Risky Business

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cover story Once they understand the new requirements—and the potential financial, litigation, and business interruption cost of noncompliance—more lenders will actively re-engineer how they operate, Meyer explains. Furthermore, he says, the availability of prefunding systems and technology for early detection of problems, the required coordination of settlement service providers and information, the timing of new disclosures, and the necessity for quick response to mitigate risk strongly motivate lenders to rethink their origination process. that approach occasionally creates is worth it since Carrington has experienced virtually no nonperforming loans, he says. Along those lines, Sharga emphasizes that Carrington created the compliance department not due to any problems it was experiencing with its lending program, but because of the havoc stemming from the overheated market a number of years ago. "Frankly, our investment group had put a lot of money into portfolios of subprime loans, so we saw firsthand many of the problems with loans and lending practices during the real estate boom," Sharga explained. "When we decided to enter the origination business, we were determined not to make the same mistakes the lenders of that era made. In our case, it was really more an issue of problem prevention than fixing an existing problem." Tides of Change M eantime, Avi Naider, CEO of ACES Risk Management Corp., noted that "in just the past few years, we've observed a sea change in the way quality control analytics are being used by lenders—from origination through securitization." Previously, analytics and trends were analyzed ex post facto—long after the origination of a loan, Naider notes. Today, however, process defects and trends are being identified in real time and communicated back to those responsible for such defects, such as brokers and underwriters, "with lightning speed," he added. That rapid reaction time partially stems from process improvements, such as a focus on prefunding quality control and analytics, driven by the GSE LQI initiatives: loans and parts of the origination process that are problematic can be identified before the loan closes, Naider explains. Successful analytical strategies take into account not only relevant market data, like recent sales and listings, but the everevolving landscape of regulatory compliance and data standards as well, said Alex Villacorta, director of research and analytics at Clear Capital. Providing automated rules and quality checks at the point of origination smooths out the path of a loan headed toward securitization, he adds. 24 | The M Report High Costs for Compliance N Following origination, consistent and relevant surveillance of both the collateral and credit are key to ensuring changes in the risk profile are accurately managed, Villacorta notes. For its part, Carrington Mortgage Services maintains a full-time department responsible for overseeing compliance, says Rick Sharga, EVP of the special servicer. The department functions apart from the company's lending group, consequently ensuring that quality matters are reviewed by an "outside set of eyes," Sharga said. "Fraud prevention is one of our primary focuses and part of our standard procedure." Further driving home that point, Carrington also uses an automated fraud identification tool, provided by an outside vendor, which scans applications against various fraud databases. Additionally, Carrington conducts manual reviews of applications against its own internal list of possible fraud "flags," he said. In fact, the firm addresses quality compliance so aggressively that there's sometimes friction between its origination and compliance groups, Sharga notes. But whatever disharmony ow, perhaps not surprisingly, the process is relatively expensive to execute, particularly to the degree at which Carrington operates its business. The company has about 2,500 employees across its various business units, but only a few hundred are in the lending operation, Sharga says. However, "if it improves the performance of your loan portfolios, you figure you'll be better off in the long run," he pointed out. In fact, fueled by some of the more challenging regulatory requirements and more complicated regulations now facing the industry, it's likely that many companies will follow Carrington's lead, Sharga says. On another front, Duncan doesn't believe lenders hold the majority of data solutions required to secure an upper hand in the marketplace. "Data's a small piece of the overall evaluation for growth initiatives, while collective information is the center of gravity in terms of gaining advantages in the market," he said.

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