5 Risks finance executives need to know about
There’s no way around it: banking is a risky business. In an industry in which risk is sometimes celebrated, there are also other not-so-pleasant risks; risks that can get you into hot water, and in some cases, a stint in prison. While those are certainly extreme cases, it’s imperative that you understand how financial regulation keeps you bank fraud free and on the up and up in the industry (and with your regulator). As a finance executive, here are five risks you need to know about:
FAILING TO FOLLOW YOUR OWN BANK REGULATIONS.Regulations and bank compliance are put into action for a reason, even the ones at your local branch, and as such, they must be followed. In January of 2011, the FDIC, as receiver for failed 1st Centennial Bank, filed suit against the bank’s former President/CEO, EVP/CCO, SVP/ Construction Loan Division Manager, and 9 bank directors, seeking damages in excess of $26 million. The complaint included valuation-related allegations for at least 13 of the 16 highlighted CRE/ADC loss loans, including various claims that the bank failed to obtain appraisals, failed to update appraisals, and failed to review appraisals, many cases in violation of the bank’s own policy. But the FDIC probed further, examining the structure of the Bank’s appraisal-review process, where the FDIC identified conflicts of interest. 1st Centennial apparently assigned most appraisal reviews to one particular employee. But the complaint does not allege that the reviewer herself was conflicted. Instead, the complaint alleges that the head of the construction loan department, to whom the reviewer reported, was conflicted, specifically because he was paid a commission on loan closings. In the FDIC’s words, “[Appraisal Reviewer] was not trained as an appraiser, and was unable to adequately manage the underwriting responsibilities for the numerous loans handled by the bank. As a result, appraisals were not conducted as required by the Bank’s loan policy.”
FAILING TO COMPLY WITH DODD-FRANK.We’ve said it once, and we’ll say it again: Dodd-Frank matters. Enacted to protect consumers against poor lending practices and to prevent another housing market collapse, Dodd-Frank is a law that places regulations on the financial industry, and specifically, appraisals. Failing to comply with Dodd-Frank can certainly land you in the hot seat. Banks got into trouble during the bubble years because the chief appraiser would typically report to the head of mortgage loan production. That model created potential conflicts because loan officers and brokers often would tell the appraisers to match the property’s valuation with the amount they wanted to fund on mortgage loans. Dodd-Frank establishes regulations that prevent things like this from happening.
COMMITTING APPRAISAL FRAUD.Appraisal fraud is defined as the value of a home being purposefully appraised above market value. In addition to being dishonest and unethical, tampering with appraisals will inevitably mean deep consequences. Appraisal fraud could mean steep fines or even jail time. In one such case, a bank executive ordered that appraisals not be placed in files that would indicate a loss. By not utilizing new or updated appraisals where the values identified in such appraisals demonstrated that the bank’s collateral was impaired, the executive committed appraisal fraud.
NEGLECTING TO UPDATE EVALUATIONS.While there are no hard and fast rules concerning when evaluations and appraisals expire, as a rule of thumb, they are good for 60 – 90 days, and they should not exceed more than six months. Failing to update evaluations and appraisals creates faulty and inaccurate loans. A year ago this month, eleven bank officers and directors were charged with fraud related to this very regulation. They frequently utilized appraisals that were several years out-of-date with no justification supporting the continued use of the stale appraisals, which routinely overstated the value of the loan properties and identified wholly inaccurate or unviable projected future uses of the properties. Other times they used conflicted appraisers beholden to Superior Bank or the borrower.
MISSING THE DETAILS.Inflating home prices or missing key information on appraisals can cause regulators to take a second look. In recent history, one in seven appraisals inflated values by 20% or more. Bankers, appraisers and federal officials in interviews said inflated appraisals are becoming more widespread as the recovery in the housing market cools. While home prices are increasing generally, their appreciation is slowing, and sales have been weak despite low interest rates…Banks generally won’t agree to a mortgage if the purchase price or the refinancing amount is higher than the appraised value.
If you find yourself or your bank in any of these risky situations, you should immediately let your regulator know. Otherwise, you won’t be able to protect your bank from a regulation nightmare. In the meantime, should you feel as though you’re ready for someone to help you navigate risky waters, an appraisal management company like MountainSeed is here to help. Let us know if you’d like to talk more. We’re ready to help protect you against risk.
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