1. Parameters of a Risk-Focused Review Process
7/27/2015
Parameters of a Risk-Focused Review Process
2015 AI Connect (Dallas, TX)
July 27, 2015
Presenters
Craig Benton, MAI, AI-GRS
Director, Valuation Services
Synovus Bank
and
Justin Slack, MAI, SRA, AI-GRS, AI-RRS
Vice President, Commercial Appraisal Manager
HomeStreet Bank

2. Parameters of a Risk Focused Review Process
7/27/2015
Session will cover:
Establishing a risk-focused review process for a regulated institution
Process for resolving deficiencies
Documentation Standards
Role of the Bank Reviewer

3. What is risk? Parameters of a Risk Focused Review Process
7/27/2015
What is risk?
The probability that foreseen events will not occur. Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).
Exposure to the possibility of loss, injury, or other adverse or unwelcome circumstance
In finance – The possibility that an actual return on an investment will be lower than the expected return
Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).
506 banks failed from 2008 to 2014
From 2000 to 2007, only 32 banks failed

4. Parameters of a Risk Focused Review Process
7/27/2015
The Interagency Appraisal and Evaluation Guidelines (IAEGs) requires risk-focused approach be applied to processes throughout an institution’s bank Appraisal Policy
Many aspects of risk are inherent in the banking system
Organizational re-alignment eliminating administrative monitoring positions
Competitive pressures leading to potential relaxing of underwriting standards to achieve growth and/ or market share
Process changes that may eliminate steps that provide additional oversight of the loan process
New geographical market expansion
Speaker Note: Excluding the T.O.C, the word “risk” appears 55 times in the 12/2010 IAEGs

5. Ranking of Risks Parameters of a Risk Focused Review Process
7/27/2015
Ranking of Risks
Audit will generally rank and weight the risks in order to determine what areas to focus on during reviews or examinations
This will often be done to sync up with what examiners may decide to look at during the next bank exam
What can be audited or examined?
Anything!
Internal Controls/ Policies/ Procedures
What should be audited first/next?
A new regulation or release of new oversight guidance
New processes or procedures put in place since the last examination
Presenter Note: While a process or procedure may have been put in place based on feedback from a previous exam, there is no guarantee that current EIC will accept what was put in place. We had a series of “funky” things happen over a short course, though when under a C & D, but many things put in place based on the last exam were not accepted, though essentially verbatim from exam recommendations from the next EIC. I asked once, how can banks expect to stay/ be/ get compliant with various interpretations from the same agency…was told that quote: “examiners are like appraisers, they all have their own opinions…” end quote…

6. Role of the Bank Reviewer
Parameters of a Risk Focused Review Process
7/27/2015
Role of the Bank Reviewer
Risk mitigation
A bank reviewer’s role is to ensure that the appraisal or evaluation received is acceptable to the bank for the real estate transaction (intended use)
The appraisal (or evaluation) does not need to be “perfect”
From USPAP SR 1-1 (c) (U-16; Ed.)
Presenter Notes: Evaluations don’t have to be USPAP compliant, but given that appraisers don’t have to “perfect”, evaluations should also fall under that same assumption

7. Role of the Bank Reviewer, Continued...
Parameters of a Risk Focused Review Process
7/27/2015
Role of the Bank Reviewer, Continued...
An appraisal or evaluation is ordered and reviewed to ensure the collateral value is adequate to cover the loan at an appropriate loan to value ratio
A professional code of ethics is usually focused on risk assessment and mitigation (by the professional on behalf of the client, public, society, or life in general)
Good thing we have one!
A bank reviewer who is an appraiser ordering a valuation service (appraisal or evaluation) from a professional really helps to start the risk mitigation process
Presenter Notes: Per 12/2010 IAEGs, the review can also be used to monitor the competency of the appraiser for that specific property type.

8. Risk focused review process
Parameters of a Risk Focused Review Process
7/27/2015
Risk focused review process
Staffing of the department
What level of education does the review staff have?
Reviewers do not necessarily need to have professional appraisal training
What level of experience does the review staff have?
Not all reviewers need to be appraisers by trade
What level of geographical competence is needed?
Regulators recognize that banks will not have staff in every location with local market expertise
This can be solved by hiring the right third party appraiser or evaluator!
What level of property type expertise is appropriate?
Reviewers need to have requisite experience levels as well, or need to ensure the report is reviewed by someone who does

9. Risk focused review process, Continued…
Parameters of a Risk Focused Review Process
7/27/2015
Risk focused review process, Continued…
Staffing of the department…

10. Review Process/Procedures
Parameters of a Risk Focused Review Process
7/27/2015
Review Process/Procedures
Review Procedures
Procedures should reflect a risk (mitigation) focused/ based review process
More complex property should be subjected to a more detailed review
Higher loan amount/LTV/value should be subjected to a more detailed review
Essentially, more potential risk should mean more detailed analysis at the bank level review
Regulators have followed this “maxim” when examining loan files

11. Risk-focused review process
Parameters of a Risk Focused Review Process
7/27/2015
Risk-focused review process
The Review itself
What level of detail is needed in the review process itself?
What to focus on?
What to research independently
What can be ignored?
Typographical errors
Trivial errors
Example: A few small errors in a specific approach to value may be trivial by themselves, but if that valuation approach was relied upon, then those errors become much more important to the overall value conclusion

12. Risk focused review process
Parameters of a Risk Focused Review Process
7/27/2015
Risk focused review process
Reporting of the review
What level of detail is needed in the documentation of the review?
Appropriate level for loan amount or property complexity
Forms
More detailed form for more complex property
Checklist for lower loan amounts
Forms only provide something to record the review on
Reviewers should be encouraged to describe the property and explain their assumptions and conclusions thoroughly
The form is not the review

13. Risk focused review process
Parameters of a Risk Focused Review Process
7/27/2015
Risk focused review process
Communication with appraiser
Once the initial review is completed but not yet documented you may need to communicate with the appraiser to address deficiencies
Begin the process with an optimistic attitude (this report will be the best you ever read) and expect a quality work product (after all – YOU most likely ordered the appraisal)
Reviewers should be professional in their manner and provide quality specific feedback to the appraiser.
Often a phone call or short will be all that is needed to resolve minor issues
Regulators prefer a “paper trail” for exam purposes

14. Risk focused review process
Parameters of a Risk Focused Review Process
7/27/2015
Risk focused review process
Communication with appraiser
is better if there are more than a few comments
Allows the appraiser to review comments before a call is made
Provides a written record of the comments and communication
Store with appraisal review file documents
Multiple rounds of review comments must be treated carefully to ensure the revisions to the appraisal report have not introduced other problems
Consider not using appraiser again until some improvement has occurred
Additional classwork, more experience over time, etc.

15. Risk focused review process
Parameters of a Risk Focused Review Process
7/27/2015
Risk focused review process
“Rehabilitation” of appraiser
If an appraiser’s work continually requires multiple rounds of revisions, you may have to discuss this directly with appraiser
Classwork, Experience
Quality Improvement
What appraiser’s peers do in that market
Other issues
FDIC requires grading of appraisals
Continual poor appraisal report grades will be looked at by examiners
Banks are questioned about these rankings

16. Risk focused review process
Parameters of a Risk Focused Review Process
7/27/2015
Risk focused review process
“Rehabilitation” of appraiser
Removal of appraiser
What kind of system
Nature of transgressions?
Number of transgressions?
What’s a transgression?
Communicate with appraiser if they are being removed?
The ultimate goal is reliable appraisals

17. Final thoughts Reviewing Another Institution’s Appraisal Report
7/27/2015
Final thoughts

18. Craig Benton, MAI, AI-GRS
Reviewing Another Institution’s Appraisal Report
7/27/2015
Questions/Thoughts?
Craig Benton, MAI, AI-GRS
Justin Slack, MAI, SRA, AI-GRS, AI-RRS