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Thursday, July 27, 2017

Aspirin for Risk Assessments - Relieving Pain for Small Mortgage Firms

What could go wrong?

Demystifying risk assessments by evaluating your solutions

New York State examiners recently began requesting Risk Assessments for NYS Department of Banking applications and some renewals. These requirements applied even to single proprietors who, naturally, felt overwhelmed and confused about what the examiners requested. In fact, risk assessments represent a prudent step in the process of building a business. It's simply asking the question: "what could go wrong?"

In that spirit, here is a sample risk assessment policy and procedure.

The CFPB provides a sample risk assessment in its examination guides, which you can access here. In our view, the CFPB assessment addresses many items, but misses some as well. There is the regulator's well-known penchant for diving into minutia in some elements (like corporate governance and certain regulations), then overly broad assessments of others. The best approach remains thinking through your process.

Risk Management Process for Mortgage Bankers and Brokers

Mortgage Companies small and large face the same risks as any company; physical damage and infrastructure damage from disasters, employee and workplace safety. But financial institutions also face risks specific to the business model: compliance, counter party risk, process management issues and particularly fraud and information security.

Even the smallest company needs to address these issues, and it can seem like an almost insurmountable task. By structuring our business with systems that regularly address these risks and then rationalizing these checks into a standard business flow, the task becomes more manageable and understandable.

The standard risk management process should look like this:

  • 1.      Identify what risks a company faces,
  • 2.      Identify the level of risk to the company, its customers and counter-parties,
  • 3.      How the company mitigates those risks through procedures and other provisions

  • We have compiled a risk assessment for standard retail mortgage brokering or lending operations, identified the level of risk, and shown how, through policies or procedures, these companies mitigate this risk.

    Risk Levels

    We follow the CFPB’s model for assessing the risk to the customer.

    Quality of Risk Controls

    A non-system based Risk Control produces haphazard results. For instance, if there is simply an individual who is responsible for the execution of a risk mitigation procedure, it is likely to be missed. By integrating controls into processes that we already conduct, scheduling regular audits, and using pre-programmed systems like LOS, Credit Reporting tools such as fraud guards, web alerts like Google Alerts, we control these risks automatically.

    At the heart of all our risk mitigation is the implementation of a “systems-based” approach that does not rely on an individual to oversee the process. For instance, checklists, step-by-step procedures, and automation all contribute to systematic risk management.

    Risk Assessment For Mortgage Companies

    Customers of can download samples for their own use here:

    Wednesday, May 31, 2017

    Investor Renewals - Broker/Mini-Corr Lender lack of distinction may cause problems

    My lender/investor is asking for our post-closing quality control plan and 10% audits... We are a non-delegated correspondent or broker. What now?

    With the propagation of categories and levels of correspondent, including mini-correspondent, non-delegated mini-correspondent, funding non-delegated correspondent, and wholesale/broker, we see many wholesalers request quality control plan elements that do not apply to a specific business model. Specifically, lenders are asking brokers or non-delegated correspondents for agency level post closing reviews, including 10% random sampling, re-verification of all loan file exhibits, appraisal reviews, closing document reviews and re-underwriting.

    If you are not delegated underwriting and closing this should not apply to you.

    The requirement for random sampling and post-closing reviews of loans doesn't apply if you aren't underwriting or drawing closing documents yourself. We have found that this is usually the result of a mis-categorization of the originator as a lender. Explaining that this requirement is like asking the broker or correspondent to underwrite and evaluate the lender's credit decision - something the broker/correspondent had NOTHING to do with in the first place - clears this requirement.

    Some wholesalers will not budge, though. This is the golden rule: He who has the gold makes the rules. In this case, evaluate how important the wholesaler is to your business. If it's a critical product or service, you may have to start conducting these reviews in order to maintain the investor. But DO NOT simply capitulate to the requirement and start a post-closing review process without ensuring that the requirement is absolute. Beyond being redundant for loans underwritten by someone else, post-closing reviews are expensive.

    "Do they even review this stuff?.."

    Wholesalers have been reviewing our quality control plans for years. It is important to note that many of these reviewers don't actually read an entire plan, so that if something doesn't jump off the page at them, they may mark your plan as deficient. That doesn't mean it isn't in the plan.  99.9% of the time we draft a rebuttal, we are simply citing the page numbers where the reviewer can locate the information he or she couldn't find (or didn't look for) the first time.

    This also doesn't mean that we don't value the feedback. We always want to know if we have missed something, so we can include it for any of our clients who might get similar feedback. That's one of the ways our products have evolved since 1996.  It's also why we can guarantee our products' acceptability.

    It's a PROCEDURE, not a POLICY

    The most important thing to remember is that you want your plan to reflect PROCEDURES about how you work to catch ANY possible error. This is completely different from writing a POLICY, which simply states that you will look for various elements. For instance, a recent communication showed:

    The Pre-Funding Quality Control Requirements (and where they are located in your Broker Plan):

    • Quality Control is Conducted by someone other than party to loan origination (Page 22)
    • The Borrower Social Security number is re-verified on all loans (Page 14)
    • The Income calculations and supporting documentation is reviewed. (Page 13)
    • Verbal verifications of employment are conducted (Page 20)
    • Assets needed to close or meet reserve requirements are reviewed (Page 15)
    • Appraisal or other property valuation is reviewed (Page 16)
    • Documentation is reviewed to assure adequate mortgage insurance coverage (Page 12)
    • Review loan to determine automated underwriting info is accurate (Page 18)
    • Liabilities between 1003 and credit report are reconciled (Page 12)

    The page numbers show where you can locate the requirement as it is addressed as part of the much more extensive documentation review.  This is the key. You can get a repurchase request or denial for an item which is not a requirement for the quality control plan. To combat this - WHILE YOU ALSO COMPLY WITH THE QC REQUIREMENT - you need a thorough system, using checklists and peer reviews.

    DO NOT write a policy that states that you will simply check for these items, as it opens you up for liability for missing other elements associated with the items requested, that have not been requested to be stated in policy in writing.

    Wednesday, April 5, 2017

    Brokers: Do I Report HMDA Data?

    4/6/2017 Update

    As we approach the 2018 HMDA reporting window, with the wider rubric for filing requirement, we are getting many calls from brokers about preparing to become reporters. We want to reiterate that a broker business that categorizes its customers as PRE-QUALIFICATIONS until the loan is referred to an investor DOES NOT HAVE TO REPORT HMDA DATA.

    1.) HMDA is an extension of ECOA, so if you are not making credit decisions, you do not report. Only the ultimate decision maker reports.
    2.) Technically, brokers CANNOT make decisions because they do not have the funds available to unilaterally fund applications. 
    3.) Many states sanction brokers who represent that they are lenders

    Original Post From 12/5/13

    As compliance season descends on the mortgage business again, we start to hear growing numbers of concerns over how a firm will comply with a nuance of a rule.  Often the concern originates with a rumor or other misinformation from a networking group or an e-mail from a service provider looking for business. With respect to brokers, you should generally avoid reporting HMDA denial data for the simple reason that BROKERS DO NOT MAKE CREDIT DECISIONS.

    Among the risks you expose yourself to:

    • State Regulator sanctions for acting as a lender without a lender license.
    • Scrutiny from a Federal regulator regarding why ALL your loans are denied?
    • Inconsistent reporting/reporting errors on other reports

    NMLS Call Report - Requests Denied Applications

    The idea that brokers should report HMDA data may come from the fact that the NMLS Call Report has a line item for "Denied."  However, this is not the intention of this element of call reporting:  this is to identify the "net loan volume."  (Pipeline + New Loans - Closed, Withdrawn and Denied Loans = Ending Pipeline) The denied loans, in this case, should be loans that you will never close because ALL of your wholesalers or investors have denied them.

    Brokers should only put the loans which the INVESTOR has denied in this column.

    NMLS Call Report - Don't include pre-qualifications you have denied.

    Is It Really a Loan Until the Lender Has It?

    If you are a straight broker, and not a mini-correspondent, you should define your application policy to ensure that loans which will not be sent to an investor, for whatever reason, are coded as pre-qualifications. Pre-Qualifications do not trigger HMDA Reporting.  This does not mean that you will not send GFE or other property or application related disclosures if you are actively processing the file.

    According to the staff commentary in the HMDA Small Entity Compliance Guide: "2. Pre-Qualification. A pre-qualification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective applicant would likely qualify for credit under an institution’s standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify. Some institutions evaluate pre-qualification requests through a procedure that is separate from the institution’s normal loan application process; others use the same process. In either case, Regulation C does not require an institution to report pre-qualification requests on the HMDA/LAR, even though these requests may constitute applications under Regulation B for purposes of adverse action notices." Commentary Appendix D, Supplement I

    HMDA Small Entity Guide

    ECOA, Fair Lending and Loan Disposition - Not to be Confused with HMDA Reporting

    Due to the overlay of so many regulations, it can be easy to confuse what rule requires what actions.  You are still required to adhere to Fair Lending and Equal Credit Opportunity Act (Regulation B) guidelines with respect to providing an applicant with a disposition within 30 days.  To avoid monitoring challenges and potential violations on small pipelines use your Incomplete Application Notice on all loans.  If the customer fails to provide all of the information, you can withdraw the loan from your pipeline without any further action.  You MAY optionally send a letter noting the withdrawal.   

    Avoid Being the Creditor

    Under the current regulatory scheme, lenders bear the burden for credit and disclosure risks.  A correctly structured broker pre-qualification process allows for the unique opportunity to avoid many of the lender's pitfalls with respect to creditor actions.