Home equity lending in a new regulatory environment

New regulations set to take effect in January 2014 have credit unions facing a tremendous amount of uncertainty. Many credit unions wonder if the loan products they have built their mortgage business around will still be compliant in the new regulatory environment.  However, even while grappling with this uncertainty, it is likely that home equity lending will remain a favorite among credit unions.

Of course, credit unions want to make sure they are prepared for home equity lending in the new regulatory environment. To do so, appropriate staff members must become very knowledgeable about the specifics of the new regulations, and credit unions must be prepared to make any necessary operating adjustments to ensure compliance. This will likely require them to consider new tools that will help them minimize risk and ensure loan quality in accordance with the new regulations.

One tool that will gain even more importance in home equity lending is Automated Valuation Models (AVMs). Although AVMs have been used extensively for home equity lending in the past, the type of AVM credit unions choose will become much more important.

AVM results can vary greatly from one location to the next. So, credit unions need to ramp up their due diligence when it comes to selection to be certain they are using the best AVM for any given subject property being considered for a home equity loan/line. The easiest way for credit unions to make sure they are selecting the best AVM for each property is to employ a cascade AVM that leverages multiple AVM suppliers and distinct databases. That’s because cascade AVMs automatically determine which AVM provider will deliver the most accurate results for any given market.

When choosing a cascade AVM, credit unions should look for a one that includes an extensive variety of compliant AVM models and that relies on prior observations in order to select the best AVM. To ensure the most accurate AVM selection, credit unions should choose a cascade AVM that is updated on a regular basis – ideally on a quarterly basis.

Most vendors will say their respective cascade AVM is the most accurate, but that cannot be true for all of them. The best way to know for sure is to select a cascade AVM that is verified by an independent third party. Testing conducted by AVMetrics, an industry-leading AVM testing and auditing authority, found that less than 50 percent of today’s AVM vendors currently meet its accuracy standards. So, looking at third-party testing results in advance can help credit unions ensure there are no unwanted surprises when attempting to demonstrate their compliance with the new regulations.

To ensure compliance, credit unions should also take property condition into consideration. When covering small areas, credit unions can usually gather necessary property condition information for home equity lending by simply having a loan officer do a drive-by inspection. But for those covering larger areas, it is not quite that easy. Fortunately, there are AVM reports that include property condition details about the property exterior and neighborhood, along with photos. Credit unions can reconcile that information with the AVM value to obtain a valuation that is more accurate and in line with the letter and spirit of the latest underwriting guidelines.

With new regulations right around the corner and a postponement unlikely, credit unions need to have a plan for ensuring compliance with minimal disruption to their current processes. Fortunately, there are a range of tools that can help. The credit unions opting to take advantage of those tools will be better positioned to adapt to and thrive in the new regulatory environment.

Robert Walker

Robert Walker

Robert Walker is a Managing Director for the Lender Processing Services (LPS) Applied Analytics division. Rob is in charge of all real estate product development; including, but not limited to, ... Web: www.LPSAppliedAnalytics.com Details