Yesterday EDR, in collaboration with the ICBA, hosted a webinar titled “Are Your Appraisal Policies & Procedures Compliant?” The focus was on the types of things that trip up banks during an audit of their appraisal practice, and more importantly, steps risk managers can and should be taking now to ensure they are teed up for a painless audit if examiners come knocking. Below are a few highlights that bear repeating.
Kicking off the live event with an examiner’s viewpoint was the highly-experienced Bob Parson, someone I worked closely with for EDR’s PRISM conference in May. Parson was a former Senior Appraisal Policy Advisor for the OCC among many other roles within the bank regulation policy world, and he knows the lender regulatory and audit process inside and out. His portion was full of valuable advice for lenders facing compliance challenges. Here are a few of what he called his “Parson’s maxims” from the live event:
Parson’s Maxim 1: Nothing is More Important than Competency
“In a bank appraisal and evaluation program, there is nothing more important than the selection and engagement process of a competent provider.”
An institution should establish qualification criteria for persons who are eligible to review appraisals and evaluations.
“You can’t have Jimmy in the mail room evaluating appraisals and evaluations. The reviewers you use should possess the knowledge, background and skills to perform the review commensurate with the complexity of the transaction.”
“This is not one size fits all. I have seen first-hand the downside of using individuals to prepare the bank’s appraisal or evaluation, or review the reports, who do not assess the adequacy of information and analysis. That’s a key takeaway from this event.”
Parson’s Maxim 2: Appraisal is a Process, Not a Form
“A form does not equate to compliance. Forms and checklists are helpful, but they are not a review.”
Just like appraisal and evaluations, review is a process. The purpose of the review is to analyze the data and answer this question: Why is the appraisal or evaluation sufficient to do a deal?
And in order to do that, the need for professional judgment comes to the forefront. Forms matter less. Make sure you hire the right people who have experience, market knowledge and competency—and especially, the ability to write in a way that the reader understands it.
The second speaker was a voice from the trenches: Fred McDonald, VP property appraisal analyst at Popular Community Bank. McDonald has more than 25 years’ experience and just came off his bank’s own internal audit—a process they undertake as a litmus test to prepare for examiners. McDonald came ready to share some of his tips for how you can prepare for Audit Day and steps to take to ensure your lending operations make the grade with the regulators. Among his tips were:
Foster A Culture of Compliance
To meet management pressure to reduce operating expenses and regain revenue growth while also adhering to federal regulations, lenders should foster a consistent culture of compliance. It starts with having a solid policy but beyond that:
“You need to run your business like you’re preparing for a regulatory exam. Every day. You cannot wait for the first-exam letter. Integrate compliance controls into your every-day work process.”
“Proactively address compliance challenges and establish solid operational processes that shows that you embrace your firm’s policy on a consistent basis—and that you have the ability to detect and correct problems when they arise.”
McDonald reinforced Parson’s advice to rely on highly competent appraisers and reviewers who are have the “highest level of integrity and professional ethics.”
“We have embraced technology to move past Word docs and Xcel spreadsheets to manage and control compliance risk, as well as our outside reviewers.”
“We currently have 8 external reviewers with over 200 years experience in appraisals and more than 1,000 hours of coursework among them. We need all of them in one database to be able to manage them as third-party vendors and have them at our fingertips. Everything is housed in one place. ..how we rate them, how we grade them.”
“We are currently in process of setting APIs up in C360 so that we can pull data that appraisers enter to generate a summary of salient facts into our internal system and run some stress management tests of the portfolio, like “What if we change vacancy rates? Or change cap rates? What does that do to the portfolio?”
FOR MORE INFORMATION
The content of this webinar was invaluable to any appraiser or risk manager at an institution who bears responsibility for managing and adhering to the bank’s policy. Be sure to review the slide titled Target Exam Areas of Concern. A link to the replay is available here to view at your leisure. Their slides contain more words of wisdom, a laundry list of helpful guidance documents as reference, and great food for thought as you turn a critical eye to your own practices and make sure it is in line with the latest regulations.
If you have any questions for the presenters, feel free to email my colleague Matt DeVoe at firstname.lastname@example.org and he will direct it to the speakers.
Gratitude to Bob Parson and Fred McDonald for a valuable and timely event!