How not to violate important industry regulations

by Jim Cutillo

Most lenders allow mortgage brokers to select appraisal management companies (AMCs), an approach that doesn’t comply with Appraiser Independence Requirements (AIR). Under the regulations, mortgage brokers are not permitted to select an AMC, even from a lender’s approved list, because that gives them an element of responsibility in the process of selecting or retaining an appraiser.

Lenders allow brokers to select the AMC they prefer or consider the best performer in the market.  From the perspective of brokers, they were in a position to select the best AMC—and that was of critical importance to them. Dodd Frank, however, upended the appraisal process for mortgage brokers and wholesale lenders—and made compliance expensive and time consuming.

Although Dodd Frank was meant to protect all parties involved in a residential and real estate transaction, from sellers to secondary market investors, the industry struggled to implement new rules and maintain the best possible mortgage experience for borrowers.

Compliance was expensive, time consuming, and often made it difficult to obtain a high-quality, reasonably priced, compliant appraisal from AMCs; and the subjective and fragmented market made the situation worse. Brokers had a sense of the best performing AMC, although it was not based on empirical data, nor could they cull performance based on zip code, mortgage and property type with a keystroke.

There is no standard for comparing performance among AMCs, since appraisal performance and quality data is not collected. Lenders receive Excel sheets at month-end, but that information is dated, and therefore, not very helpful for selecting AMCs.

One solution is for the lender to have a staff member decide the AMC to assign the file to. This is a compliant approach, but brokers might not trust that a lender is always selecting the best AMC in the market for their order. It’s difficult to gather, analyze and rank all the performance metrics needed to come up with the best result, much less provide transparency into the selection process.

Another approach is to implement a machine learning algorithm with advanced technology applications that can help ensure lenders and brokers are choosing the best AMC every time. Lenders could allow the broker to enter their order and have the system choose the best AMC for every order. Not only is this compliant with mortgage regulations, but it also ensures objectivity, and creates a standard for comparison since each AMC is being graded on the same criteria.

This is not just anecdotal information that the lender or broker might have regarding the AMC’s performance. These systems can identify the best performers down to a county level for every loan type and appraisal form, guaranteeing the best results for every scenario. Once the technology has been deployed, AMCs can use it to select appraisers, based on empirical data.

Mortgage industry operates under more regulations, that consume more time and resources than ever before.  The regulatory challenges AIR raises for lenders, brokers and AMC selection are here to stay. While that’s true, lenders that deploy technology will reduce risk and operating costs, and above all, gain a competitive advantage.

About the Author
Jim Cutillo is the CEO of Theoris Software, the visionary firm that has emerged as the premier developer of intelligent business applications for the mortgage industry, and the developer of Appraisal Quality and Performance Management. Prior to joining Theoris, Jim was the founder and CEO of Stonegate Mortgage Corporation.

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