee schedules based on compensation surveys of market rates paid to independent fee appraisers in the states the appraisal service is provided.
  • Determine a standard minimum fee.
  • Separate the appraisal fee and fee charged by the AMC.
Competency -
  • Employees hired by the AMCs that perform the vetting process for appraiser selection, quality control functions, or any other diligence as required by the AMC is properly trained and qualified. Additionally, the employee should have demonstrated knowledge of USPAP by taking a 15 hour AQB compliant USPAP class and passing the test.

Appraiser Engagement - from HVCC III
A. The lender or any third party specifically authorized by the lender (including, but not limited to, appraisal companies, appraisal management companies, and correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The lender will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third party (including mortgage brokers and real estate agents). The lender may accept an appraisal prepared by an appraiser for a different lender, including where a mortgage broker has facilitated the mortgage application (but not ordered the appraisal), provided the lender: (1) obtains written assurances that such other lender follows this Code of Conduct in connection with the loan being originated; and (2) determines that such appraisal conforms to its requirements for appraisals and is otherwise acceptable.
There should be minimum approval standards established and this policy around approval needs to be documented. If they wish to approve a contractor and he has been disciplined by the state then the client should be made aware.

Miscellaneous Guidelines:
Copies of the AMC's policy and procedures should be on file with the company using the AMC and QA to ensure compliance should be required.
Special instructions / engagement letter should be attached to the work product and placed within the working file. Guidance is needed to ensure safeguarding of information and transferring of files. Do they have a disaster recovery plan so there is no disruption of service?
Should there be a minimum capital requirements for an AMC so that there is no compromise to quality or threat to the process. Currently, hybrid products exclude the appraisers name and location, should there be standards so that the end user can understand geographic competency.
E&O requirements for both the AMC and their contractors?

Errors and Omissions Insurance -
Should not be a requirement for an assignment. I have seen where lenders are less inclined to do the necessary due diligence just because of the comfort level that the perception of E & O insurance provided. Some lenders have even gone as far as to not allowing their review staff to identify fraud in their reviews because this would void most E & O insurance policies.

Respectfully Submitted

John G. Ferguson

Last Updated 9/14/2010 FinReformComments@fdic.gov

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