VENDOR MANAGEMENT: Advice for Lenders in Using Appraisers and Environmental Professionals (Part II of III)
In Part I of this series last month, I discussed the basics of why and when to address vendor management decisions for appraisal and environmental risk functions. Part 2 will offer advice to help you get started.
Let’s begin by clarifying that vendors are NOT all the same. Neither are all appraisal or environmental assignments.
Real Estate appraisers are residential or commercial. There are also personal property, equipment, business, antiques, jewelry and other types of appraisers. Residential appraisers focus on 1-4 unit residential property valuation within small geographic regions. Specialties include GSE work, large estates, view properties, rural/farm residences, and sometimes small commercial properties if properly licensed.
Commercial appraisers focus on 5+ unit residential properties, offices, retail, and industrial uses (i.e., the “4 Major Food Groups”), and may also value mixed uses and tenant versus owner occupied properties. Specialties include going concerns (e.g., hotels, nursing facilities, etc.), high-rise offices, large shopping centers, major industrial complexes, cold storage, subdivisions, ground leases, agricultural, vacant acreage, etc. Complex assignments may require advanced competency with discounted cash flow analyses. As for Environmental Professionals, not all are engineers. Lenders should also be aware that there are many different types of engineering specialties (e.g., structural, civil, geologic, petroleum, etc.).
One size does NOT fit all assignments. Do not engage a residential appraiser from Los Angeles who typically appraises tract homes to value a luxury gated Malibu oceanfront estate. Do not engage just any commercial appraiser to value a high-end cold storage food processing plant or a hotel property. Do not engage a petroleum engineer for a seismic risk PML assessment. Competency must be vetted before the bidding process begins.
Using under-qualified people to detect risks harms the institution. Paying more to obtain and retain higher qualified internal talent to review appraisals has proven to be cost justifiable over time according to various statistical studies.
Examiners will review steps taken by an institution to ensure that persons who perform the institution’s appraisals, evaluations, and environmental reports are qualified, competent, and not subject to conflicts of interest. Banks are encouraged to “know your vendor” with respect to financial solvency, diversity and legal compliance issues in addition to competency. As small lenders increase their lending volume, Examiners will look for outsourced expertise to gradually be internalized for better control. “An institution’s real estate appraisal and evaluation policies and procedures will be reviewed as part of the examination of the institution’s overall real estate-related activities. Examiners will consider the size and nature of an institution’s real estate-related activities when assessing the appropriateness of its program.” (IA&EG 2010)
Find and engage a SME (subject matter expert) as project leader or outsourced consultant to help devise appraisal and environmental risk management functions that meet the institution’s goals, risk tolerance levels, and ability to efficiently and competently manage these processes. Networking referrals are often a good starting point. Contact local appraisal or environmental risk organizations (e.g., Appraisal Institute, RMA, Environmental Bankers Association, etc.) to ask for referrals. Unique regional catastrophic risk experts may also be consulted to mitigate higher risk concerns in those areas.
Vendor Selection and Engagement
Key points to avoid common pitfalls:
- State Credentials ≠ Competency
- Make sure vendor/firm is sufficiently financial solvent to handle the assignment
- Not driven by reduced cost
- Bank policies should reflect internal controls & monitoring of 3rd party vendors
- Develop metrics for vendor qualifications, performance (this includes AMCs and AVMs)
- Vendor scrutiny increases when servicing “Critical Activities” at the bank
- Appraisals and Reviews are processes, not a form or checklist of ingredients
Vendor selection is a process too.
- Meet vendors if possible; it sets a good foundation of respect.
- Grade vendor performance – this is a compliance issue.
- Manage vendor relationships – at smaller banks it is prudent to treat vendors as you would employees with respect and empowerment, but diplomatically addressing errors needing correction and sub-par performance.
- Monitor vendors over time – track performance, credentials (licenses), E&O insurance, and any company or specialization updates.
- Need SME Reviewers for appraisal and environmental risk assignments – staff or outsource.
- Vendor list approval options – appraisal panels need to be approved by senior management. This may be done individually, over regular time intervals, or by endorsement of a regularly monitored formal policy/procedure. Regulators only require appraiser list approval; however, recent guidance says all 3rd party vendors must be risk managed especially if engaged in “Critical Activities” (higher risk functions).
- Develop procedures for vendor suspension, removal, and termination – tread carefully as this may lead to legal disputes if vendor feels inappropriately slighted or unfairly restrained.
This is an overview of appraisal and environmental risk vendor management with focus on getting started. Vendor differentiation, selection, and monitoring were all addressed. Part 3 will offer tips for optimizing vendor management and relationships.
Part Three in this series will be published in June 2015, and will include advanced tips on optimizing vendor relationships for a win-win-win (lender-vendor-customer) program.
ABOUT THE AUTHOR
Since 1980, Mitch Kreeger provides real estate appraisal and review services on residential and commercial valuation assignments, environmental and seismic risk management services for lenders, plus consulting services related to policies and procedures, regulatory compliance, and appraisal / environmental risk in-house or outsource function design. Professional services also have included apartment acquisition investment DCFs, budget analysis, construction lending inspections and analysis, and real estate market trend analysis. Mitch’s client base ranges from very small to very large lending institutions, corporate and individual property owners, investors and syndicates, municipalities and redevelopment agencies, and legal services; however, most of his career has been as internal appraisal management or staff with various institutional lenders. Mitch is considered a Subject Matter Expert (SME) on various valuation, environmental and seismic risk, and regulatory compliance topics by peers nationwide, and volunteers or is sponsored as guest speaker, panelist, author, and network blogger. Mitch is currently Chief Appraiser and Principal Consultant at Kreeger Consulting, a private appraisal / environmental / seismic risk consulting services firm that offers commercial appraisal reviews, outsourced Chief Appraiser duties, and advisory services to lenders on regulatory compliance, efficient appraisal / environmental risk functions, and effective policy updates.
Mitch Kreeger, MAl SRA MBA
Principal Consultant, Kreeger Consulting: Appraisal Review, Environmental & Seismic Risk Policy Manager
Mitch’s LinkedIn Profile
“Appraisal Leader for Tomorrow’s Environment”