Fraud Prevention: A Five-Step Compliance System

If the net branch organization is the rising star of the mortgage industry, then compliance failure is its arch nemesis. We’ve seen a significant growth in the number of net branch organizations over the past several years, but just as these proliferating organizations step in to assist brokers who want to expand their businesses, so lurks the constant undercurrent of compliance failure, waiting to tear them down.

An infrastructure that doesn’t actively strive to achieve and maintain compliance has emerged as a primary saboteur among net branches and other firms, and the casualties can be brutal.

By the time a branch organization finds itself in compliance trouble, it’s probably too late to backpedal. The trick to success in compliance is to lay the proper groundwork upfront. There are five main actions that an organization can take to significantly increase its chances of achieving compliance and help prevent the costly issues that arise from fraudulent loans. If you’re a broker looking to affiliate with a branch organization, conduct research to make sure the branch organization utilizes these controls. Failure to do so could result in additional headaches, not to mention lost commissions should the organization shut down while you’ve got loans in the pipeline.

Conduct Self-Needs Analysis
Each organization should conduct a thorough evaluation of its own needs. Before we started a branch, we sat down and identified where problems could arise. We understood that while you can control a small organization, when you get to dozens and hundreds of branches you’ll need to make adjustments to ensure that compliance is a top priority. We conducted significant analyses to determine that what we needed was lots of eyes on our files. We assessed that we’d need to see the files at the same time that the investor and underwriter is seeing them, and that we’d need to be able to check the files.

In other words, if a medium or large branch organization behaves like it’s a small one, it’s clear that it hasn’t properly conducted a self needs analysis and isn’t taking compliance seriously. Without a thorough analysis, bad loans are going to slip through the cracks. It’s a surefire path to serious problems in the future.

Utilize “Watchdog” LOS Software
It’s imperative that organizations have unlimited access to review each and every loan for which they are ultimately responsible. This can be achieved by utilizing a loan origination system specifically designed to enable corporate access. We chose Encompass, a loan origination system that enables us to see every loan that gets originated, processed and submitted. Our system allows us to see loan details at every stage, so that it’s not left up to the branch location to provide us with the access we need to monitor their activity.

The governing parent organization must have access to each loan in order to have a fighting chance of achieving and maintaining compliance. The easiest way to accommodate this is to utilize a loan origination system which affords ongoing centralized control.

Implement an Auditing System
It goes without saying that loans must be evaluated thoroughly. Depending on the volume of loans that are originated and closed through branch locations, this can be a difficult and time-consuming task. The best way to accomplish this is by initiating a random self-auditing system. We send every tenth file to an outside company that evaluates files. And every day, we look at five random files. Our auditing system is intense. We go so far as to call the seller to make sure that the terms specified in the file are, in fact, what the seller has agreed upon.

An auditing system is going to cost money, but it’s money well spent in the long-term. Buybacks are just too costly and damaging to a company.

Get into Details
Many organizations fall short of success merely because they don’t recognize trigger points when they arise. When looking at a file, it’s very important to get into the details and make sure that the numbers make sense. For instance, stated income needs to make sense. We look really hard at that. We also know industry specifics. For example, this year there were 250 percent more foreclosures in Nevada than last year. If we give people 100 percent, no equity option ARMs, we understand the possibility that if they can no longer afford their payments, they’ll simply go back to renting again. Things are escalating so quickly in the real estate market that everything is overpriced, which means the house is no longer worth the money. If the home goes into foreclosure shortly after sale, the branch has to buy back a home, which is very expensive.

If you’re not looking for trigger points, like no equity in the house or a stated deal when we don’t know what the person really makes, you’re operating in very risky territory.

Hire Qualified Managers
The market has become so competitive that companies are willing to hire inexperienced managers who have never closed a loan and have no knowledge of conducting background checks. While cutting costs on salary, they’re taking a huge gamble on compliance. A smart company will invest in qualified branch managers who understand the business. That person should be well trained, and actively walk the compliance floor, and be prepared and qualified to offer assistance to originators and processors that have compliance questions.

In short, a good branch manager will not only have expertise in responsibility reports and physical inspections, but also proactively pursue compliance. Without a good leader at the helm, the ship will start to sink.

Compliance is Mandatory
I cannot overemphasize the importance of achieving and maintaining compliance. Branch organizations are at particular risk because of the sheer number of their branches. Being scattered widely across the country, these locations often create inherent challenges for the branch organization. Branch organizations need to implement strong controls, both on the local and corporate level.

By conducting a self analysis, utilizing a “watchdog” loan origination system, implementing a self-auditing system, hiring qualified branch managers and getting into the details, a branch organization will be well on its way to keeping compliant and avoiding fraud. It may be more costly initially, but it’ll certainly be well worth the payoff for the long-term growth and profitability of the company.

By Mitch Freifeld