VENDOR MANAGEMENT: Advice for Lenders in Using Appraisers and Environmental Professionals (Part III of III)
In Part I and Part II of this series, I discussed the basics of vendor management compliance and design for appraisal and environmental risk functions, then offered advice to help you get started. In this final installment of my three-part series, you will find advanced tips on optimizing vendor relationships for a win-win-win (lender-vendor-customer) program.
Get to know your vendor—and get them to know you.
Each vendor should be apprised of the institution’s risk comfort levels, preferred processes and vendor output expectations. Provide vendors with a list of minimum acceptable standards as a Master Service Agreement or within each engagement contract, with annual or ad hoc updates and feedback as appropriate (e.g., recognizing regulatory or institutional changes). Learn from your vendors by listening to key concerns and decision options in their feedback, and accept training opportunities they may offer (of course, make it crystal clear that acceptance does not constitute quid pro quo preferential status).
One technique I like to use is to sponsor occasional informal “meet your vendor-banker” meetings where lenders, credit/underwriters and appraisal/environmental staff members can meet face-to-face with appraisal and environmental vendors. This forum is usually enlightening on both sides, offers an opportunity to learn from each other, lets vendors meet their peers, and demonstrates professional respect for vendors as well as shows vendors-bankers-regulators how seriously the institution treats the risk management function.
These tips optimize the vendor-banker connection as a positive mutually beneficial relationship.
Good vendor? Or just qualified provider?
Match the right vendor for each unique assignment. Good vendors demonstrate:
- superior competency or excellence with respect to the property type and relevant geographic region(s),
- knowledge and interpretive understanding of the market economics and its participants,
- regulatory compliance expertise,
- related technology proficiency,
- access to all relevant market data economic resources,
- access to, and interpretive understanding of, comparable rents/sales/listings resources (including the ability to distinguish what is and is not comparable), and
- an understanding of the complexity or non-complexity of each assignment.
Good vendors also identify if they lack competency for an assignment and will either decline or state how they intend to obtain competency per USPAP, or conversely, may offer useful bid comments to distinguish their niche expertise or recent similar projects. Good vendors may offer constructive feedback to the job manager to clarify or help define the assignment. They also understand the institution’s focus and risk tolerances, and treat bank customers with all due respect when inspecting the property or interviewing borrowers or their agent contacts. Last, good vendors work amicably with lenders and reviewers toward a common goal of providing a credible and compliant tool supporting safe and sound decisions.
- may reflect minimally licensed/certified vendors with limited understanding and knowledge of, or experience with, the assignment parameters.
- can do the job, but may not be the best vendor for complex assignments.
- are often the low bidders.
** Be aware that when selecting a vendor for a particular assignment, vendors are NOT all the same even though they may have the same prerequisite basic training and equipment.
Optimizing the vendor relationship
The more you and your vendor are on the same page, the better the results for everyone involved – vendor, reviewer, institution and borrower. Good two-way communication is a key element for effective vendor-job manager relationship and favorable results. The job manager (appraisal or environmental risk manager, coordinator, or whoever is managing the assignment for the lender) may offer constructive feedback to good appraisers who may not be the best report writers such as suggesting they format the appraisal (or environmental report) as a logically laid-out story, or to connect the dots among factoids. The job manager must let the vendor know they represent the eyes and ears of the institution and are to report what they observe; caveat – giving all due respect to regulatory compliance, some sensitive matters or items to be resolved prior to close of escrow may best be addressed verbally or outside the formal written report.
Do NOT micro-manage the vendor or criticize items that do not violate the spirit of regulatory compliance (i.e., safety and soundness), reasonableness of methodology, or credibility of the process or outcome.
Optimizing the bidding process
What is the optimum number of bids? Who should be sent an RFP? How often should a “favorite” vendor be used?
Most assignment RFPs should be offered to 3 to 4 bidders; unique assignments may require more or fewer bidders. RFP distribution and bid selections are to be performed by an independent job manager with no compensation related to loan production outcome.
The bidding process MUST BE INDEPENDENT of loan production; however, allowances may be made if lenders or credit officers wish to blindly (i.e., having no knowledge of bidder) offer selection preferences among the bidders’ fees and timing (i.e., job manager must have override authority and/or make final selection) so they can get borrower approval of the cost and timing. Loan production must NOT dictate fee ranges or suggest vendors to use at any time – these are compliance “red flags” and strictly disallowed. It is incumbent upon a strong job manager to resist (and report) undue influence or pressure in the bidding, vendor selection, or valuation processes; it is vital for top-down senior management culture to support and promote independence in the appraisal and environmental risk management processes.
Optimally, all bidders should be equally competent and reflect similar levels of expertise and familiarity with the property type and location. Bidders should more-or-less be interchangeable professional peers with equivalent ability to provide services and results that meet or exceed the assignment complexity.
Do NOT offer RFP to random vendors without regard to qualifications, competency and experience. Random vendor engagement will injure the institution’s financial and reputational positions, result in poor vendor performance, weaken vendor-lender relationships and trust (shows lack of respect), and will likely bring regulatory scrutiny and perhaps also criticism.
Do NOT put all eggs in one basket. Spread the jobs around to several different vendors so no one or two vendors will depend on the institution for a major share of their annual income or job volume, and so the institution is not dependent on a limited pool of vendors – regulators discourage interdependency.
Final Tips and Take-Aways
The appraisal process must be independent of loan production or borrower influence or pressure – that is the law. That includes vendor recommendations, approved vendor panels, RFP distribution, final bid selection, scope of work discussions, comparable selection, review of vendor reports and resulting values, and vendor ratings. Loan production and borrowers may interact with vendors in providing property access, verbal or written factual data, and factual information that may not otherwise be available to the vendor. Job managers should act as conduits for information exchange and filter inappropriate materials or discussions. The environmental process is not currently as tightly regulated as the appraisal process, although environmental vendor selection may affect CERCLA liability protections, and prudent risk management suggests that similar protocols and independence are recommended.
Share the wealth. Do not give substantial volumes of work to one or two favorite vendors. It is acceptable to engage sensitive projects to favored vendors, plus a fair share of general assignments. Mixing it up avoids inter-dependence as well as complacency of the vendor or reviewer.
Among job manager peers, it is acceptable and generous to compliment and share favorable vendor service comments and references. Be careful not to offer warranties or promises; only offer what you know from experience (i.e., “This vendor has always provided us with good service in the past.”).
Compliment your vendors on exceptional – or even good – service. Conversely, offer constructive criticism related to correcting errors or less-than-desired research, market support, methodology or reporting. This can be a delicate balance. I find the best results arise when the vendor is treated respectfully and cordially, criticisms are directed toward the report and not personally toward the vendor, concerns are broached as items meriting further consideration based on the reviewer’s learned observations (this only works if the reviewer is an SME), and empower the vendor to come up with acceptable solution suggestions. Offer a carrot, not a stick – and you will find that not only are results for that project going to be better, but future jobs will be given higher attentiveness out of mutual respect.
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”