page contents Mortgage News Digest: 2016

Monday, November 14, 2016

Checklists - The Ultimate Independent Audit

Checklists are foundational quality control elements and can improve process efficiency and identify problem areas. But bad checklist practices can create more problems than they potentially solve.


If you have spent any time in the industry, you have seen checklists of one fashion or another. In mortgage banking, where there are literally 3,000 quality control checks in a single loan file, it's hard to conceive how any individual - new initiate or seasoned pro - could keep all of the elements in mind while reviewing a loan file. So, naturally, some sort of job aid evolves in every workplace. We need to applaud those who develop these tools because they have so many overlapping beneficial purposes and uses. But while even a bad checklist or form can solve some problems, companies don't realize their full benefits unless they use one designed to capture all purposes and work within the flow of a particular function's duties.

Independence


The insistence on independence in the review process comes from the idea that 1.) you are too close to your own work to review it and 2.) you are pre-disposed to cover up any errors you make, so these preclude you from auditing your own work. However, if honestly adhered to, checklists can create independence. Checklists don't fudge reports, or have a bad day and miss things they ordinarily wouldn't. So you don't have to hire a 3rd party auditor to obtain independence. You just need a good checklist.

Consistency


By using a single checklist across your platform, many of the misunderstandings and inefficiencies get eliminated because everyone works through the same form. No surprises!


Checklist Design Best Practices


In designing a checklist, think about the process or documents you use the checklist to review. Key principles in this process


  1. You may use the review data again; more than just as a checklist for a processor, for example. You need a format that you can easily break up and re-integrate. Although you can get nicer formatting through Word, you can more easily access and manipulate data in Excel. A worksheet that will be used as a training tool, that contains manual calculations, or handwritten notes for one time use, lends itself to Word formatting. An audit checklist, which you use for extracting missing or erroneous items from a long list, lends itself to Excel formatting, so you can export the information into your LOS or aggregate into reports.
  2. You can use prompts within the descriptive fields as a decision tree. For example If>then statements, or by identifying specific guideline triggers such as $____ > $, then... This level of detail allows you to aggregate the descriptive information in any report. This is one of those areas where you can get more bang for your buck from the process by understanding the different ways you can use the information garnered through the checklist review.
  3. Organize the form in a way that a reviewer would rationally progress through the file. For instance, in a cross check of property address, rather than having the reviewer stop and browse through application, contract, W-2 and paystub, appraisal, survey and any other address bearing exhibit, review each exhibit one time, coming back to confirm information. Awkward checklists that make the user bounce around the file or the form don't get used and create more mistakes than errors they solve.
  4. MAKE SURE BINARY CHOICES ALWAYS ADDRESS THE SAME POSITIVE OR NEGATIVE CONTEXT!! One of the most common faux pas on a checklist is having a yes/no box, but the yes or no have different meanings. This makes the reviewer have to review the entire checklist item again when recording findings. Phrase checklist elements to only flag a check if an item is wrong, or for a no flag to indicate non-compliance. For instance, don't have one question saying "is the earnest money deposit check cleared?" which a yes would be a non-finding; the next question shouldn't be "is there any evidence that the property is not owner occupied?" where no is a non finding. 
  5. COMPRESS! While this can be taken to extremes (I have been guilty of this; trying to get it all on ONE PAGE!), do pay some attention to not making forms excessively long. AT A MINIMUM, on a multi-page form, try to insert page breaks when the context or content changes; again, keeping the reviewer from bouncing between pages.  (The one at left turns into a 10 page pre-funding review because of white space and inattention to compression.) 
  6. WHITE SPACE can be useful, but having white space simply because of a long descriptor makes for a very long form. This is the kind of thing the government would do.
  7. Multiple versions of the same checklist. We often see multiple varieties of a single checklist used for different types of loans. This multiplies the likelihood that a checklist won't get updated when there is an across the board change. Most frequently this appears in underwriting checklists, but elsewhere as well, when you have a different checklist for FHA/VA/Jumbo Investor/MI and other specs which vary slightly. In cases where the bulk of the checklist (up to 50% or more) consists of items reviewed on every loan, you shouldn't create separate versions of checklists in this way, but should work to create dropdown lists which highlight the specific investor guidelines.







These Checklists ARE Audits!


For those who want to evaluate their procedures and learn how their businesses could run better, the results of these reviews, properly imported into the LOS or database, show us where we make repetitive errors, where we miss things our partners pick up, and which individuals most effectively perform their functions. 

In the end, embrace the idea that you constantly edit your forms and checklists. "Perfect is the enemy of good." We designed our templates with that in mind; you can use them to track changes in your business, investor or wholesaler requirements, and regulatory changes. We have found that it is possible to close a loan without conditions by anticipating every possible requirement. Imagine how much time you would have left to originate new business if you weren't chasing conditions after the fact?
 





Wednesday, September 7, 2016

Wasted Days and Wasted Nights - Broker/Mini-Corr QC Audits Misunderstood

Many brokers and mini-correspondents spend unnecessary money and time on QC Audits that aren't required

How to Use Checklists and Investor Underwriting to Implement Your QC Plan

The problem becomes more pronounced when brokers transition to mini-correspondent or non-delegated lender status. Lending partners, investors and other providers apply the same requirements for these transitional business models as they do for fully delegated mortgage bankers. The result: Your scope for auditing loans includes auditing the lending partner's work. The ultimate lender holds the responsibility for conducting these audits, which doesn't mean that non-delegated correspondents don't conduct audits, but need to limit the scope of audits to the work actually performed. 

The question is: What is the scope of the non-delegated correspondent/lender's audit? That depends on the roles the institution performs, not the name or industry moniker. You must take care in explaining these roles, as part of the confusion comes from the fact that table-funders like to represent themselves as lenders to the public; it connotes a greater sense of institutional fortitude. However, when this representation carries into its dealings with lending partners, the lender label adds those unnecessary functions. 

Understanding Which Functions Require Audit

Image 1 - Lenders carry additional audit responsibilities if they take on actual underwriting and closing functions, and those are not performed by proxy, such as delegated closing agents, or any pre-funding underwrite.
Image 2- 1.) Delegated Lenders perform random selection reviews on a percentage of all production. 2.) Everyone must conduct pre-funding reviews, and lender reviews of a non-delegated 

Delegated Lenders conduct Post-Closing Random Audits - Non-Delegated Do Not!

How to Create Quality Control Reports Without Using a Third Party Auditor


Checklists are foundational quality control elements and can improve process efficiency and identify problem areas. But bad checklist practices can create more problems than they potentially solve.

If you have spent any time in the industry, you have seen checklists of one fashion or another. In mortgage banking, where there are literally 3,000 quality control checks in a single loan file, it's hard to conceive how any individual - new initiate or seasoned pro - could keep all of the elements in mind while reviewing a loan file. So, naturally, some sort of job aid evolves in every workplace. We need to applaud those who develop these tools because they have so many overlapping beneficial purposes and uses. But while even a bad checklist or form can solve some problems, companies don't realize their full benefits unless they use one designed to capture all purposes and work within the flow of a particular function's duties. 


Independence - At the Core of Auditing


The insistence on independence in the review process comes from the idea that 1.) you are too close to your own work to review it and 2.) you are pre-disposed to cover up any errors you make, so these preclude you from auditing your own work. However, if honestly adhered to, checklists can create independence. Checklists don't fudge reports, or have a bad day and miss things they ordinarily wouldn't. So you don't have to hire a 3rd party auditor to obtain independence. You just need a good checklist. 


Consistency


By using a single checklist across your platform, many of the misunderstandings and inefficiencies get eliminated because everyone works through the same form. No surprises!

Checklist Design Best Practices


In designing a checklist, think about the process or documents you use the checklist to review. Key principles in this process

  1. You may use the review data again; more than just as a checklist for a processor, for example. You need a format that you can easily break up and re-integrate. Although you can get nicer formatting through Word, you can more easily access and manipulate data in Excel. A worksheet that will be used as a training tool, that contains manual calculations, or handwritten notes for one time use, lends itself to Word formatting. An audit checklist, which you use for extracting missing or erroneous items from a long list, lends itself to Excel formatting, so you can export the information into your LOS or aggregate into reports.
  2. Image 3 - 1.) Insert Decision Trees in the review 2.) Multiple data points allow you to collapse your spreadsheet for all those rows that contain a failure.

  3. You can use prompts within the descriptive fields as a decision tree. For example If>then statements, or by identifying specific guideline triggers such as $____ > $, then... This level of detail allows you to aggregate the descriptive information in any report. This is one of those areas where you can get more bang for your buck from the process by understanding the different ways you can use the information garnered through the checklist review. 
  4. Organize the form in a way that a reviewer would rationally progress through the file. For instance, in a cross check of property address, rather than having the reviewer stop and browse through application, contract, W-2 and paystub, appraisal, survey and any other address bearing exhibit, review each exhibit one time, coming back to confirm information. Awkward checklists that make the user bounce around the file or the form don't get used and create more mistakes than errors they solve.
  5. MAKE SURE BINARY CHOICES ALWAYS ADDRESS THE SAME POSITIVE OR NEGATIVE CONTEXT!! One of the most common faux pas on a checklist is having a yes/no box, but the yes or no have different meanings. This makes the reviewer have to review the entire checklist item again when recording findings. Phrase checklist elements to only flag a check if an item is wrong, or for a no flag to indicate non-compliance. For instance, don't have one question saying "is the earnest money deposit check cleared?" which a yes would be a non-finding; the next question shouldn't be "is there any evidence that the property is not owner occupied?" where no is a non finding.
  6. COMPRESS! While this can be taken to extremes (I have been guilty of this; trying to get it all on ONE PAGE!), do pay some attention to not making forms excessively long. AT A MINIMUM, on a multi-page form, try to insert page breaks when the context or content changes; again, keeping the reviewer from bouncing between pages.  (The one at left turns into a 10 page pre-funding review because of white space and inattention to compression.)
  7. WHITE SPACE can be useful, but having white space simply because of a long descriptor makes for a very long form. This is the kind of thing the government would do.
  8. Multiple versions of the same checklist. We often see multiple varieties of a single checklist used for different types of loans. This multiplies the likelihood that a checklist won't get updated when there is an across the board change. Most frequently this appears in underwriting checklists, but elsewhere as well, when you have a different checklist for FHA/VA/Jumbo Investor/MI and other specs which vary slightly. In cases where the bulk of the checklist (up to 50% or more) consists of items reviewed on every loan, you shouldn't create separate versions of checklists in this way, but should work to create dropdown lists which highlight the specific investor guidelines. 

Adding This Information to your LOS to Create Your QC Report


Most LOS' have the ability to record "conditions" or other items stipulated by the underwriter. A common error we see involves the individual taking the conditions resulting from an underwriting or closing prep review and typing them into a separate e-mail to the customer or other party for assistance in resolving. You have accomplished one goal - communicating the information to the customer - but you have no record of that. 

Step 1: Record the Data in the LOS


Instead of this two step process, record the conditions in the LOS and use that data to generate a customer notification. Then, as the documents come in, mark date received and date satisfied. This forms the foundation of the quality control report. 


Step 2: Identify Items as Critical/Clerical/Compliance


Critical items include things that could potentially cause the loan not to close. These items get referred to as "suspense" items, potential fraud, or general mis-qualification.  These critical defects should have a target rate of "0". 
Clerical items include missing documents, errors that require explanation or correction, and checklist items not critical to loan approval, but that complete the documentation requirement
Compliance items could potentially cause the loan not to close. These compliance items can reveal repetitive system error.

Step 3: Evaluate your Defect Rate


Your defect rate has two components. Gross defects include the total number of defects in each category. Net defects reflect the number of defects AFTER you have made all corrections or resolved each issue. 

Once you start collecting data, you will start to see the trends, and can identify an average defect rate for each category. Without making any adjustments to your system, you will use this average defect rate as your target defect rate. However, if you recognize that your Gross Defects are too high, you can initiate a correction in your process, and then compare your defect rates month over month to determine whether any changes you made to process. In addition, these numbers become your quality control report, whether monthly, quarterly or annually.


Tuesday, August 9, 2016

A Novel Solution to Loan Officer Certification

Solving the Need for Loan Officer Product Knowledge Training


In teaching our Loan Officer Boot Camp, I have always thought (if we had unlimited time) that we should start with the Foreclosure Process; If we, as loan officers, do a bad job, that's where the borrower ends up, after all. But we don't have unlimited resources. Training new loan officer's is hard and expensive.


When you say "FREE" online, you get banned!


Most e-mail spam filters are set up to recognize "FREE" as a scam. But in the mortgage industry, when it comes to training, that's what we want; something FREE.

If I told you I had just discovered a free answer to one of the most pernicious problems in the mortgage industry you would want to know about it, wouldn't you?

Training and developing new mortgage loan originators remains one of the most challenging aspect of the industry. We don't have time to develop a comprehensive curriculum. If you find an individual with good character and willingness, you still have somebody who is completely new without any exposure to the mortgage language and process; not just with loan products but also the entire spectrum consumer financial analysis. Add to that the fact that it takes 6 - 12 months until the loan officer is comfortable enough with the process to be effective in dealing with customers and referral sources, usually too long to make enough money to succeed.

This is because there are three areas in which our industry is completely ill-equipped to train and support new entrants:

Content - We don't have the curriculum mapped out, so when we train someone it is ad-hoc
Revenue - Knowing that only 10-20% of new originators succeed, we don't want to risk the expense of training. In addition, we can't afford to pay someone's salary while they learn
Time - The constant time demands of the new originator mean we have to put aside tasks in order to focus on their needs.

Isn't there a related industry which specializes in developing these individuals? There is: housing counselors.  The best part is IT'S ENTIRELY FREE.

Step 1: Complete the HUD Housing Counseling Curriculum


Available on the Housing Counseling Website, this free program provides in-depth preparation on all the general financial skills and sensitivities that an originator must possess.

Step 2: Participate in Housing Counseling for a Non-Profit or Debt Management Counseling Agency


What a great opportunity to start developing some customer relationships. These firms are government sponsored lead mills. Think about it. Every single housing related website points to housing counseling. Pre-purchase counseling is a great tool to start working with some agents.  After the counselor has spent 6 - 12 months working with customers, that individual has more customer focused experience than many seasoned originators. Most housing counseling agencies provide a salary during this learning period. Introductory positions yield a salary of $30,000 to $45,000 a year.

Step 3: Identify Individuals who want a career with higher earnings potential


We know that many individuals don't have the drive or personalities to source their own business. This process weeds those individuals out. Someone who is satisfied with a $45,000 salary won't make a top producing loan originator.

Step 4: Use FREE industry programs to fill in the niches


Even experienced housing counselors, there is in invariable need for additional skills type training. But the industry provides this for free as well! Just look at the list:

Associations: Providing sponsor underwritten training
Wholesalers: Providing product specific training
Private Mortgage Insurers: Among the deepest curricula of the industry providers, with everything from processing issues to sales and marketing.

When we formed lendertraining.com, in the mid-1990's, there was very little industry training. We filled the gap between compliance/licensing training (NMLS) and niche training with a resource which includes the foundational loan originator skills of mortgage math, product comparison and complete application methodology that doesn't exist anywhere else. In addition, we provide loan officer marketing methodology. Our programs cost between $55 and $159.

The Housing Counselor Training solution doesn't replace us, it just puts us in the correct context of the training universe.





Tuesday, August 2, 2016

Reverse Mortgages and UDAAP - Can a disclosure fix it?

How do we solve customer notification issues?

In the wake of TRID and its hegemony over the compliance discussion, several high profile compliance issues get overlooked. One of these came up in a recent examination of a Massachusetts client challenged to provide its Reverse Mortgage procedures specifically with respect to ensuring the customer received sufficient information to make an informed decision. We categorize this type of risk in the category of Unfair, Deceptive and Abusive Acts and Practices. (UDAAP)

Traditionally, we ensure we don't run into trouble with predatory-type practices through the use of informational disclosures. We used this approach to design the solution for our client. The regulator wanted to know how we made sure the customer received specific information. Our only choices was to provide an informational document. It surprised me that there was no standardized disclosure, but we simply took the regulator's requirements and extracted them into a single page disclosure.


The regulator's site describes requirements. In the audit, the regulator simply asked "How do you inform customer of who to call with complaints?"

We designed a disclosure which described the requirements for reverse mortgages in the states the client conducted business. 

Is a disclosure enough?


Ironically, GFE reform, and now TRID, took disclosure as a cure for deceptive acts off the table. Now, rules extend to the content of the disclosure and the measurement of the final terms as a cure. Will this regulatory cure extend to programs like the Reverse Mortgage, where so much elder abuse takes place? Ultimately, the regulation of the loan type, the customer's proof of understanding, such as the completion of a course in the product, now fills that need. Perhaps the customer also needs to be quizzed on the terms of the product for our own assurance of understanding.





Friday, June 10, 2016

MERS® QA - This week's new compliance flavor

Secondary Market Investors, Regulators Requesting Mortgage Electronic Record System® Quality Assurance Plan

MERS® has been functioning in place for many years, eliminating many cumbersome, expensive and ineffective procedures to effect and track the transfer of individual mortgages in the secondary market. It drew much unwanted attention during the foreclosure crisis, as legal challenges resulting from the inferred opacity of the system - because you can't ascertain the holder of the mortgage/note from county recorders offices - seemed to threaten the very basis of the business model. Having survived, for now, many of the issues which arose during the crisis are now filtering their way to the front lines. Market participants who once did very little more than assign a MERS® ID now find themselves having to fulfill other obligations. 

First among these is Quality Assurance. While adding another series of checks and balances to our quality control process seems like another burdensome cost of doing business, a rational approach allows us to understand that we actually conduct this audit as a regular part of our business. We just need to prove we do it. This involves two steps:

1.) Recording our MERS® steps
2.) Having a plan that identifies the person who keeps the records and submits the information

SAMPLE MERS QA PLAN

MERS QA Plan Sample Table of Contents



We have a plan which purchasers of our servicing module receive as part of that, since the process of MERS® management is concentrated in secondary marketing and servicing. Since originating lenders now seem to be responsible for their small portion of MERS® compliance, we are making this policy available to our customers at no charge on our updates and downloads page. Non-customers can purchase the plan for $195.00 on the website here https://www.mortgagemanuals.com/mers-quality-assurance-qa.html.  






Wednesday, May 18, 2016

Trended Credit Data - Pitfalls of Deeper Data Analysis in DU 10.0

As Fannie Mae rolls out DU 10.0, they point out the benefits included in the June 25, 2016 updates, such as the simplification of self-employment categorization and identification of multiple financed properties. But the introduction of trended credit data gets explained as an "improved analysis of risk."  In origination, the phase "improvement" normally means a curtailment of guidelines to the detriment of flexibility, and this update seems to confirm that.

Trended data simply means that the underwriter, live or automated, can evaluate the historical balance and payment amounts on revolving credit. Fannie Mae's position on the face of this is "we can see how much a borrower pays (beyond the minimum payment) to give additional risk flexibility to the borrower who pays more than the minimum regularly."  What Fannie Mae doesn't say, and what presenters don't seem to want to address, is the OTHER information revealed by this data, and its implications for approval and the processing of the application.

For instance, a borrower who pays off credit cards in anticipation of getting a mortgage in the months approaching a home purchase may have the source of those payoff funds questioned, throwing the whole 60 - 90 day seasoning of funds assumption into question. In addition, the underwriter may see a historically higher level of debt, and due to Ability to Repay concerns, apply that level of debt to current qualifying ratios reducing the amount the borrower can afford.

Certainly, a deeper look at a borrower's spending patterns gives a better idea of the risk profile, but opacity of guidelines for reviewing the other aspects and implications of this information means loan production will have more uncertainty - not less, as Fannie Mae posits - regarding underwriting outcomes. 

Monday, March 21, 2016

Time to Revisit Mortgage Vendor IT Security Reviews

A document management vendor spills files onto the street
It's an accident waiting to happen. Walking down the street through a busy downtown, I witnessed a reminder of the inadvertent problems you can encounter through exposure of customer information. A banker's box of loan files fell off a dolly and crashed into the street spewing customer information onto the roadway. Luckily, for this vendor, the wind was calm, and the driver picked up the materials and returned them to the box without further incident. For me, this highlighted one of the many concerns my clients deal with; information security plans.

Who's Touching Your Clients' Data?

In the image above, it's clear that the driver could have taken the opportunity to capture some information from those loan files. Why weren't the boxes sealed? These are some of the elements that a site inspection of a vendor can reveal. Always review your vendor's procedures.

Today most of our files are transmitted electronically. One client used this as a rationale for not having locked file cabinets in a shared office space. But the reality, upon inspection, revealed "relics" all over her office. Copies of documents she scanned were in shadow files. Other printed material was left in folders on desktops. We overlook that our landlords and cleaning crews have access to the physical space. Always lock your cabinets and leave a clean desk.

Nevada, New York, Pennsylvania and Other Picky Regulators

A slew of requests from Nevada and New York reveal that these regulators have identified the information security weaknesses in our offices. They demand companies have an information security plan, which includes a vendor approval process.

For brokers, particularly, this may seem like overkill, since they don't even have a chance to approve attorneys, appraisers and credit bureaus. They can only use companies previously approved by the investor or wholesaler. However, it makes sense in the context of the level of diligence the lender or broker uses in having the protection of customers' non-public information top-of-mind. Don't send customer information to anyone unless you have ascertained they have received screening from another regulated entity. Better yet, screen them yourself. 

A Vendor Management Information Security Self-Audit Example

You can combine these audits with other elements of your vendor review. For instance, if you have a credit bureau you are reviewing, in addition to their information security plan, you can access their Fair Lending and any other consumer protection policies. Remember that if your vendor is licensed in your state, you can rely on the state's examination of a particular element of the vendor approval.
If you would like a copy of the Vendor Self-Audit Checklist please e-mail me, or like our Facebook page. (Make sure you send me your e-mail address!)

Thursday, February 4, 2016

4000.1 Revisions Making Your Teeth and Hair Hurt?

Please be calm - the changes are mostly cosmetic


As we reported earlier, there should be no real surprises in the 9/14/2015 4000.1 release. The only area that seemed to cause some alarm related to the pre-closing audit rigor. If you are a Quality Control Plan customer of ours, you know that we have ALWAYS recommended this as a standard process.

Then you have to parse the guidance to understand the percentages, To reiterate:

10% of all production gets audited
10% of all AUDITS must be pre-closing/in-process audited

If you originate 100 loans, you must audit 10 (in addition to ensuring that you capture all sources in an audit cycle). Of that 10, 1 may be a pre-closing/in-process random audit. It seems like chicken and egg, but you have to look back at your total audit percentages to make the determination that you have conducted enough pre-closing/in-process audits.

Here is a sample policy that addresses 4000.1 Requirements for your QC Plan.

1-19-1 QC HUD 4000.1 Requirements


The requirements listed in Quality Control Plan requirements are referenced below as to how we comply in our procedures.

In general, the 9/14/2016 Update to the HUD/FHA Single Family Handbook re-organized standards into a new format referred to as the 4000.1 Revision. Although HUD’s requirements for quality control did not change substantively, the new policy manual opens QC reviews to a broader definition, by referring the examiner back to the Underwriting or Delivery requirements. Single elements no longer get addressed as minutiae, rather the entire guide is incorporated by reference.


A reiteration of HUD/FHA QC Review Area. This shows with some clarity that the scope and scale of "In-Process/Pre-Closing Review" is the same as the Post-Closing Review.



1-19-2 Referrals for Elements Specified in HUD 4000.1


We have located specific elements queried by examiners in the QC Plan for ease of reference.


4000.1 Section
Requirement
Location in QC Plan
A.3.a iv(A)
Sampling Methodology
1-22 QC DEL – Loan Selection Methodology and
1-23 QC DEL - Loan Sampling/Selection Procedure
A.3.a i(A)
Pre-closing reviews
1-20-1 In-Process Quality Control Audit
1-40 QC DEL – In Process Loan Level Quality Control Review Process
A.3.a i(C)
Early Payment Default (EPD) reviews
1-22-2 Early Payment Default

1-19-21 Terminology – Pre-Funding, Pre-Closing and In-Process Reviews


Please note that terminology may vary with all of the variation between industry standards regarding the Pre-Closing, Pre-Funding and In-Process reviews.

The terminology is so close as to cause confusion among lenders and reviewers.

·         Pre-Funding reviews refer to the review of Loan Quality Initiative and similar fraud detection elements conducted on EVERY loan before it closes.
·         Pre-Closing/In-Process reviews refer to the concealed selection of individual loans in process to identify potential fraud within the production process.
·         10% of ALL audited loans should be sampled. Example: If you fund 100 loans, 10 total loans should be audited and 1 should be pre-closing audited.
·         Loans PRE-CLOSING AUDITED do NOT have to be re-audited post-closing and count toward the 10% of ALL LOANS audited.
·         The ONLY DIFFERENCE between the pre-closing and post-closing audit is that the reviewer does NOT HAVE TO WAIT for re-verifications to come in. We still request third party verifications, but we do not have to wait to close the loan.
·         Post-Closing Audit is the full scope audit conducted by lenders and delegated correspondents. 

Unlike Pre-Closing/In-Process Audits, Post-Closing Audits MUST WAIT for Third Party Verifications before completing review.


MortgageManuals.com customers may download the update here.  If your numeration doesn't match the items shown here, you have missed the past updates and need to request a complete update

Tuesday, January 26, 2016

Mortgage Compliance Service Providers Using Scare Tactics



Why do they use Scare Tactics? They get the phone ringing.


But they also  create a lot of unnecessary disruption for companies that are trying to comply. For instance, one e-mail we saw recently, sent from a compliance company, warned Florida mortgage brokers over license suspension issues for non-compliance. As you know, we always try to shed light on issues that confuse participants, and there are some misleading problems with this solicitation. The first one is that the enforcement action WASN'T IN FLORIDA, it was in North Carolina, so Florida brokers can stop worrying about why they weren't aware they needed certain disclosures that don't exist in Florida.

Beyond this misleading alarm, there are other elements to consider.


First, let's just clarify one thing: you have to do something egregious to receive a cease and desist order. In the case of the broker who was the subject of this cautionary tale (whose name was redacted in the marketing piece), the egregious act involved charging borrowers fees which they did not agree to in writing. When a regulator cites you for this type of behavior, if it was unintentional and not systematic,  you can usually negotiate to correct the activity by making restitution for the unearned portion of fees. As we all know, most investors WON'T LET US collect more than we are legally entitled to, so one can conclude that this particular broker didn't have that type of oversight.

Second, in this case the broker surrendered his or her license, rather than deal with compliance. In this case, the broker likely didn't submit or negotiate any required policies and procedures. For regulators, this is standard procedure. If you cite an entity for one element, you cite them for everything that they lacked. Certainly, the lack of a compliance system was not the primary violation.

That said, brokers do need to have a compliance system in place. Regulators generally require policies to cover the elements for which they cited the broker:


  1. Lack of control and supervision over its operations and staff; (a quality control plan should provide supervisory guidelines for staff - part of our broker pack)
  2. Failure to have a written information security plan;  (Information Security is a requirement of FACTA - part of our broker pack)
  3. Failure to have a written Anti-Money Laundering Program and policies and procedures for reporting and maintaining Suspicious Activity Reports; (AML required by FinCEN, is a fraud detection plan - your Quality Control plan doesn't have legs if there isn't a reporting structure - we provide a plug-in)
  4. Good Faith Estimates that did not comport with state and federal laws and regulations pertaining to mortgage lending; (Compliance policies and procedures address how to properly disclose - clearly this action is also pre-10/3, due to the GFE reference)
  5. Improper charging or collecting of third party fees for loan-related goods, products, and services; (A quality control plan should address the completion of a loan agreement, retention of documents and financial audit to avoid these types of findings)
  6. Failure to maintain required records; (you should conduct a Quality Control Compliance audit on each loan you close. This procedure, which is part of Quality Control, identifies documents you must keep and any deficiencies)
  7. Failure to provide required disclosures to borrowers (Your production quality control should include a checklist that identifies all required disclosures - this way you can prove you sent and checked for them, even if the borrower doesn't return a signed copy)

Laundry Lists Don't Help you Identify What's Needed


Regulators and investors often provide lists of specific policies or procedures they want to see. Complying with the laundry list creates a false impression that you have satisfied all concerns when in reality much risk remains in the uncertainty of how your procedure gets implemented. The individual responsibility for compliance starts at the function level; the person who actually does the work. If you map out a person's job duties, and provide a detailed rubric for how it gets completed, you ensure compliance. 

There exists a panoply of policy solutions for mortgage industry participants, but only those which specifically spell out HOW you comply will eliminate the risk of non-compliance.