There are a number of widely accepted myths about AMCs that cost lenders money. Given the high price of making a compliance error in today’s highly regulated marketplace, we felt that for us to withhold the truth would be a disservice to the industry. With the goal of shedding light on some important truths that can protect lenders from the high cost of non-compliance, we will debunk three of the most popular myths about AMCs.
Myth 1: Appraisal Management Companies add costs to the lender’s business
In fact, there are additional costs involved in the appraisal process now that the rules have changed. These include new compliance costs, but they aren’t limited to that. They also involve the costs of new technologies used to keep these transactions at arm’s length from the loan origination team.
So, yes, the costs of putting a solid value on a piece of real estate have gone up. But this is not due to the fact that an AMC has been added to the equation. It’s due to the fact that it costs more to do it right, to employ the technology, to manage the fee panels, to quality-check the results. Like most myths, this one has at its core the ugly truth that the price of an appraisal has gone up between $80 and $200, depending upon the circumstances.
To say that the AMC is the cause of this is like blaming your car for increasing the cost of a trip when the price of gasoline goes up. It’s a simple cost of doing business. To further assume the lender must absorb this additional cost is incorrect. The cost of the appraisal, like the costs associated with the other settlement services that go into processing a mortgage loan, is ultimately passed on to the borrower.
We could argue about whether the borrower should pay this much for an appraisal. I’m sure we know what our friends in the appraisal business would say. They will tell you that they are not paid enough for the hard work they do. They have a point. This pricing structure is a direct result of the federal government’s attempt to protect both consumers and the industry from making loans without sufficient collateral.
Instead of trying to find someone to blame for costs that have risen due to changes perpetrated on our industry from the outside, we prefer to look at the value that is added for that additional cost. Whereas a lender might try to reduce costs as much as possible to remain compliant, the good AMC executive will always try to add value to justify any additional costs such as adding more compliance checks, more quality control checks or by providing more data for analysis by the trained valuation professional.
In fact, AMCs are working on the appraisal process every day. It’s all they do. They are in a much better position to deliver value and ensure compliance cost-effectively, two things that every lender desperately needs. We question whether any lender, on its own and without the aid of a good AMC, could do as much for the price.
Myth 2: AMCs deliver poor turnaround times that can’t compare to internal teams
Anyone who buys into this myth must live in a world without Service Level Agreements (SLAs) that spell out exactly what a vendor will provide to a lender. It sets the terms of the engagement and specifies penalties that the vendor will suffer should it fail to live up to the promises the document holds. Turnaround times are always part of the SLA between an AMC and a lender.
AMCs that don’t promise to meet the standards set forth by the lenders they hope to serve will not win the business. AMCs who fail to meet those standards once they have won the contract will quickly lose it. That’s the harsh truth for any AMC operating today. Meet the lender’s standards or lose out on the business.
Now, here’s the grain of truth at the center of this ridiculous myth: lenders are working to incorporate so many new compliance rules into their processes that the collateral valuation process is simply taking longer for many of them than it has in the past. Part of this comes from the fact that compliance checking takes time. Part of this comes from unnecessary processes within the lender’s shop that exist out of some executive’s fear of possible compliance problems. The appraisal process is taking longer in many cases, but it’s not due to the AMC. It’s just part of the new business environment we’re working in.
As the industry becomes more accustomed to the new rules, we fully expect timelines to compress to the point that we can deliver appraisal, quality and compliance checks faster than was possible in the past. It can be argued that AMCs are already delivering more quickly than lenders that don’t rely on AMCs because they have spent more time perfecting our processes.
Ultimately, the lender calls all the shots. They determine the SLA they will agree to. They decide how much additional processing the appraisal requires internally before the value is accepted. They determine when to streamline their internal processes and when they must go the long way to ensure compliance. And still, most lenders depend upon AMCs as their trusted partners.
Myth 3: The lender relinquishes control when they outsource to an AMC
The lender is in complete control at all times and federal regulators have made it crystal clear that the lender is the responsible party anytime they outsource to a third-party vendor. No lender will relinquish control to a third party when it knows the CFPB will come back to its front door in the event of a problem.
There are some aspects of the collateral valuation process that the government has said must be removed from the control of the loan officers originating the loan and the managers who oversee them. Federal regulators do not want the lender to control the outcome of the appraisal process and so they have made it clear in the regulations that it must be moved away from the origination department.
The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here, for the good of the consumer and the financial institution. But handing responsibility for a few aspects of one process to a third-party outsourcer is not the same thing as giving away control. No lender we know and no good AMC executive would equate these two.
BONUS: A truth that serves lenders and borrowers
The appraisal management companies sprang up to meet an immediate need in an embattled industry that was suffering from a government pendulum that was swinging way too far in the wrong direction. Not everyone agrees with everything the government has done in response to the financial crash. Some of the new rules the government has put into place are already being considered for revision or amendment. It will take time to work this all out. In the meantime, lenders need expert assistance in the collateral valuation process.
In many ways, this is a very young part of our industry and there are still some aspects of our service and the value that we bring that are still under development. Even now a new trade association is coming together to shed more light on these important issues and to work with lenders to ensure compliance, high quality valuations and better value overall for the borrowers they serve.
There are those in the industry who offer an alternative to the partnership between AMCs and lenders. These folks will be quick to criticize when they think it will give them an advantage. We understand that. The AMC industry is willing to take its criticisms where appropriate.
But we’re still part of the solution and should be discussed in terms of facts, not myths.