EDR Insight Webinar Presented by Mitch Kreeger September 10, 2015

1. September 10, 2015
Mitch Kreeger, MAI SRA MBA
“Appraisal Leader for Tomorrow’s Environment”
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2.  Over 30 Years…
 Chief Appraiser (2x) - small to mid-size banks
 Senior Appraiser - small and “too-big-to-fail” lenders
 Independent Appraiser, Reviewer, Consultant
 National Vendor Manager: appraisal, environmental, seismic
 MBA (Honors), BSc - RE Finance & Business Econonomics
 MAI, SRPA, SRA, State Certified General Appraiser
 Industry & Peer Networking, Service (national):
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- Appraisal Institute - Chief Appr Round Tables (RMA)
- Collateral Risk Network (CRN) - Chief Appraiser Groups
- Environmental Bankers Association (EBA)

3.  Webinar Introduction
 Regulatory Guidance & Basics (Set-Up)
 Right Vendor for the Job
 Know Your Vendor
 Best Practice Tips – Optimizing Vendor Relationship
(win-win-win scenario)
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5. Builds on Scott Roller’s 8/15 webinar and
Mitch Kreeger’s EDR Insight Articles:
“Vendor Management Advice (3 parts)”
o Updated Regulator Tips
o Compliance & Credibility Focus
o Privacy / Confidentiality / Independence
o Additional Best Practices, Key Take-Aways
(Attendees will get links to the articles and webinars)
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6. Scott Roller advised:
“Forget about the days of ’once and done’ due
diligence. Banks can’t look at a vendor, sign them up in
2015 and never look back. What regulators expect to
see is that you document everything. That you’re
essentially repeating your due diligence on an annual
basis to gauge things like: Is this vendor still worthy of
your biz? Have they met or exceeded performance
goals? Have their financials changed?”
Scott Roller, 3W Partners, EDR Webinar 8/2015
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7. Regulators say “MANAGE RISKS”
◦ No how-to guidance
◦ Lender must develop policies, lending functions,
and find competent vendors (HOW?)
◦ Risk tolerance guidance:
 Varies by lender (ok if “appropriately” risk managed)
 Don’t get caught with your pants down!
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8.  Faster, Cheaper Vendors?
◦ Outlawed yet still practiced by some
◦ Stakeholders want low fees, fast turns, market share growth
 Studies: Lower expenses ≠ Lower costs
◦ Short-term: Market Share gain is short-lived (“hot”)
◦ Long-Term: Higher losses, increased criticisms/fines,
stakeholder opinion of low Sr Mgmt competency
 Vendors are:
◦ One-Size-Fits-All?
◦ Overpaid, Imprecise, Commodity, &/or Necessary Evil?
◦ Req’d by Obstructive Banking Laws (Dodd-Frank, CFPB, etc.)
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9. Why Manage Vendors – Aren’t They All the Same?
1. Because Regulators say so!
OCC Guidance puts onus on BOD/Sr Mgmt to uphold
safety & soundness, including vendor management.
2. Because it serves long-range stakeholder risk
mgmt goals, and survival.
Studies show that less competent, less managed
vendors lead to greater lender losses over time.
3. Vendors ARE different.
Most are professional, some not so much.
4. Hidden risks if vendors are not managed closely
Compromised privacy/NPPI; Reduced efficiency; Reduced
loyalty; Reduced quality and reliability; Possible fraud, etc.
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10. Effective Vendor Risk Mgmt. =
Lifecycle Relationship
• Planning
• Due Diligence & 3rd Party Selection
• Contract Negotiation
• Ongoing Monitoring w/Independent Reviews
• Termination
(there may be some overlap in these steps)
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12. Planning:
 Control vendor access to bank IT systems (critical)
 Privacy / Confidentiality – Manage NPPI (critical)
◦ need to know (job specifics, unpublished market info)
◦ need to NOT know (LTV, loan amount, threshold value, SSN)
◦ NOT need to know (non-job specific info, biased opinions)
 Financial & Reputational RISKS … no one remembers
vendor’s name, but they do remember bank’s name
(and deep pockets)
Due Diligence & 3rd Party Selection:
 Who are competent vendors? Who is best for this job?
Where do I find good vendors? …discussed later
 Subcontractors … control who is doing the work
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13. Contract Negotiation:
 Thorough & Detailed …
◦ Master Service Agreement (MSA) and/or Engagement Letters
◦ Specific terms & requirements, due date, late delivery penalties
◦ Current - must reflect regulatory, procedural updates
◦ Define - Client, Intended Use/User, and Engaged Vendor
 Key Needs …
◦ Desired Scope of Work (SOW)
◦ Site inspection (who will perform), Client contact (timing,
courtesy), Measurements (how detailed),
◦ Expected methodologies, competency, consistency
◦ USPAP & other regulatory compliance
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14. Ongoing Monitoring + Independent Reviews:
 Ongoing vendor scorecard (ratings) … DOCUMENT:
◦ Feedback (warnings, compliments, competency level,
discuss corrective actions or improvement plans),
◦ Action (remove or suspend, reduce workload, recommend
training, modify status)
◦ Annual vendor due diligence (current license, E&O, CEU
status, competencies, pending litigation or regulatory action,
contact info changes, etc.)
◦ Annual vendor panel approval process (Individual,
Whole Panel, or based on approved minimum guidelines)
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15.  Random post-closing audits: vendors, reports
 Vendors can offer training, guidance (no favoritism)
 Lender must control relationship
◦ “Who’s driving the train?”
Robert Parson, OCC Appraisal Policy Specialist
 Higher Risk = Greater Audit Frequency
 “Know Your Vendor” (regulatory guidance)
Termination (or Revocation):
 Termination or escape clauses
 Contract end or renewal date
 Default consequences
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16. When should we hire a Chief Appraiser?
 Regulators may recommend (or criticize)
 Tasks too big to handle
◦ 10-25 jobs/month, or $1+B asset size w/RE focus
 Beyond current in-house competency
When to hire an Environmental Risk Officer?
 Chief Appraiser = Chief ERO?
 Higher risk projects: earlier than later
 Bank size, job volume, risk profile increases
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18. In-House or Outsourced Function?
 Strategic growth concept – plan early
 Typical Progression:
◦ Outsourced SME ⇨ Internal Coordinator/Manager ⇨
Internal SME/Chief ⇨ Staffed Dept.
 Manage: Process, compliance, best practices
 Environmental (and Seismic) Risk Mgmt.?
 Goal: Stay ahead of Examiners
Following chart is a progression guideline
 Internalizing ≈ a function of bank size, job volume &
complexity, and control for higher risk lending
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20. ONE SIZE DOES NOT FIT ALL ASSIGNMENTS!!
Competency Must Be Vetted Early
Appraisers: Residential, Commercial, FF&E, Business, Jewelry,
Antiques, Stamps/Coins, Right-of-Way, Assessors, etc.
Specialists: “4 Basic Food Groups”, Going Concerns, Mixed-Uses,
High Rise Offices, Large Retail, Food Processing/Cold Storage,
Subdivisions, Agriculture, Self-Storage, Acreage, LIHTC/Bonds,
Tract Homes, Gated Estates, View Properties, Rural/Farms, etc.
Job Complexity: Basic approaches to value, Complex DCF cash
flows, Proposed, Contamination, Title/Legal issues, etc.
Environmental: Physical, Civil, Mechanical, Structural, Seismology,
Hydrology, Petroleum, Geology... - engineers or non-engineers?
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21. Studies show …
↟ Risk:
◦ Using under-qualified people to detect risks
◦ Engaging faster, cheaper (S-T gain, L-T losses)
◦ Not managing vendor competency or controlling NPPI
↡ Risk:
◦ Higher qualified reviewers (higher price proven to be cost
effective over time)
◦ Engage best vendor for each job assignment (competency,
experience, pricing, timing)
“Appraisals and reviews are processes, not a form or checklist
of ingredients.”
Robert Parson, OCC Appraisal Policy Specialist
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22. Common Pitfalls to Avoid:
 State Credentials ≠ Competency
 Vendor solvency to handle assignment(s)
 Driven merely by reduced cost or timing needs
 Policies do not adequately reflect internal controls,
monitoring
 No regular metrics for vendors, AMCs, AVMs
 Inadequate scrutiny of vendors who service bank’s
“critical activities”
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23. Vendor Selection Process … Best Practices
• Meet vendors – sets good foundation of respect
• Grade vendor performance – compliance issue
• Manage vendor relationships
• Treat vendors with respect, empowerment
• Diplomacy addressing errors or revisions -- NO blame
• Use SME Reviewers for higher risk assignments
• Vendor panel approval options (Sr Mgmt):
• Individuals - one at a time
• Regular time intervals - entire fee panel
• Endorsement of regularly monitored policy/procedure
• More scrutiny if engaged in “critical activities” (higher risk)
• Suspension, removal, termination – tread carefully
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24. Good Vendor or Qualified Provider?
Good Vendor…
o Superior competency, experience (SME)
o property type, geographic region, complex issues
o Market Economics relevant knowledge
o Regulatory Compliance expertise
o Technology proficiency
o Access to relevant market data resources
o Access to market comparable resources
o Ability to distinguish good from bad comps
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25. Good Vendor or Qualified Provider?
Good Vendor…
o Will identify competency limitations
• Decline job or obtain competency
• Offer useful bid comments – niche or recent jobs
o Understands assignment complexity level
o Constructive feedback to clarify assignment
o Understands lender’s focus, risk tolerances
o Treats bank’s customers with respect
o Amicable toward common goal of credible,
compliant tools for “safe and sound” lending
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26. Good Vendor or Qualified Provider?
Qualified Provider…
o Minimally licensed, certified
o Limited understanding of complex issues
o Limited understanding of job parameters
o Can do job but not best vendor if complex
o Usually low bidders (cost, timing)
Caution: Vendors are NOT all the same despite
similar prerequisite basic training, equipment.
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28. Win-Win-Win (Lender – Vendor – Client)
Vendors should appreciate Lenders’…
• Risk comfort levels
• Preferred processes
• Output expectations
• Minimum standards (via MSA or Eng Ltr)
• Review concerns, Policy updates, & Feedback
Lenders should appreciate Vendors’…
• Key concerns, Technical expertise, Feedback,
Options & Recommendations
• Training – usually technical or regulatory updates
• (caveat: acceptance ≠ preferred status)
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29. Win-Win-Win (Lender – Vendor – Client)
EVENT: “Meet your Vendor / Banker” forum…
 Lenders, underwriters, appraisal staff (bankers)
face-to-face with appraisers, environmental experts
(vendors)
◦ Learn from each other (informal training)
◦ Vendors get to meet peers (higher expectations)
◦ Professional respect
◦ Demonstrates to vendors, bankers, regulators
serious intent for risk management
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30. Optimizing Vendor Relationship
Good 2-way Communication:
 Effective Vendor ⇔ Job Manager relationship
 Better mutual understanding of the assignment
 Do NOT micro-manage vendor
 Do NOT criticize minor items
◦ Only regulatory compliance, reasonableness, and credibility
Best results for vendor, reviewer, lender, borrower
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31. Optimizing Vendor Relationship
Constructive Feedback: Job Manager ⇔ Vendor
 Effective Report Formatting: recommend logical laid-
out story, or connect-the-data-dots
 Empower Vendor: “eyes & ears of the institution”
◦ Vendor observation facts
 (no adjectives please)
◦ Vendor recommends but not requires lender action
 (there may be other options)
◦ Caveat: Sensitive items may best be resolved verbally
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32. Optimizing Bidding Process
What is optimum # of bids?
How often to use “favorite” vendor?
Who should get RFP?
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33. Optimizing Bidding Process
Bidders:
 Typically 3-4, more or less for unique jobs
 Equally competent, interchangeable peers, able to
provide similar service level and results
 Able to meet or exceed job complexity
 Spread jobs around – Don’t put all eggs in one basket
◦ Reduce risk of over-reliance, interdependency
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34. Optimizing Bidding Process
RFP’s sent out by independent job manager
 NO lender, client input on fees, vendors – RED FLAG
 Independent of loan production (and credit?)
 Lender, Client may only opine on timing needs
 Strong Job Manager – resist (report) undue influence,
bidding pressure for vendor, process manipulation
 Strong Top-Down Mgmt. – support independence
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35. Optimizing Bidding Process
Do NOT send RFPs to random, unequal vendors
 KNOW qualifications, competency, experience
 Random vendor selection will…
 Injure lender’s financial, reputation positions
 Result in poor vendor performance
 Weaken vendor-lender relationship, trust
 shows lack of respect
 Invite regulatory scrutiny, criticism
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36.  Regulatory Oversight
◦ Effective Vendor Risk Mgmt. = Lifecycle Relationship
◦ OCC (pyramid) chart offers guidelines
 Independent Reviews
 Documentation & Reporting
 Oversight & Accountability
 Progression of Appraisal / Environmental SME
◦ Chart offers functional guidance
◦ In-House or Outsourced SME; In-House Control
◦ Bank size, job volume, assignment complexities, risk
tolerance levels
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37.  Independence
◦ Loan production, credit, borrower, agent influence or pressure
is illegal and regulatory RED FLAG
◦ NO: vendor recommendations or ratings, RFP distribution, bid
decision, SOW influence, comp choice, value thresholds, or
pre-review lender/borrower access to report or values
◦ Permitted: Property access, factual data, unpublished factual
information, preliminary results (caveat: subject to change)
◦ Job Manager = conduit (must filter inappropriate exchanges)
 Environmental:
◦ Minimal regulatory guidance so far
◦ Prudent risk mgmt. advocates similar independent protocols
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38.  Best Vendor for the Job!
◦ Vender Differentiation – one size does NOT fit all
◦ Good Vendor vs Qualified Provider
◦ Know Your Vendors – Meet Them
◦ Only use most qualified vendor for each assignment
◦ If complex, only use an expert - NOT faster, cheaper
 Share the Wealth
◦ Do NOT over-rely on 1-2 favored vendors
 Acceptable for sensitive projects, niche specialists
◦ Avoids vendor or reviewer complacency
◦ Avoids vendor, lender interdependency
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39.  Vendor Compliments / Criticisms
◦ Compliment exceptionally good service
◦ Constructively criticize errors or less-than-desired
research, market support, methodology, reporting
◦ Delicate balance…treat respectfully overall
◦ NO micro-management or minor criticisms
◦ Aim feedback at report, NOT at vendor
◦ SME Reviewer may offer observations and options,
but empower vendor to find win-win-win solutions.
Offer carrot, not stick for best results!
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40. Mitch Kreeger, MAl, SRA, MBA
Principal Consultant - Appraisal Review,
Environmental & Seismic Risk Policy Manager
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