As we continue to look into the major differences between banking and non-banking loans there are factors one most understand. The regulations, laws, guidelines, and protocols each institution holds play a significant role throughout the lending process. But what happens when a bank does not obey the laws? Does it affect appraisal independence? And does it create an uneven playing field?
Tony Pistilli with Computershare Property Solutions joins us again in part two of our discussion to continue the conversation.
To see the first part of this interview, click here.
Buzz: Tony, last time we spoke you gave us some background into the difference between banking and non-banking lenders. Let’s dig a little deeper. How do these different types of lenders effect appraisers?
Tony: The difference ultimately comes down to compliance. Every lender, whether they are a banking lender or non-banking lender, such as a mortgage company, are obligated to have policies and procedures in place that comply with state and federal laws. The difference is that typical banks have additional rules and guidelines that non-bank lenders or mortgage companies do not have to follow. One example is the Interagency Appraisal and Evaluation Guidelines. These guidelines spell out suggested diligence on many topics in the appraisal process. Items such as creating an approved panel, selecting an appraiser, qualifications of reviewers and the contents of an evaluation, and even appraiser independence are precisely described.
Additionally, and equally important, the level of scrutiny at a bank is typically much greater than at a non-bank lender or mortgage company because of the oversight by the regulators. Like we discussed previously, this is what creates an uneven playing field. The shift in the volume of mortgage loans from bank lending to non-bank lending can be traced, in part, to this unequal level of oversight and compliance. Bank regulators such as the OCC or the Federal Reserve are very specific and detailed in their examinations of banks processes. They also have trained staff to perform audits on banks. Conversely, there are not as many regulators of non-bank lenders, and those that do regulate do not generally perform the same level or granularity of oversight. Many do not have the subject matter expertise to find issues like the banking regulators.
Buzz: You mentioned a difference in certain regulations and laws, can you tell us about the differences?
Tony: There are two sets of standards, laws and regulations. An easy way to think of the differences is in the “shalls” and “shoulds”. All of the laws “shall” apply to both banks and non-bank lenders. The “shoulds” are in the regulations and typically apply only to banks.
The federal banking regulators have many regulations that pertain only to banks. These are intended to aid in safety and soundness and do not carry the weight of the law. However, inside a bank they are followed as if they are the law. The one common set of regulations are set forth by Fannie Mae, Freddie Mac, Federal Housing Administration, Veterans Administration and United States Department of Agriculture. Banks and non-banks alike are bound to these rules when selling to any of these entities. Many of these regulations are similar to the Interagency Appraisal and Evaluation Guidelines and are printed in the Selling Guides and Handbooks for the applicable agency.
Buzz: Do you think these different types of lenders play a part in appraiser independence?
Tony: Absolutely. Most banks are very careful to prohibit the possible influence from sales or production staff with appraisers. Many banks choose AMCs to ensure that there is a firewall between sales staff and appraisers because they want to comply. Equally, some non-bank lenders will attract loan officers to join their companies by allowing them to use their own AMCs. The non-bank lenders routinely allow the use AMCs to facilitate the use of sales staff’s “appraisers” in the rotation. There are some AMCs that will accept the loan officer’s recommendations of appraisers and then use them for appraisal assignments on the loan officer’s loans. These are not compliant processes, but unless there is more vigorous oversight by regulators, the offenders are not identified, and they are allowed to operate.
Buzz: Why then, after all we’ve talked about here, are non-bank lenders seemingly allowed to operate with a different set of rules that banks?
Tony: It comes down to enforcement of the regulations – period. All of the laws apply to both banks and non-banks equally – and there are plenty of laws. The current laws need to be enforced by the applicable regulators. As appraisers, if you are aware of any non-compliant processes that violate appraisal independence, you should report it to the applicable regulators.
Buzz:Tony, thank you for sharing this information with us.
Tony: Thank you for having me.
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