PERSON OF THE WEEK: Greg Schroeder is president of Mission Viejo, Calif.-based Comergence Compliance, which is focused on third-party originator and appraiser risk management and offers a SaaS-based vendor management solution. Using a variety of best-practice processes, proprietary monitoring technology and hands-on service protocols, Comergence provides lenders and appraisal management companies with tools that review and continually monitor registered mortgage loan originators and appraisers through its proprietary platform that manages these relationships from beginning to end.
MortgageOrb recently interviewed Schroeder to get his views on why third-party oversight has become so important for lenders and what they can do to ensure that their third-party management policies don’t land them in hot water with regulators.
Q: What do you see as one of the biggest compliance challenges facing lenders today?
Schroeder: Lenders are facing a number of challenges, but there’s one area that gets less attention than it should: oversight of third-party relationships and vendor management. Lenders aren’t just being held legally accountable for their own actions, but for the actions of all the third parties with whom they do business. That includes not just third-party originators but other parties as well, including appraisers and software providers, with the latter two constituents just now popping up on the radar. The problem is, with so little guidance offered by the regulators, many lenders must simply wait for an audit and be told what to do through an enforcement action.
Q: Why is it more important than ever that lenders monitor third-party vendors these days?
Schroeder: Third-party oversight has always been important and good for business, but it’s become even more critical now. Regulators have stepped up their enforcement in this area. The Consumer Financial Protection Bureau (CFPB) has made it very clear that the financial institutions under its supervision will be held responsible for the actions of their third-party partners. Lenders cannot outsource the risk when it comes to someone they work with. And it’s not just the CFPB – other agencies, including the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are closely watching how banks and lenders manage and monitor their third-party relationships.
It’s more important than ever that lenders monitor their vendors because the penalties for noncompliance are steep. The Dodd-Frank Act authorizes the CFPB to increase its assessment of civil monetary penalties from up to $5,000 per violation per day to as much as $25,000 per violation per day if violations are reckless, and as high as $1 million per violation per day if violations are knowingly occurring.
Even that’s not the end of lender liability. Lenders that allow borrowers to shop for third-party settlement services have legal responsibility under the CFPB’s new regulations in case those providers do harm.
Clearly, protecting the consumer is the ultimate goal, and banks and lenders are being held accountable for any missteps in the mortgage process. That means lenders are being held to a higher standard when it comes to managing their third-party relationships; otherwise they risk facing enforcement actions, including fines, cease and desist orders, and other penalties.
Q: Is it feasible for lenders’ in-house due diligence departments to properly monitor third parties?
Schroeder: I first saw this as an issue when I was working for an Alt-A lender back in the mid 2000’s. I realized at that time that lenders needed help with managing and monitoring their third-party originators. Now, given the scope of what’s being required today, and the vast amount of data involved, monitoring third parties to comply with the regulations is a daunting task for any organization. In fact, it’s rare that a lender has the capability to truly manage the surveillance and oversight of its third parties on its own while staying focused on loan production. Mortgage lenders must have an effective process in place for managing their third-party vendors.
The wise move would be for organizations to leverage the proper services and tools available, so this extra discipline becomes an asset and not a liability. This also enables lenders to continue to focus on their core business functions. It’s never too late to get started on managing third-party relationships if you want to keep your business and your customers safe.
The good news is that there are products and services available today that are specifically designed to help mortgage lenders manage third-party relationships in an efficient and compliant manner. However, not all vendors can monitor third parties on an ongoing basis, so it’s important to ensure that the vendor or service you choose provides continuous updates on all of your third-party relationships.
Q: What impact are recent regulatory changes having on appraisers?
Schroeder: As mentioned, we’re seeing that the same regulations governing third-party relationships now being interpreted to include appraisers. More and more, lenders, banks and appraisal management companies (AMCs) are requiring that real estate appraisers be thoroughly vetted before they will work with them.
For appraisers, this has been a boondoggle. The good intentions of these companies to have their appraiser panels vetted has had the unintended consequence of burdening the appraisers with having to undergo numerous background checks and other verifications for all of the lenders and AMCs they work with. And they have to spend their own money on each background check, as well as their time. We have solved this problem by deploying a portable background check that is kept current all year long, but for whatever reasons we have encountered serious resistance by the AMCs to adopt our reports, even though doing so clearly solves the problem. Appraisers are fed up with the ad-hoc requests and would love the AMCs to accept our methodology and stop making life unnecessarily difficult for them.
Q: What other issues are becoming problems for appraisers? Are these contributing to a shortage of appraisers?
Schroeder: Many appraisers are finding themselves increasingly constrained by this onslaught of new regulations. They have not only made the training, licensing and fees associated with appraisal work more time consuming – and thus expensive – but also have given rise to AMCs, which take a slice out of the appraiser’s fees, which have not gone up correspondingly.
Many individual appraisers are having a hard time making a decent living as a result. Many of them are also getting burnt out. The biggest issue is that the population of remaining appraisers is aging to the point that many are retiring and there is nobody coming behind them. For a new appraiser to enter the market, they are looking at four years of college plus one year of apprenticeship just to earn $150 to $200 for an appraisal that now takes them all day to complete. Can you blame them for the fact that nobody is signing up for this? It’s far easier for a mortgage loan officer to enter the business and their income dwarfs an appraiser’s. This situation is making it harder to attract new people to the field.