Waking up in a cold sweat after a nightmare about banking regulations isn’t something any of us is interested in. Unfortunately, in a world where you’re consistently dealing with financial regulations it can get confusing, and chances are those nightmares can be a little too close for comfort. With things like violations and regulations on your mind, counting sheep probably won’t do you any good. Instead of fighting the Sandman each night, sleep easy knowing you’re doing everything you can to safeguard your bank from a regulation nightmare.
While you might not see your regulator often, when you do, they’ve arrived for a reason. What are regulators looking for? Besides appeasing your regulator with your processes, there are a few other items he or she might be looking for. There have been recent discussions by the Federal Financial Institutions Examination Council (FFIEC) about raising the de minimis threshold from above 250k to above 500k – allowing for an appraisal exemption and the use of an evaluation in lieu of an appraisal. With this rule change, any properties below 500k would no longer need an appraisal, and would instead require an evaluation. If this happens, a majority of today’s residential appraisals wouldn’t be needed. As a result, the use of evaluations would sky-rocket and appraisal needs would plummet. Some might argue that instead of this being a viable solution for unreliable appraisal turn-times, it’s merely shifting the problem from appraisals to evaluations. From there, questions about quality, timeliness, and accuracy arise, especially in regards to compliance.
Moving to commercial appraisals, one major issue that concerns regulators is the amount of borrower equity in transactions involving new construction. This regulation is know as HVCRE. Another issue that concerns regulators are participations and syndications. If you are participating in a loan with another bank, or if you are buying a piece of a particular loan, the regulators are concerned that the participating bank is relying on the appraisal report and review from the original bank versus completing their own due diligence. Another concern is appraisal review, especially whether the program is effectively determining whether or not the appraisal reports are reliable. Finally, regulators are constantly looking at appraisal independence and making sure the panels are not influenced by the lender. This means ensuring that the lending staff is removed from the appraisal and the appraisal review process to create structural independence.
So how do you safeguard your bank from a financial regulation nightmare?
Understand what a regulation is.
This might seem redundant, but understanding what constitutes a regulation is the first step in protection. Knowing what it is, what it isn’t, and what rules must be followed is integral.
Have the correct processes (and people) in place.
Regulations themselves are so complex, the first thing a bank should do is consult or hire someone who is an expert in compliance. Typically, a bank will have a Compliance Officer, and larger banks might even have a compliance team. This person or team should be knowledgeable about underwriting, appraisals, financial regulations, customary and reasonable fees, TRID, and more. There are so many rules related to delivering reports, how quickly they need to be done, and when evaluations (versus appraisals) should be completed.
Document. Document. Document.
Documenting is also a key component of the compliance officer or team’s role, especially when it comes to gray area decisions. This person will document decisions, and especially explain why decisions were made in case of any questions or gray areas. In addition to documentation being a major aspect of the compliance role, it’s also an important factor in safeguarding your bank from regulation nightmares down the road.
Depending on the bank, your regulator might (or might not) check-in from time to time. Since there really isn’t a set schedule, when your regulator pays a visit is specific to your financial institution. Sometimes these visits might just be a simple update on recent changes, and other times you might experience a detailed deep-dive. It’s up to the regulator, what’s going on at the bank, and what’s going on within the appraisal department. Typically, your regulation program is set in advance, so you (and the regulator) know what to expect month to month. This helps you be organized and ready with all of the necessary documents available.
Truthfully, there are so many regulations that have to be followed that it’s easy for things to slip through the cracks, especially without the proper protocols in place. Often times, regulations tend to be reactive rather than proactive, so it can be hard to nail down specific instances where a bank is in violation. This is why it’s imperative that banks have proper processes and roles in place. Your compliance officer or team is essential to your success. If you find yourself in a sticky situation, it’s best practice to inform your regulator. Not only is it the right thing to do, but it’s ethical and in every sense of the word, obligatory. If you’re ever found hiding or withholding information, you’re sure to find yourself in the midst of a bad dream.
If you’re ready to let someone else tackle nightmarish regulations for you, an appraisal management company might be your answer. We’d love to chat with you about how we can put your mind at ease.