FNC and the American Bankers AssociationCompliance and Workflow in the Age of Collateral

© 2011 FNC, Inc.

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Conference Web Page

• Today’s PowerPoint

• Audio

• Questions

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Questions

• education@fncinc.com• Chat box submission

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Program Overview

• FNC® and ABA

• Regulatory and investor climate – increased focus on collateral

• Operational and regulatory requirements for compliance

• FNC solutions and Collateral HQ™

• Questions

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Speakers

• Kagan Coughlin• Product Manager, FNC

• Steve Conlin• Risk Manager, FNC

• Chip Caldwell• Account Executive, FNC

Overview of FNC and ABA

Kagan CoughlinProduct Manager

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About FNC

• Largest provider of Collateral Management System®

software and tools to:

• Lenders

• AMCs

• Appraisers

• Residential mortgage investors

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About FNC

• Focused on collateral data and collateral decisioning

• Enterprise platform – Collateral Management System (CMS®)

• Software-as-a-Service – Collateral Headquarters™ (CHQ™)

• AppraisalPort® – Work portal for appraisers & AMCs

• Data-centric transaction processing & workflow

Compliance and Workflow in the Age of Collateral

Steve ConlinRisk Manager

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Overview: Dodd-Frank

• Dodd-Frank Wall Street Reform and ConsumerProtection Act (“Dodd-Frank”)• The FRB issued the Interim Final Regulations

(Regulations) on Oct. 18, 2010, and published them in the Federal Register on Oct. 28, 2010 (75 FR 66554).

• The Regulations were effective on Dec. 27, 2010.

• Compliance with the Regulations is mandatory on April 1, 2011.

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Overview: Dodd-Frank

• Major topics of the Act• Applies to consumer credit transactions secured by

the principal dwelling of the consumer (SFR owner-occupied properties)

• Sunset of HVCC• Appraiser independence• Permitted actions (Appraiser Contact & Questions)• Conflict of interest• Customary and reasonable fees• Mandatory reporting to state boards• Creates The Bureau of Consumer Financial

Protection

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Overview: GSEs

• GSEs• GSE joint effort to collect loan data• The joint program is called the Uniform

Mortgage Data Program (UMDP)

• UMDP has three components:• UCDP (Uniform Collateral Data Portal)• UAD (Uniform Appraisal Dataset)• ULDD (Uniform Loan Delivery Dataset)

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Overview: GSEs

• GSE loan sellers are required to:• Successfully deliver appraisal reports via UCDP

beginning March 19, 2012• Deliver loan applications on or after Dec. 1, 2011• UCDP portal will be available in June 2011

• GSE loan sellers must require:• Appraisals to be completed using the UAD formatting

beginning Sept. 1, 2011• (It is anticipated the appraisal forms vendors will begin

offering software updates that support UAD standards beginning in the second quarter of 2011)

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Overview: Interagency Guidelines

• Interagency Appraisal and Evaluation Guidelines• Became effective Dec. 10, 2010

• The following guidance documents have been incorporated into the Guidelines and have been rescinded:• 1994 Interagency Appraisal and Evaluation

Guidelines• 2003 Interagency Statement on Independent

Appraisal and Evaluation Functions• Interagency Statement on the 2006 Revision to

USPAP

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Overview: Interagency Guidelines

• Guidelines Remaining in Effect:• 2005 Frequently Asked Questions on the

Appraisal Regulations and the Interagency Statement on Independent Appraisal and Evaluation Functions

• 2005 Interagency FAQs on Residential Tract Development Lending

• Unlike Dodd-Frank, the Regulations apply to all property types and ownership

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Overview: Interagency Guidelines

• The regulated institutions that are governed by the Guidelines include:• National or state-chartered banks and their

subsidiaries• Bank holding companies and their non-bank

subsidiaries• Federal savings associations and their

subsidiaries• Federal savings and loan holding companies

and their subsidiaries• Credit unions

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Summary - Policy

• Section summary as it relates to Consumer Real Estate transactions:

• Sections I and II – Purpose and Background• Section III – Supervisory Policy

• Emphasis placed on value of the underlying real estate collateral in accordance with the Agencies’ appraisal regulations

• Examiners will review appraisal or evaluation to determine whether methods, assumptions and value conclusions are reasonable

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Summary – Independence

• Section IV – Appraisal and Evaluation Program should provide the following:

• The institution’s Board or designated committee is responsible for adopting and reviewing policies and procedures to establish an effective appraisal and evaluation program

• Provide for the independence of the persons ordering, performing and reviewing appraisals and evaluations

• Establish selection criteria and procedures to evaluate and monitor the ongoing performance of appraisers and persons who perform valuations

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Summary – Independence

• Ensure that appraisals and evaluations contain sufficient information to support credit decision

• Provide for receipt and review of the valuations in a timely manner

• Implement internal controls that promote compliance with program standards, including those related to monitoring third-party arrangements

• Establish criteria for monitoring collateral values

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Summary – Independence

• Section V – Independence of the Appraisal and Evaluation Program• Appraisers must be isolated from influence by the

institution’s loan production staff, including:• Ordering, reviewing, and acceptance of appraisals

and evaluations• Appraisers must be independent of loan

production and collection processes and have no direct, indirect or prospective interest, financial or otherwise in the property or transaction

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Summary – Independence

• Section VI – Selection of Appraisers or Persons Who Perform Evaluations• Institution’s collateral valuation program should

establish criteria to select, evaluate and monitor the performance of appraisers and persons who perform evaluations and ensure that:

• The person selected possesses the requisite education, expertise, and experience to competently complete the assignment and is capable of rendering an unbiased opinion

• Periodic reviews are conducted on the work performed by appraisers and evaluators

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Summary – Minimum Standards

• Must conform to Uniform Standards of Professional Appraisal Practice (USPAP)

• May require stricter standards for safety and soundness• Result of AVM by itself or signed by an appraiser is

not an appraisal (must perform an appraisal in conformance with USPAP and Agencies’ minimum appraisal standards)

• Dodd-Frank Act – BPOs may not be used as the primary basis to determine the value in the purchase of a consumer’s principal dwelling for loan origination secured by the principal dwelling

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Summary – Minimum Standards• The estimate of market value should consider

the real property’s actual:• Physical condition• Use• Zoning as of the effective date of value

opinion• Appraiser selection based upon:

• Competency to perform the appraisal• Knowledge of the property type and market• Competency by virtue of being licensed or

certified

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Additional Guidelines

• The document contains the following sections:

• IX Appraisal Development• X Appraisal Reports• XI Transactions That Require Evaluations• XII Evaluation Development• XIII Evaluation Content• XIV Validity of Appraisals and Evaluations

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Summary - Reviewing Appraisal and Evaluations

• Section XV Reviews• Prior to a final credit decision, an institution

should review appraisals and evaluations to ensure that they comply with the Agencies’ appraisal regulations and that they are consistent with supervisory guidance and its own internal policies

• An appraisal should contain sufficient information and analysis to support the decision to engage in the transaction

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Summary – Reviewing Appraisals and Evaluations

• Policies and procedures should, at minimum:• Address independence; educational and

training qualifications; and role of the reviewer• Reflect a risk-focused approach for

determining the depth of the review• Establish a process for resolving any

deficiencies in appraisals and evaluations• Set forth documentation standards for the

review and resolution of noted deficiencies

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Summary – Third-Party Arrangements

• Section XVI Third-Party Arrangements• Institution retains responsibility for understanding and managing

the risks associated with third-party arrangements

• Should have internal controls for identifying, monitoring, and managing the risks associated with using a third-party arrangement for valuation services including compliance, legal, reputational, and operational risks

• Should have a written contract that clearly defines the expectations and obligations of both the financial institution and the third party including that the third party will perform its services in compliance with the Agencies’ appraisal regulations and consistent with the supervisory guidance

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Summary - Referrals

• Section XVIII Referrals• Institution SHOULD file a complaint with appropriate state

appraiser regulatory officials when it suspects a licensed or certified appraiser has failed to comply with USPAP or applicable state laws or has engaged in unethical or unprofessional conduct

• Must file a SAR report if suspects fraud or identifies other transactions meeting the SAR filing requirements

• Note: This is broader than Dodd-Frank Act reporting requirements which reference being of a material impact (likely to significantly affect the value assigned to the consumer’s principal dwelling)

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Summary – Appendix B, Evaluations based on Analytical Methods and Technological Tools

Policies should:• Ensure staff has requisite expertise and training to

manage the selection, use and validation of an analytical method or technological tool

• Employ outside expertise if absent in-house

• Address the selection, use and validation of the valuation method or tool

• Address standards for the use of multiple methods or tools, if applicable, for valuing the same property or to support a particular lending activity

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Summary – Appendix B, Evaluations based on Analytical Methods and Technological Tools

• Provide criteria for ensuring that the institution uses a method or tool that produces a reliable estimate of market value that supports the institution’s decision to engage in the transaction

• Address the extent to which:• An inspection or research is necessary to ascertain the

property’s actual physical condition• Supplemental information is needed to assess the

effect of market conditions or other factors on the estimate of market value

• An inspection or research is necessary to ascertain the property’s actual physical condition

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Automated Valuation Models

• An institution may not rely solely on the results of an AVM to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and the Interagency Guidelines.

• An institution’s P&Ps should require the use of an alternative valuation method or tool when the supplemental information indicates the AVM is not an acceptable valuation tool.

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Overview: Interagency Guidelines Cont’d.

• Additional sections included are:

• Section XVIIProgram Compliance• Appendix A, Appraisal Exemptions• Appendix C, Deductions and Discounts• Appendix D, Glossary of Terms

Workflow Solutions for the Age of Collateral

Chip CaldwellAccount Executive

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FNC/ABA Solution for Appraisal Compliance and Operational Efficiency

• FNC’s Collateral Headquarters:• Compliance with all aspects of appraisal

requirements, from the moment an appraisal is required through investor delivery

• Appraisal operational infrastructure – appraiser panel, fees, workflow routing

• Appraisal quality checks – GAAR® and QC Vigilance™

• Transparency – internal and external audits• UCDP portal will be available in June 2011

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Questions

• Today’s Questions• Chat Function• education@fncinc.com

• www.fncinc.com• ccaldwell@fncinc.com• sconlin@fncinc.com• kcoughlin@fncinc.com

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Thank You

• Questionnaire