TheMReport — News and strategies for the evolving mortgage marketplace.
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20 | Th e M Rep o RT Feature Most lenders by now have de- veloped some level of the required CMS. However, it's not enough to have a written CMS, the policies and procedures must be in place to ensure compliance, and all employees must be trained and knowledgeable of the plan and how it works. The CMS must ensure loan quality and comply with the law, CFPB requirements, as well as Fannie, Freddie, FHA, and VA guidelines. The benefits are self-evident. By doing things the right way and establishing a culture that measures and monitors how well the directions for loan disclo- sures, requirements, reviews, approvals, and auditing are being followed, a better product will be manufactured and the defects and problems which cost money will be avoided. Reducing the defects decreases the costs to originate a loan which in turn will increase profits. Simple, all that is needed is a well-trained sales and operational staff, decent competitively priced loan products, a functioning compli- ance management system, and a company-directed compliance culture. There are no guarantees, but with these elements in place there is a much higher likelihood of success and increasing profits. Face Increasing Scrutiny with Confidence T he GSEs and now FHA have put increased emphasis on reducing loan defects. Their studies have shown that lenders can reduce their loan defects dramatically by incorporating into their process a uniform sys- tem of pre-closing loan reviews. So much so that the pre-closing reviews are mandated. The level and number of reviews is not dictated at this point, but a selection must take into account the lender's assessment of the risks inherent in its origination processes, business sources (e.g. third-party originators), volume, and product mix. The review process must target areas identi- fied as having a higher potential for errors, misrepresentations, and/or fraud. Therefore, a process and system to identify such loans is required. The lender must then review their selection process periodi- cally to ensure that their sample selection process, including the size, is appropriate to identify potential risks and reduce defects. Although the GSEs do not require nor recommend a number of pre-closing audits be per- formed at this point, it is believed that a prudent lender would do some level of review on all loans coming up for closing. It is better to be safe than sorry. To be successful, a lender must have the required com- pliance management system, a company-wide compliance culture, and a quality-control model with the capability to scale efficiently and provide the monitoring of a loan's quality and compliance throughout its life cycle from beginning to end. The quality control system should be complete with: • Reporting to aid in the detection and correction of loan level defects while also providing trend analysis to aid in long-term risk management and defect mitigation; • The ability for the intelli- gent extraction of important dates and data from source documents like disclosures and security instruments to ensure compliance, identify errors, and avoid costly mistakes; • An automated process to streamline the operation to eliminate the manual time-inten- sive stare and compare process of loan reviews and audits; • The capability to quickly identify defects, track tends, and patterns and perform root-cause analysis needed to improve loan quality and pro- vide information to proactively manage risk; • Loan management and compli- ance systems that provide for timely, accurate, loan-level pre- and post-closing audits in com- pliance with all federal laws, as well as secondary market requirements with detailed re- porting of the results for senior management. A system supported by tech- nology allows lenders to increase productivity by streamlining the process, resulting in more loans handled per person per day. The process should also be ongoing as the loan moves through the origi- nation process and throughout the loan's lifecycle. By identifying problems which can be corrected before loans close, suspense ratios and repurchase requests are posi- tively impacted. Timely reporting enables lenders to act quickly, correct defects and identify issues that might otherwise impact other loans in the pipeline. Staff becomes more productive with the automation of routine tasks, handling more loans with fewer people. Historical audit data can be further analyzed to identify trends and patterns, surfacing the root causes of defects so they can be addressed quickly. The net effect is improvement in overall loan quality and minimization of the expenses associated with defects. Remember, detect and correct early and often to reduce defects and increase profits! Mike Vitali, is SVP and Chief Compliance Officer for LoanLogics, has extensive mortgage industry experience, which includes EVP/Chief Risk Officer for a major national lender. processes, procedures, and loans should be reviewed on a regular basis to ensure that for each loan originated the proper steps are taken to ensure information and disclosures are being provided when required and systems are in place to actively identify potential problems so that timely corrective action can be taken.