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 Fi by cpt74056

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									          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
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
                                          Closing the Gap
                     Appraiser-to-Loan Decision with Secure, MISMO Compliant Methods   2
         Overview of
      Appraisal Review
              and
      Validation Process

John Cirincione and Rob Frazier


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Basic Flow – Obtain Appraisal




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Source of Valuation Requests

 Appraiser receives a request for services:
 • Direct from the lender
 • Through a Vendor Management Service
 • Through a centralized portal




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Overview- Appraisal QC Workflow


    Appraisal Report
  Received from Vendor     Does this appraisal             Report is routed to
                                                                                         Check for underwriting
                         report match the loan in         Review Process Work
                                                                                        compliance and credibility
                                progress?                       Queue




                                                      Issues Found – Fails Review




                            Reject Process to               Accept Appraisal
   Appraiser Corrects                                                                                           No Issues Found -
                                request                     and send for final
    and Re-submits                                                                                               Passes Review
                               correction                      processing




                                                        Update Tracking System,                 Archive report and
                                                          send report to client                   pertinent data




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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?

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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




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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.
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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?




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Common Methods-Appraisal Review


   1.   Pass it through
   2.   Assign a low level processor
   3.   Use a checklist
   4.   Develop electronic review process
   5.   Develop a review process that integrates
        technology and human intelligence (best
        practice)




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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.

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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




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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

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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




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Automated Enhanced Review

 Appraisal report submitted in MISMO Format, ready for
                                                                         Corrections Sent                  Appraiser corrects and re-submits
                   electronic analysis



                                                                                                             No
                                                                  No                                                              No
                                                                                         No



                                                                              Yes                                     Yes
                                 Yes
                                                                                                                               Does the report/property
                                          Is the report complete – did
                                                                                     Are the facts reported by the               comply to underwriting
  Is this the right appraisal?           the appraiser omit any of the
                                                                                     appraiser verified as correct?          guidelines of the client or loan
                                               critical data points?
                                                                                                                                         type?




                                                                                  Yes

                                                                             Report sent along to
                                             Enhanced Review                 workflow queues for
                                                                           enhanced manual review

                                                                                                                                   MISMO Data sent
             Sort to Next Level of Process                                                                Data Update              to Client for direct
                                                                                                                                    updating of LOS

                                                                              Report sent to client




                                    Straight Through Processing




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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




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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




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Where to best deploy the rules?



What point is the best place to check the appraisal?



                                                                                                  Performed
 Appraiser’s office before   Point of Delivery                 Review and
                                                                                                      By
       completion            to Client or AMC                 Quality Control
                                                                                                  Underwriter




      Appraiser has            Performs auto                  This is the most                  This could be an
       rules on his           checking before                    common                          additional filter
         desktop             report is accepted              deployment today                       process




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Is this the right property?




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Is this the same property?




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




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Is the factual data correct?




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Subject sales history




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Comparison of Market Trends




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Sales History of Comparable Sales




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Are any of these nearby sales potentially comparable?




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




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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?


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      Closing the Gap

 Appraiser-to-Loan Decision with
Secure, MISMO Compliant Methods
           Dick Taylor




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



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•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
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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


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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


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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.

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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.
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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.

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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?




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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.
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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)
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How does it work?

    Sample
 Demonstration


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    A Case Study

  AMC Adoption of
MISMO Appraisal XML
           By
 Jeffery J. Bradford, CEO
Bradford Technologies, Inc

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Current Practice


         Compliance Checking at the Desktop




                     Desktop
                     Reviewer                           Yes


                                                                        No
     Appraisal       Desktop                      Errors
     Completed       Reviewer


                     Desktop
                     Reviewer



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Current Practice

 Convert Report to Third Party Standard


                                 Industry                 Recreate
                                Converter                Data & PDF


 Appraisal      Convert          Industry                 Recreate                           Send to
 Completed      Report          Converter                Data & PDF                          Vendor


                                  Industry                Recreate
    True                         Converter               Data & PDF
    PDF




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




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Current Practice

For every return – have to repeat compliance checks




                        Desktop
                        Reviewer                            Yes


                                                                             No
        Appraisal       Desktop                        Errors
        Completed       Reviewer


                        Desktop
                        Reviewer




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Current Practice

For every return – have to repeat third party conversion process


                               Industry                 Recreate
                              Converter                Data & PDF


 Appraisal      Convert        Industry                 Recreate                           Send to
 Completed      Report        Converter                Data & PDF                          Vendor


                                Industry                Recreate
   Original                    Converter               Data & PDF
    PDF




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Current Practice

Repeat checks until report’s compliance is validated




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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.




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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.




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AMC MISMO Implementation

3. Reasons for adopting MISMO Appraisal XML

   Currently, appraisal software vendors make changes to
   applications thus resulting in changes to their XML.
   Adoption of MISMO Appraisal XML eliminates problem.


   It is inefficient and AMC cannot rely on software companies to
   maintain accurate conversions. These ongoing changes
   result in the converters creating corrupt files that require
   manual intervention.




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AMC MISMO Implementation

4. Reasons for adopting MISMO Appraisal XML

   Eliminate data to PDF conversion application by having
   appraisers create “true” PDF at their desktop through the
   appraisal software and send as embedded PDF in
   product response.


   “This application is continually causing angst on a daily
   basis. Currently, production support is required to manually
   watch this application daily to ensure it does not fail.”




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AMC MISMO Implementation

5. Reasons for adopting MISMO Appraisal XML

 Decrease turn times by creating universal delivery process that
   can be pushed out to all software vendors.
 Open marketplace to all qualified appraisers regardless of
   current software they may be using.
 Increase agility in processing appraisals upon receipt from
    vendor.




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AMC Implementation Overview


          Accept             Validate                                      AMC
          Decline            Appraisal                                   Receives
           Order               Data                                      Appraisal


                            MISMO
                             XML
                                                                           MISMO
                                                                            XML

Receive      Complete    Prepare              Validation                   Original
 Order       Appraisal   To Sent              Complete                      PDF




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AMC Implementation




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AMC Implementation




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A Data Matrix = 2D Barcode




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AMC Implementation




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AMC Implementation


                                         AMC
                                       Receives
                                        Report




                                         MISMO
                                          XML
            Complete
            Validated
                                         Original
            Appraisal
                                          PDF




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Benefits of MISMO Adoption

Eliminated inefficiency of having compliance rules at the desktop




                         Desktop
                         Reviewer                            Yes


                                                                              No
         Appraisal       Desktop                        Errors
         Completed       Reviewer


                         Desktop
                         Reviewer




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 Benefits of MISMO Adoption
Eliminated conversion errors by getting MISMO XML direct


                                Industry                Recreate
                               Converter               Data & PDF


   Appraisal     Convert        Industry                Recreate                           Send to
   Completed     Report        Converter               Data & PDF                          Vendor


                                 Industry               Recreate
     Original                   Converter              Data & PDF
      PDF




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Benefits of MISMO Adoption

Returns completely eliminated




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Benefits of MISMO Adoption


 1. Desktop Report Compliance Software Eliminated

 2. Conversion to Proprietary 3rd Party Formats Eliminated

 3. Original PDF of Report Received – Not Reproductions

 4. Returns Due to Non-Compliance Completely Eliminated

 5. Total Turn Time Decreased Significantly

 6. Marketplace Opened Up to All Qualified Appraisers

 7. Processing Costs Significantly Reduced

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MISMO Security
Current practices do not transmit original PDF
Security is defeated form the start!

                                        Industry                Recreate
                                       Converter               Data & PDF


  Appraisal        Convert              Industry                Recreate                           Send to
  Completed        Report              Converter               Data & PDF                          Vendor


                                        Industry                Recreate
    Original                           Converter               Data & PDF
     PDF




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MISMO Security – Best Practice


               AMC
             Receives
              Report




              MISMO
               XML
 Complete
 Validated                 MISMO “Best Practice” Security
              Original
 Appraisal                         Starts with Original PDF
               PDF




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On Document Verification




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A current use of this technology




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Uses of Data Matrix Technology




   Fingerprints Encoded
   You can also encode digital signature to encrypt data


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Different Types of 2D Barcodes

What are 2D barcodes?
2D Barcodes are symbologies that are capable of storing more information
than can normally be contained in a conventional linear barcode.



                 DATAMATRIX – a square symbology, of varying
                 densities used extensively in part marking as a large
                 number of characters can fit in a small space. Max of
                 2335 chars

                 PDF417 – can be printed at a variety of aspect ratios
                 and densities. Used in transportation, manifests,
                 and personal ID including state driver’s licenses.
                 Can store up to 2710 characters. Its stacked
                 symbology instead of matrix.


                 Others include AZTEC, MAXICODE, and QR Code.

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Step 1. Combine Identity & Data



    Appraiser Identity Information




                                                          Data Matrix




  Appraisal Report Salient Data


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Step 2. On Document Verification




                   Affix Data Matrix to document




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Step 3. Create Document Digest




                             12348723649234248…..
                               512 Bit Document Digest

                         Store on Secure Server




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To Authenticate Document


                           Upload to Authentication Service
                           - New Digest is created
                  Digest   - New Digest is compared to stored Digest
                  Server   - Data Matrix is decoded

                           • If digest matches
                                • Document Authenticated

                           • Decode Identity from Matrix
                              • Appraiser Identity Validated
Document in Question


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Four Levels of Security


                                      Identity Authentication
                                      Two Factor
                                      Certificate & PIN

                                       Data Matrix
                                       Encrypted Information


                                       Document Digest
                                       Report Integrity Validation


                                       Optional Document Storage
                                       Complete Report Replication


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Conclusion

 Benefits MISMO Appraisal XML
 •   Improves Report Quality
 •   Reduces Costs
 •   Reduces Turn-Times
 •   Original Appraisal PDF and Data Maintained
 •   Opens Market to all Qualified Appraisers

 Benefits of MISMO “Best Practices” Security
 •   Two Factor Authentication
 •   Data Matrix – Industry Standard Encryption
 •   On Document Verification of Data & Identity
 •   Tamper Evident
 •   Document Integrity Maintained (secure audit trail)




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Addendum



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Minimal Risk Process

   • No elevation of Collateral Risk Score
   • No obvious variances to underwriting
     guidelines
   • No warnings based on:
     • Property type
     • Geography
     • Vendor
     • Product type
     • Client specific “flags”



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Escalated/Complex Review

  •Initial sorting identifies “complex issues”
    • Property characteristics
    • Appraisal issues
    • Market area trends
  •More human intervention required
  •“Second Look” if lower level queue
   moves case to a “reject loan” status
  •May be set to route directly to this level



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Making It All Work Together

  •Getting the most “bang for your buck”!
    • Enhance results of collateral decisions
      produced by products already in your
      workflow
    • Products work together for increased risk
      mitigation
      • Data from the appraisal or other valuation services
        product is immediately available to be added to the
        loan file and/or database.




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Review Capacity Sample Formula

       Daily production capacity (DPC)

      DPC = # Analysts x #/hour x hours

 Example:
 DPC = 5 analysts x 3/hour x 8 hours = 120
   loans/Day
 If daily loans = 210, then 80 don’t get done,
   or you have to hire 3.3 additional analysts.

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Too many loans, too little time…

   • Choices
     • “Pump & Dump”
       • Don’t review 80 of the loans – just close them
     • Hire More Staff
     • Work everybody overtime
     • Enhanced review
       • Spend most of your time on the loans with
         the highest risk.
       • Spend less time on lower risk loans
       • Increase efficiency of staff


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MISMO provides a data standard
 • Appraisal or other valuation service report in
   MISMO Format
   • No translation, typing or scanning.
   • Original appraiser makes the conversion and
     “seals” the report
   • Live data elements in your system lend
     themselves to advanced level electronic
     comparison and review
   • “Straight through processing” still includes
     checking and verification




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Automated Review and Validation

 • Checks the appraisal for consistency and
   compliance to underwriting guidelines.
 • Employs third party tools for collateral risk scoring
   and value verification.
   • Appraisal must be credible
   • Check for bias or errors.
   • Issues and exceptions are routed to analyst or
     underwriter for decision




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                     Closing the Gap
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