Closing the Gap

1. Closing the Gap Appraiser to Loan Decision with Secure, MISMO Compliant Methods John Cirincione, SRA, CRE, FRICS Chief Appraiser SecoLink Rob Frazier, SRA, MRICS, Chief Appraiser First American CoreLogic Dick Taylor, Information Security Officer, Fiserv Lending Solutions Jeff Bradford, CEO, Bradford Technologies

2. Seminar and Speaker Outline John Cirincione and Rob Frazier • Appraisal Review and Validation Process Dick Taylor • Ensuring the Source and Security of the Appraisal Report Jeff Bradford • AMC Case Study: The Benefits of the MISMO Appraisal XML in Actual Practice

3. Overview of Appraisal Review and Validation Process John Cirincione and Rob Frazier

4. Basic Flow – Obtain Appraisal

5. Source of Valuation Requests Appraiser receives a request for services: • Direct from the lender • Through a Vendor Management Service • Through a centralized portal

6. Overview- Appraisal QC Workflow

7. Application of Business Rules The level of review required is based on various business rules: • LTV/CLTV decisions • Findings within the appraisal itself • Property type and similarity to the neighborhood • Appropriateness of comparable sales provided • Red flags (recent disaster declarations, high foreclosure rates, flip/fraud activity) • Appraiser • Is this a pre-approved vendor? • Is the appraiser qualified to perform this assignment?

8. Automated Enhanced Review (AER) Deploy an automated “smart process” to: • Verify factual components • Identify complex property issues • Identify potential fraud risk • Take better decisions in less time • Referral to exception process as needed • Set Review level based on findings • Provide evidence of due diligence for client and regulators

9. Review Process Issues Initial quality check points: Does the report match the loan in progress? Is the report complete? Have loan specific issues been addressed? Does the property and appraisal report comply with underwriting guidelines? Deployment of the AER adds: Efficiency through automation Verification of factual data against loan information and public records Can provide instant communication with the vendor to ensure accurate submission.

10. IS THE APPRAISAL CREDIBLE? Credibility means worthy of belief. Does it include: Factual data that is true and verifiable? A logical flow of information? Analysis and discussion of facts and issues? A conclusion that follows a reasonable path? Does the reader reach the same conclusion? Are there errors in facts or analysis?

11. Common Methods-Appraisal Review Pass it through Assign a low level processor Use a checklist Develop electronic review process Develop a review process that integrates technology and human intelligence (best practice)

12. MISMO and PVS Workgroup MISMO is the leading standards development body for the residential and commercial real estate finance industries. MISMO has working agreements with all the major data standards development organizations and has developed a language of industry data elements, stored in a common data dictionary used to create all MISMO transactions. Property and Valuation Services Workgroup (Formerly Real Estate Property Information- REPI) develops and maintains standardized data elements and structures used to report real property valuation, property data and communications with vendors.

13. Review enhanced with MISMO Currently available technology provides Use of MISMO XML Direct communication from appraiser to client without translation Automated verification of factual data Automated review of report for completeness Routing to workflow queues

14. Why use MISMO XML formats? Standardized Forms provide consistent format and data fields but: Paper and PDF only allow someone to read it. OCR and post appraiser conversion of PDF or paper can cause errors Human translation, data input can vary from what the appraiser submitted Solution: Appraiser provides MISMO format directly What you see, read and import into LOS is original product from appraiser Open standards limit transaction costs

15. Recent work of MISMO REPI 2.4 Valuation Response ALL of the data points for ALL common report forms. Major appraisal form software vendors participated Some large lenders and VMCs are already upgrading No serious burden to appraisers Review rules and fact checking services are integrating their systems What is needed: Demand and deployment from the users of appraisals

16. Automated Enhanced Review

17. Advantages to Users of Appraisals Automated Enhanced Review process Provides better quality appraisals Reports are complete and credible Exception issues are identified and resolved Internal processing time is reduced Fewer rejections from secondary market More defensible against “buy-backs” More loans successfully processed Appraisers become more aware of quality

18. Checking Errors & Inconsistencies A standardized data format enhances Easily developed underwriting & validation rules Results of rule deployment programmed to: Reject the report for correction Send to an exception queue for manual review Notify the client/underwriter of exception Reviewers are more productive Spend “quality time” in analysis, rather than marking up a checklist. Simple errors are cured before they get the file

19. Where to best deploy the rules?

20. Is this the right property?

21. Is this the same property?

22. Quick and Easy Check: If the zoning is wrong, is the Highest and Best Use estimate credible?

23. Is the factual data correct?

24. Subject sales history

25. Comparison of Market Trends

26. Sales History of Comparable Sales

27. Are any of these nearby sales potentially comparable?

28. Appraiser said “no adverse conditions apparent”… A reason to read the appraisal: Do you see any potential appraiser bias?

29. Next Issue - Security Risk • Is this the work of the appraiser whose name is on the form? • Did someone: • “adjust” the report? • “exchange” some pages? • “help the process”? • Was it performed by someone already found not worthy of trust? • Did someone provide “suggestions” to the appraiser?

30. Closing the Gap Appraiser-to-Loan Decision withSecure, MISMO Compliant Methods Dick Taylor

31. A White Paper in Draft Form Risk Identification And Risk Mitigation Recommendationsfor the Mortgage Industry Appraisal Community Prepared by the MISMO Information Security Work Group in cooperation with the MISMO Real Estate Property Information Work Group

32. What were the Drivers? GSE mandate for appraisal authentication Increased fraud opportunities using automation Objectives Identify risks associated with appraisal process Understand Environment and Infrastructure Make recommendations based on common risk mitigation techniques Focus on Authentication and Integrity of the appraisal documents Avoid hardware or software specific recommendations

33. Authentication Authentication – (real or genuine, from authentes) is the act of establishing or confirming something (or someone) as authentic, that is, that claims made by or about the thing are true. Authenticating an object may mean confirming its’ provenance, whereas authenticating a person often consists of verifying their identity. Authentication depends upon one or more authentication factors. 1 1 From www.wikipedia.com

34. Appraisal Industry Concerns Appraiser identity Fraud Lender identity fraud Appraisal information integrity Alteration of appraisal document Can be pre or post submission Collusion and coercion between appraisal entities Effort to misrepresent property value Uneducated or Incompetent Appraisers

35. Mitigating Appraisal Information Risks Intentional or Unintentional Alteration of Data Implement automated, data integrity controls that can detect when appraisal information has been altered after it has been sent by the appraiser but before it has been received by the Ordering Party. Implement capabilities to “lock” or “secure” the appraisal information before being submitted by the appraiser to the Ordering Party. Implement workflows that allow only authorized personnel access to the appraisal information moving through the workflow. Implement a historical analysis capability that can detect potential fraud being performed.

36. Mitigating Appraisal Information Risks Credential Risks Implement secure protocols and processes that protect the confidentiality of secret or sensitive information associated with identity credential or account access information (e.g., PINs, Passwords). Implement strong authentication capabilities that 1) define acceptable identity credentials to be used by appraisers, and 2) can be used by lenders to verify the identity of an appraiser. Implement strong authentication capabilities that 1) define acceptable identity credentials to be used by lenders, and 2) can be used by appraisers to verify the identity of an lender.

37. Mitigating Appraisal Information Risks Intentional or Unintentional Misrepresentation Educate appraisers on best practices for developing appraisals prior to submitting them to the Ordering Party. Implement data quality checking controls that can detect when appraisal information does not match up with other loan information. Implement data quality checking controls that help detect intentionally misrepresented data as well as honest mistakes before submitting the data to the Ordering Party.

38. Mitigating Appraisal Information Risks Collusion and Coercion Randomly obtain an additional appraisal or another opinion of value from an unrelated source. Have the order placed, received, and reviewed without the knowledge or involvement of the parties to the original transaction. Protect the integrity of the original appraisal document in whatever form it exists (hardcopy or electronic). This can be difficult to uncover and even harder to prove. How do you identify the difference between a mistake and a planned incorrect valuation?

39. Next Steps Build on recommendation Using the recommendations to develop best practices Create measures and practices the appraisers, vendors and lenders can use to build and evaluate services and tools. MISMO Information Security Workgroup (ISWG) and Property and Valuation Services (PVS) Workgroup to create phase 2 white paper.

40. MISMO Information Security Workgroup (ISWG) Mission Support the information security concerns of other MISMO workgroups, provide industry security related recommendations, and general security educational material. How to Participate The ISWG bi-weekly calls on Wednesdays at 2PM EST (April 2nd). Phone Number: (641) 715-3300 / Access Code: 786194# ISWG Listserv http://www.mismo.org/GettingStarted/ListservSignUp.htm) Published papers, research and guidance: Identifying and Safeguarding Personal Information white paper State Security Breach Notification Matrix Snapshot of Sensitive Data Points in MISMO LDD Remote Authentication White Paper Risk Identification And Risk Mitigation Recommendations (pending)

41. How does it work?Sample Demonstration

42. A Case StudyAMC Adoption ofMISMO Appraisal XML By Jeffery J. Bradford, CEO Bradford Technologies, Inc

43. Current Practice Compliance Checking at the Desktop Desktop Reviewer Yes Errors Appraisal Completed No Desktop Reviewer Desktop Reviewer

44. Current Practice Convert Report to Third Party Standard Industry Converter Recreate Data & PDF Appraisal Completed Convert Report Industry Converter Recreate Data & PDF Send to Vendor Industry Converter Recreate Data & PDF True PDF

45. Current Practice Convert to Internal XML, Run Compliance Rules Return to Appraiser if Non-Compliant

46. Current Practice For every return – have to repeat compliance checks Desktop Reviewer Yes Errors Appraisal Completed No Desktop Reviewer Desktop Reviewer

47. Current Practice For every return – have to repeat third party conversion process Industry Converter Recreate Data & PDF Appraisal Completed Convert Report Industry Converter Recreate Data & PDF Send to Vendor Industry Converter Recreate Data & PDF Original PDF

48. Current Practice Repeat checks until report’s compliance is validated

49. AMC MISMO Implementation 1. Reasons for adopting MISMO Appraisal XML • Eliminate desktop report compliance checking. Check compliance server-side for greater flexibility and agility to respond to the market place. • Adopt MISMO externally and internally. • Currently, issues are encountered with desktop compliance software. It is expensive and time restrictive to deploy new rules or enhanced rules. Difficult to respond to clients needs.

50. AMC MISMO Implementation 2. Reasons for adopting MISMO Appraisal XML • Eliminate conversion from vendor XML to internal XML format to run quality and compliance rules. • Adopt MISMO externally and internally. • Currently, daily issues are encountered with existing software delivery files that require manual intervention to “fix” specific transactional problems in the conversion of the software XML to AMC Internal XML.