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18 | Th e M Rep o RT Feature matured the appraisal manage- ment process. AMCs were now charged with the majority of the management process, including order placement, quality control, and independence assurance. "The Oversight Era" O n July 31, 2010, President Obama signed the Dodd- Frank Wall Street Reform and Consumer Protection Act into law, taking full effect on April 1, 2011. The Dodd-Frank Act codified appraisal independence as well as other provisions af- fecting the valuation industry. The act created the Consumer Financial Protection Bureau (CFPB) and focused attention on oversight of federally regulated financial institutions. Regulators, awakened by this legislative on- slaught, began to give their full attention to oversight of their lending institutions. This mam- moth legislative act introduced a new era for appraisal manage- ment companies. AMCs now entered the "Oversight Era." Oversight is really nothing new. Regulators have always required financially regulated institutions to oversee third-party vendors they utilize. Interagency guide- lines, updated in December 2010, stated, "An institution that engages a third party to perform certain collateral valuation functions on its behalf is responsible for understanding and managing the risks associated with the arrange- ment." Although this has always been the understanding, regulators have started to drive home this responsibility while examining their lenders. For example, Darrin Benhart, OCC deputy comptrol- ler for credit and market risk, startled lending professionals in a September 2013 speech before the Mortgage Bankers Association's Risk Management and Quality Assurance Forum. Benhart opined, "We sometimes found little oversight of appraisal management companies. In some cases, bankers didn't understand how apprais- ers were selected and engaged on behalf of the bank. This is a critical function where effective oversight was missing, especially when the function was outsourced." On October 30, 2013, shortly after the Benhart address, the OCC released a bulletin providing guidance for assessing and man- aging the risks associated with third-party relationships. This document, along with other regu- lator communications, pointed the spotlight of oversight on AMCs (as well as other third-party ven- dors). When the examiners arrive today, lenders must be prepared to demonstrate they have fulfilled their oversight responsibilities. Again, times have clearly changed for appraisal management com- panies. What will the "Oversight Era" hold for AMCs? Much Higher Expec- tations R egulators have charged their examiners with a checklist of specific items to account for in third-party oversight. In the OCC bulletin, the process is de- scribed as a "Risk Management Life Cycle." This lifecycle includes planning, due diligence, and third-party selection, contract negotiation, ongoing monitoring, and finally termination (or renewal). The requirements inside these five sections are onerous but cannot be overlooked. The bar is set very high, and AMCs that do not make the grade will be fast tracked to the final lifecycle, "termination." In this new era of oversight, AMCs must be prepared for extensive due diligence before a contract is signed. They will have to demonstrate knowledge of the regulatory landscape and the abil- ity to comply legally at the state and federal level. Vendors will have to provide audited financial statements that exemplify financial strength and stability. The bank's analysis will be as comprehensive as if extending credit to the AMC. The reputation, background, and qualifications of the company principals will be investigated. This investigation will also en- compass senior management and employees. Lenders will be con- cerned with their own reputation and how it is affected by their third-party relationships. Once the service level agree- ment is worked out and the AMC is on-boarded, examiners expect lenders to perform ongo- ing monitoring of the third-party relationship. Monthly meetings are expected and on-site visits will be a requirement. AMCs should expect periodic reporting of payment to appraisers, how they established customary and reason- able fees, and their policies regard- ing appraiser selection. These items just scratch the surface of the level of detail periodic site visits and meetings will entail. Fewer AMCs W hile the "Era of Indepen- dence" saw the AMC space expand dramatically, the "Era of Oversight" will be the polar opposite. We can expect fewer AMCs in the future. As lenders begin to implement the requirements imposed by their regulators, many AMCs will wither under the bright lights. Compliance with the standards will be very costly, and margins will be further reduced. Scores of AMCs already operate on a shoestring, and the demands imposed by their clients may cause their demise. The examin- ers' mandate to investigate the financial condition of an AMC will result in some AMCs losing existing clients and not being able to woo new ones. This era will certainly see a consolida- tion and reduction of the num- ber of AMCs in existence. This thinning of the herd will not be a bad thing. AMCs that remain will be stronger, more compliant vendors that can meet the regulatory demands of the marketplace. We have in excess of 500 AMCs today. This regula- tory culling will not result in a limited selection of potential ven- dors. There will still be plenty of AMCs providing professional services in innovative ways. AMCs will begin to compete based on their ability to promote safe-and-sound valuation prac- tices, not the cheapest or fastest appraisal. This "Era of Oversight" will yield higher-quality ap- praisal services, and appraisers can expect customary and rea- sonable fees to be a part of this process. Although the additional monitoring may be arduous, the byproduct of this process will be a continual maturing of the industry. Professional appraisal management companies should welcome this new era as an opportunity to better themselves and set themselves apart from the competition. Welcome to the new "Era of Oversight." This thinning of the herd will not be a bad thing. AMCs that remain will be stronger, more compliant vendors that can meet the regulatory demands of the marketplace.