The Importance of Third-Party Oversight

By Pistilli, Tony | Mortgage Banking, August 2014 | Go to article overview

The Importance of Third-Party Oversight


Pistilli, Tony, Mortgage Banking


THERE IS NO QUESTION that operational risk and third-party oversight are common buzzwords inside the walls of financial regulatory agencies these days. This is in large part a result of the regulatory changes stemming from the financial crisis.

Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls; noncompliance with laws, rules, regulations, policies or ethical standards; and external influences such as market conditions and fraudulent activities.

With this increased attention and scrutiny of financial institutions comes the inevitability of adverse commentary during exams from the regulators.

Third-party oversight is the term used to describe the process to ensure that an entity chosen to perform an operational process or to provide a service is performing adequately to minimize exposure to potential significant financial loss, reputation damage and supervisory action. It also is the means to assess the quality of the service, risk management practices, financial condition, conformance to policies and procedures, and applicable controls and reports.

When it comes to third-party oversight in the valuation space, the responsibility translates to the need to oversee valuation providers--commonly referred to as appraisal management companies (AMCs).

Many banks and now mortgage companies are receiving matters requiring attention (MRAs) from their regulators related to third-party oversight of their chosen valuation providers.

Going back to 1989, federal agencies have issued guidance designed to promote safe and sound practices related to establishing real estate appraisal and valuation programs. The regulatory focus began with the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989 and was expanded on in the Interagency Appraisal and Evaluation Guidelines in 1994. A series of bulletins followed, in addition to numerous changes to other regulations affecting the valuation process.

The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Interagency Appraisal and Evaluation Guidelines in 2010 elevated prudent third-party vendor management to a new level of significance.

Since early 2010, there have been more than 300 pages of new and/or proposed regulations relating to the valuation process. The provisions were mandated under the Dodd-Frank Act, the Interagency Appraisal and Evaluation Guidelines; changes to FIRREA, the Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA) and Uniform Standards of Professional Appraisal Practice (USPAP); and an ever-growing list of state statutes and rules, to name a few.

Additional requirements came from Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA). These various requirements add an additional layer of complexity and create a need for closer examination of policies, procedures and process to ensure full compliance.

At times, institutions and valuation providers can struggle to identify and aggregate all of the rules, regulations, recommendations and guidance related to establishing safe, sound and compliant practices. Whereas other regulations come with concise names such as Reg O or Reg Z, appraisal- and valuation-related regulations are found in a number of different statutes and regulations. (Note to the regulators: Consider using "Regulation A" for all things appraisal. …

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