Background screening has become a hot topic in the appraisal industry lately. Various appraisal-related organizations have formed committees to attempt to create a standardized process that meets the compliance needs of lenders but also makes the process easier and more cost-efficient for the individual appraisers. Appraisal-related conferences have sessions dedicated to the subject and more lenders are pushing background screening requirements to their appraisal management partners.
While I get a host of questions, a common one from appraisers is “Why now?” Some AMCs have been performing background screening on their appraiser panels for a decade, but the sudden influx is mainly tied to heightened requirements for lenders’ oversight of third party vendors. One of the areas that is a primary focus for the CFPB is a lender’s compliance management procedures. The CFPB is shining its light on lenders’ relationships with their third parties.
As a result of this increased scrutiny, lenders are more risk averse than in the past. Billions of dollars in judgments against some of the nations’ largest banks have resulted from lawsuits filed as a result of the increased focus on regulations and oversight. The message that has been delivered is that this is just the beginning.
SO WHAT’S THE RISK?
Putting all of the regulation aside, let’s use some good ol’ common sense. Appraisal management companies have grown rapidly since the advent of the HVCC and one of the core reasons lenders utilize their services is due to an AMC’s ability to help the lender comply with appraisal independence requirements. Most AMCs will tell you that an essential operational piece of their business is choosing the best appraiser for each assignment. This is a combination of quality ratings, performance ratings and proper vetting to ensure the most qualified panel possible. Background screening is part of the vetting to ensure the right appraiser is chosen for each assignment to avoid possible liability exposure and buy backs. As an AMC, you could be putting your business and your lender at risk if you aren’t performing background screening. There have been cases where the failure to properly vet the background of an appraiser has caused the loss of major business relationships and the eventual erosion of the AMC.
USE A SIMPLE COST/BENEFIT ANALYSIS
Performing a cost-benefit analysis is often the first step in determining the need for a background check for your appraisers. In general over the past 10 years, various lawsuits have arisen due to improper background screening. According to statistics provided by Liability Consultants, Inc., the average settlement of a negligent hiring lawsuit is around $1 million.. And they report the highest award in a negligent hiring case was $26.5 million. Research from Crimescreen.com states “…in a sample study of 300,000 background checks conducted by a major screening firm, the company found: 5% of applicants had criminal records, 36% had motor vehicle violations, prior employment was unverifiable for 18% and education could not be verified for 11%.” These statistics aren’t industry-specific but provide some perspective on the potential risk.
With penalties in excess of $1 million, the potential cost of a negative judgment in a negligent hiring lawsuit dwarfs the fees for performing proper due diligence. It’s important to evaluate other risks that are intangible but could turn into tangible future risk and consider the negative impact an incident could have on your brand and the reputation of your AMC. While significant monetary loss could result in a lost judgment, the reputational risk associated could also result in bankruptcy and/or eventual closure of a business.
No AMC can prevent or control every action made by their appraiser panel, but thorough due diligence, combined with background screening and monitoring can help minimize that risk. Taking the time to conduct a thorough background screening can reduce the chances of lawsuits. It can also reduce an AMC’s liability should a bad situation occur through the actions of a panel appraiser. The most intelligent risks are those where the potential downside is limited, but the potential upside is virtually unlimited. Ask yourself if not performing thorough background screening is an intelligent risk. It only takes one…