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?

 

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. 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. 

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 the date received and the 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.

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.

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.

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

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.