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Using AMCs

Published On 07-10-2013 , 7:20 AM

It seems that nothing is as simple as it once was. Take, for example, appraisal ordering for loan production. Years ago this was a straightforward process of calling a few appraisers you know, getting a few bids, selecting the appraiser, and stuffing the delivered appraisal in the collateral file. Not anymore. A lot more is required under the newest regulatory guidelines. Banks now have to create an “Appraisal Program” that has to be approved on the board level. If only there was a way to make this newly complex challenge easier.

For some banks, AMCs are the answer to the enhanced complexity of the appraisal function. For all the fervently-espoused pros and cons of AMCs, they are in essence no more than another form of outsourcing. As we all know, outsourcing can be a viable means of obtaining assistance without the fuss and cost of permanent hires. This option is of particular importance when a company does not have enough volume to justify hiring a specialist.

The decision to outsource the appraisal function can be a viable one. However, this alternative is only beneficial if some crucial steps are taken.
1)      Policy and Procedures: Hiring an AMC does not remove the regulatory obligation to have an appraisal policy and written appraisal procedures that outline the bank’s Appraisal Program in detail. Provide a copy of the bank’s board-approved appraisal policy and procedures to each bidding AMC and require them to submit their proposal in compliance with these documents.
2)      References: Ask for and check the references provided by each AMC under consideration. Make sure to ask about evidenced competency, or lack thereof.
3)      Cost versus Risk: The Interagency Appraisal and Evaluation Guidelines stress competency on the part of appraisers who are engaged and on the part of the people the bank uses to engage and review appraisals. The guidelines are also clear that a bank does not outsource its risk when it outsources some or all of the appraisal function. Because this function is a combination of production and risk mitigation, all AMCs under consideration must be weighed on more than their fee quote. How seasoned is their staff? How many residential reviewers do they have on staff or contracted? How many commercial reviewers do they have on staff or contracted? What is the experience of these reviewers, both in the appraisal field and as bank reviewers? What are their practices for ensuring property-specific and geographic competency in the appraisers they engage? What are their practices to ensure that all appraisers are paid customary and reasonable fees (a federal law mandate)?
4)      Check Solvency: The news is full of AMCs going under. Do you really want to go through the process of looking for an AMC a second or third time? There is also a risk of bad press for your organization and possible lawsuits if your contracted AMC goes out of business without paying its engaged appraisers for appraisal work your bank has already compensated the AMC.
5)      Direct Billing: To avoid any issues with customary and reasonable fees, as well as ensuring that the appraisers get paid for their work in a timely fashion, insist on paying all appraisal fees directly to the appraisers, rather than bundling them with the AMC’s fees. The AMCs will not prefer this parsing of costs. However, doing so fosters transparency with the borrower and ensures federal law compliance with respect to timely payment of appraisers and customary and reasonable fees.
6)      Approved Appraiser List: A good way to foster appraisal quality is to require the AMC to use the approved appraiser list that your bank has created after years of experience within its footprint. While lenders are prohibited from influencing appraisal selection, there is no prohibition against the AMC selecting from the bank-approved list of appraisers.
7)      Periodic Audits: Once an AMC is selected and engaged, the regulations make it clear that the bank still has an obligation to review the work of their contractor on a regular basis – at least annually. As a starting point, the bank should verify that any turnover of personnel at the AMC has not downgraded internal competency. The next step is an audit of the appraisals ordered by the AMC and the reviews it has performed thereon. Such an audit cannot be performed by a bank employee with less appraisal competency than the AMC employees or contractors. It is best to engage a contract reviewer for such annual audits. Alternatively, a competing AMC can be used, providing that this firm has been informed it will not be considered for a replacement in the event issues of concern are discovered.



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