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Compliance for Mortgage Lenders

Loan Servicing Quality and Compliance Solutions for Mortgage Servicers

Mortgage Electronic Registry System (MERS) Annual Review

Quality Control for Mortgage Lenders

Regulatory Compliance Review for Mortgage Lenders

This final installment in our mortgage servicing series is an article discussing the audit guidance relevant to advance reserves. Our first article discussed ways to prepare your organization for the possibility of increased mortgage defaults, and our second article discussed what happens in the servicing process when a loan becomes delinquent. Article three included applicable accounting guidance for mortgage servicers. For more information on the subject, visit the Mortgage Center of Excellence.
When testing the advance reserve, it is common practice for engagement teams, both external audit and internal audit, to test management’s reserve model as opposed to performing an independent assessment or subsequent activity analysis. It can be difficult or inefficient to independently determine an appropriate reserve given the multiple data points and inputs needed for the advance reserve. Further, given the filing requirements for SEC issuers, performing a subsequent activity analysis generally does not allow for enough time to determine if the advance reserve was adequate. Outlined below are common steps involved in auditing the advance reserve.    Evaluating the company’s methods  When evaluating a company’s methodology for reserving for advances, engagement teams should first consider if the methods used to develop the advance reserve estimate are in conformity with generally accepted accounting principles (GAAP) and appropriate given the engagement team’s understanding of the company and its operating environment. For the advance reserve, auditors should determine if the reserve conforms with the accounting codification that is appropriate based on whether the losses are tied to credit or operating losses (see article three). The determination of the accounting guidance is concurrent with understanding the entity.   Many servicers believe that losses on advances relate to the precision of processing claims, along with the precision of loss mitigation procedures. As such, losses related to credit risk are trivial, and generally fall outside of an Accounting Standards Codification 326 (ASC 326) reserve evaluation. The auditor should confirm the client’s position through their understanding of the entity by reviewing the types of losses experienced, and how these losses align with investor and agency guidelines. If the auditor cannot confirm that losses are related to non-precise or untimely claim operations, or if the auditor discovers contradictory evidence such as losses related to credit exposure, then the auditor should evaluate if the company’s method was appropriate or if further assessment is required.  Testing data used  While all of the steps in testing the advance reserve are important, the procedures performed on “testing the data utilized” – including the completeness and accuracy of the information included in the reserve – is the step that is most often scrutinized. There are several pieces of information that go into an advance reserve:
Identification and evaluation of significant assumptions   The assumptions that most often drive the advance reserve, relate to recoverability verse non-recoverability, historical losses, agency type, and status.
Auditing the advance reserve estimate for mortgage companies involves evaluating methods, testing the completeness and accuracy of data, and assessing key assumptions. By challenging management's assumptions, reviewing historical performance, and considering industry guidelines, auditors can provide valuable assurance on the adequacy of the advance reserve estimate.  This article aims to help you better understand servicing advances from an audit perspective. Companies and interested parties should monitor developments in servicing advances and contact their accountants, consultants and industry specialists prior to taking instruction from this article. Baker Tilly professionals are available to discuss your questions and individual needs through our Mortgage Center of Excellence.  Baker Tilly created the Mortgage Center of Excellence to meet these challenges with an end-to-end suite of solutions designed to help organizations navigate the complexities of the ever-changing residential mortgage landscape. We assist mortgage lenders, banks, credit unions and other financial institutions with dedicated compliance and risk advisory, along with specialized financial services that produce meaningful outcomes.  Our multi-faceted team provides deep mortgage expertise and digital technology exposure necessary to support our clients from all angles – keeping them agile and sustainable in a constantly-evolving environment. Our mortgage specialists can help servicers traverse the ever-changing mortgage landscape. Discuss the state of the industry with our team and how we can help you prepare for the future, today.  
Co-author Matt Petrick, CPA is a senior finance and accounting executive specializing in the financial services industry, with a focus on mortgage and servicing entities. Matt has experience with REITs, financial institutions, business development companies and other funds. The discussions throughout the article should not be implied to represent the position, processes, or procedures of professional affiliations, current or former employers, or employer relationships.  The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.

Auditing the advance reserve estimate for mortgage companies involves evaluating methods, testing the completeness and accuracy of data, and assessing key assumptions.

Financial Services

Banking & Capital Markets 

Compliance+

Regulatory Compliance: Alphabet Soup

Audit guidance for mortgage company auditors

Servicing advances can be recovered through borrower payments and payoffs, loss mitigation procedures, liquidation, and claims. With delinquencies expected to be on the rise, recovering servicing advances could become a greater issue, especially given the intricacies associated with servicing operations. Complicating the recovery effort is determining whether or not the advance is recoverable in accordance with the agency or investor guidelines, or whether it is not recoverable due to operational errors, if they occur. The government (Government National Mortgage Association or “GNMA”), Government-Sponsored Enterprise (Federal National Mortgage Association or “FNMA” and Federal Home Loan Mortgage Corporation or “FHLMC”) and private label investor guidelines dictate which advances are recoverable and not recoverable. 
This article is part of a series of servicing articles that Baker Tilly will be releasing in the coming months. Stay tuned for the next installment featuring accounting and audit guidance relevant to servicers and originators. Register for our upcoming Compliance+ webinar, Preparing your mortgage portfolio for the “What ifs,” taking place on May 17, 2023, from 2 - 3 p.m. ET.  Baker Tilly’s Mortgage Center of Excellence offers assistance with servicing, regulatory compliance, quality control and risk management – all in one place. Our mortgage specialists can help servicers traverse the ever-changing mortgage landscape. Discuss the state of the industry with our team and learn how we can help you prepare for the future, today. 
Co-author Matt Petrick, CPA is a senior finance and accounting executive specializing in the financial services industry, with a focus on mortgage and servicing entities. Matt has experience with REITs, financial institutions, business development companies and other funds. The discussions throughout the article should not be implied to represent the position, processes, or procedures of professional affiliations, current or former employers, or employer relationships.  The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.

This article in mortgage servicing series discussing what happens in the servicing process when a loan becomes delinquent. We review loss mitigation strategies, P&I advancing obligations and much more. 

What happens in the servicing process when a loan becomes delinquent?

Many of the attendees at the recent 2022 Mortgage Bankers Association’s (MBA) annual convention left the three-day convention – featuring a speech from former Speaker of the U.S. House of Representatives Paul Ryan and a performance by Darius Rucker – with mixed feelings. Despite the somber reality of the current state of the mortgage market, there was a palpable underlying optimism for what the future holds. Though many believe we are not yet clear of the difficult climate we are in, calmer days are coming and collectively the industry is heading towards a sense of normalcy once again.  In his economic outlook session on the first day of the convention, MBA’s chief economist Mike Frantantoni made predictions that were not surprising and generally in line with the consensus sentiment from the attendees. The forecast for next year indicates a recession (albeit an expected mild one) and that mortgage origination volumes should decline year-over-year from the anticipated $2.25 trillion in 2022 down to just below $2.0 trillion in 2023. Initial estimates for 2024 show a bit of a rebound back to $2.3 trillion. 
 
The key to how hard of a landing will be seen in some key economic data to be released before the end of the year. The 7.7% consumer price index (CPI) figure released by the U.S. Bureau of Labor Statistics (BLS) on Nov. 10 seemed to indicate that some of the Fed’s aggressive actions over the last several months were starting to show signs of getting things back on the right track. Frantantoni pointed out that in the current economic state, it is more important to read between the lines of some of the statements coming from the Federal Reserve Board of Governors. Some recent statements from them indicate that we’ve done enough and that there may be some concerns about overshooting.     Job market and interest rates  Regarding the job market – the byproduct of slowing job growth and Fed interest rate activity should lead to a rise in unemployment numbers in 2023-24. The mortgage industry has been one of the hardest hit sectors in 2022, and with estimates of 15-25% overcapacity currently based on volumes, there will likely be more layoffs as firms react and adjust. Other sectors are making moves similar to this, and it is anticipated that by the end of 2023, unemployment will be around 5.2% and drop in 2024 to 4.4%.   Interest rate volatility is higher today than it was in 2020, but not as high as it was in the 2008-09 period. The outlook for interest rates is that we’re currently in a spike and that as inflationary pressures cool, rates will cool as well – which could lead to some refinance opportunities in mid-2023 as rates settle around 5.5%. In addition, home equity positions are strong due to rapid price appreciation over the last several years. While the Homeowners Protection Act (HPA) has been cooling – in some markets more rapidly than others – even the expected pull back in 2023 won’t unduly pressure homeowners’ ability to tap home equity in the event of a need.    Inflation trends  While Harry Truman was famous for asking for a one-handed economist, Bill Adams from Comerica gave a presentation at the Texas MBA Mortgage Symposium – and he readily acknowledged that he’s a two-handed macro economist. On one hand, he pointed to the Purchasing Managers Index (PMI) and talked about how in early 2020, the PMI was giving early warning signs that inflationary pressures were already starting to gurgle – long before it was on the radar screen of the BLS. Recent data suggests that we are already on the road to a recovery and that the spending trends have been shifting this year as well – post-pandemic activities are seeing a noticeable shift to spending on entertainment, travel and dining out. On the other hand, he pointed to data that showed that costs for some “sticky services” such as veterinary care, motor vehicle repairs and daycare were still accelerating.    Volatility and profitability  For mortgage originators, the overarching concern is volatility and profitability. Typically, mortgage bankers fare well in the second and third quarters in terms of profitability as those are generally seen as higher origination periods and fixed operational costs are spread out over a larger number of new loans. Since 2008, there have only been four quarterly periods where overall mortgage banking profitability (based on a survey of independent mortgage bankers) has been negative and 2022 marks the first time a negative quarterly profit number showed up in the second quarter. While Q3 numbers are not out (as of this writing), it is also anticipated to be a challenging quarter and may be the first time ever to see two consecutive quarters of negative profit for mortgage banks.   At the convention, MBA’s Marina Walsh discussed such technology concerns as cutting IT costs, managing information security costs, picking the right team, integration efforts and adoption among the user base. Back in 2020, Rick Hill of the MBA estimated that volume decreases would lead to the increased, rapid implementation of enabling technologies as overutilized resources would have the time and the ability to focus on them. The gradual decrease in volumes didn’t materialize and in general, firms were not able to re-prioritize internal resources and important projects were delayed.   While there are several arguments concerning whether a slow deflation of rates would have been better than what we experienced earlier this year with the largest increase in interest rates in 40 years, in reality the lenders had to make quick-fire decisions with the same alacrity as they had to at the onset of the pandemic when we moved to all-remote.   Shift away from reaction mode  From our perspective, now that there is a light at the end of the tunnel in terms of the aforementioned “calmer waters,” we are seeing firms that have been in reaction mode over the course of 2022 start to focus on the elements within their origination shops that they had put on the back burner.   What is generally true is that these organizations now have to do more with less. Operational staffing has been and will continue to be reduced, and systemic issues that weren’t adequately addressed during the last two years of capacity stressing volumes are now coming to the forefront. The lack of internal resources to tackle those issues can prove to be problematic.   This is a great time for strategic conversations with your vendors as you prepare to close the books for 2022 and prepare for 2023. If you are not aware of your vendor’s full suite of offerings, you should be. Oftentimes, a decision to onboard a vendor was single-threaded through one particular service – and having a candid conversation about the goals and objectives for your organization in the coming year could provide multiple benefits.   A vendor in your existing stable may be able to find solutions for issues you weren’t aware they had the means to solve. Vendors are traders of anecdotal best practices and can act as neutral observers,  provide unemotional input for certain business challenges and put the proper perspective on business ideas.    Our time at the MBA Annual Convention was fruitful in many regards. We had conversations with clients and prospects looking forward to the future while being very cognizant of the ongoing struggles we’re collectively facing. We spoke with fellow vendors and shared ideas about what firms are talking about and how we can provide solutions or resources to help. What was almost universally true during our time in Nashville is that while not many people set out with intent on being in the mortgage business, once we get in it, we are dedicated to it and to each other.

This informative article discusses key takeaways from the MBA annual convention which reviewed the job market, interest rates, inflation and much more 

Banking & Capital Markets

Consumer Lending

Reflections on the MBA annual convention

CARLSBAD, Calif. (Nov. 9, 2021) – Leading advisory CPA firm Baker Tilly US, LLP (Baker Tilly) announces its intent to acquire California-based The Compliance Group (TCG), a one-stop-shop for mortgage lenders requiring regulatory compliance and seeking risk management. The combination will be effective Dec. 6, 2021. Financial institutions and independent mortgage bankers continue to shift their focus toward the modern borrower experience, defined by digitization and automation. At the same time, quality control services must keep pace with high demand and evolving compliance requirements. 
TCG’s deep understanding of managing the regulatory and risk obligations for the mortgage industry plus Baker Tilly’s extensive financial services specialized knowledge and solutions — internal audit, cybersecurity, digital transformation, regulatory compliance and financial modeling — creates a combination of skills, knowledge and bench strength to produce powerful outcomes for the financial services industry. TCG’s 110-person remotely located team will join Baker Tilly.
About Baker Tilly US, LLP (bakertilly.com) Baker Tilly US, LLP (Baker Tilly) is a leading advisory CPA firm, providing clients with a genuine coast-to-coast and global advantage in major regions of the U.S. and in many of the world’s leading financial centers – New York, London, San Francisco, Los Angeles and Chicago. Baker Tilly is an independent member of Baker Tilly International, a worldwide network of independent accounting and business advisory firms in 148 territories, with 36,000 professionals and a combined worldwide revenue of $4.0 billion. Visit bakertilly.com or join the conversation on LinkedIn, Facebook and Twitter.  About The Compliance Group (TheComplianceGroup.net) The Compliance Group (TCG) is a service-oriented company supported by unrivaled expertise. The TCG mission, since inception, is to provide quality service to clients while offering cutting edge solutions that resolve the complexities of today’s compliance and credit risk. TCG is passionate about assisting all types of financial institutions within the mortgage industry. Applying decades of state and federal regulatory compliance and risk management experience, niche expertise, and common sense, TCG assists clients in easily navigating evolving regulatory channels by mitigating risk through their Enterprise Risk Management platform.

Leading advisory CPA firm Baker Tilly US, LLP (Baker Tilly) announces its intent to acquire California-based The Compliance Group (TCG), a one-stop-shop for mortgage lenders requiring regulatory compliance and seeking risk management. The combination will be effective Dec. 6, 2021.

Baker Tilly Creates Mortgage Center of Excellence with Acquisition of The Compliance Group

Operationalizing compliance management, quality control and technology

Managing risk associated with mortgage lending, servicing, and financial services requires attention each day, every day, with a strategy to bring together diverse compliance management categories into one compliance platform.

If your current platform is built on policies and procedures, it is a good start, but it likely is not comprehensive enough to satisfy federal regulatory agencies and GSEs.

Baker Tilly’s mortgage compliance team brings together a compliance and readiness platform assessment that can identify the most critical points for mitigating exposure to risk and subsequently provide the guidance and plan to strengthen your business across the entire platform.

Programs, policies, training, monitoring, reporting, corrective action

Policies, procedures, quality control, board oversight

Network security, external threat assessment, access to consumer information, continuity planning

Baker Tilly’s regulatory compliance review assesses:

Ready to learn more? Let’s get started.

Baker Tilly’s mortgage compliance team has built best practice assessments for its platform from other audits and exposure to interpretations from the CFPB. Your team benefits from exceptional insight and experience that will prepare you for your examination and balance your compliance platform.

Preparation and assessment practices from across the industry

With the banking industry (and world) in a state of digital transformation and change, you need a team that can assist in navigating challenges and charting a new course. 

Baker Tilly banking practice leaders collaborate with a wide range of financial services companies on financial statement, internal audit and advisory services.

Faced with changing regulatory requirements, intense technology disruption and an accelerated M&A environment, community banks need specialized financial and operational solutions tailored to their size.

Baker Tilly banking practice leaders work with community banks to help them maintain profitability, comply with changing regulations and grow their institution.

Baker Tilly lending industry professionals collaborate with mortgage, student loan, automotive and other lending organizations to enhance analytics and process governance.

Baker Tilly financial institutions practice leaders work with credit unions to help them enhance member experience, deliver on their mission and grow their institution.

The financial services industry continues to diversify, but competition and more complex vendor relationships make determining business strategy more complicated.

Baker Tilly financial services practice leaders collaborate with a wide range of financial services companies to help move organizations toward the future they envision.

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The industry hub for compliance, risk management, innovation and more

Baker Tilly’s mission through our Mortgage Center of Excellence is to provide quality care to our clients while also staying on the cutting edge of the complexities of compliance and credit risk. 

Mortgage Center of Excellence | Mortgage Compliance & Quality Control Solutions

Michelle Doyle is a principal with Baker Tilly US, LLP.

Jim McCracken is a director of business development with Baker Tilly US, LLP.

Kevin has been serving financial institutions since 2000 with significant emphasis on banking operations.

Janet Twombly is a compliance director with Baker Tilly’s financial services practice.

The key to a successful mortgage enterprise is to establish a proficient compliance and quality control foundation.

Baker Tilly’s mortgage compliance team conducts a review of your policies, procedures, controls, and practices in place to validate compliance with the MERS Membership Agreement requirements, including data standards.

Regulatory Compliance Review for Mortgage Lenders

Audit guidance for mortgage company auditors

What happens in the servicing process when a loan becomes delinquent?

Reflections on the MBA annual convention

Baker Tilly Creates Mortgage Center of Excellence with Acquisition of The Compliance Group

Banking & Capital Markets

Community Banks

Consumer Lending

Credit Unions

Financial Services

Compliance for Mortgage Lenders

Mortgage Electronic Registry System (MERS) Annual Review

Mortgage Center of Excellence

Michelle Doyle

Jim McCracken

Kevin Schalk

Janet Twombly

Operationalizing compliance management, quality control and technology

Baker Tilly’s regulatory compliance review assesses:

Compliance management

Operational controls

Technology management

Preparation and assessment practices from across the industry

Key leaders