Policy, Procedures, and Examinations - Part I  
Article - Excerpts
The 'Manual Mill'
Focusing on Risk




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March 2013 

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Perhaps the most difficult task of the independent mortgage professional is to obtain and maintain a full set of policies and procedures. Too often, a broker's approach to compiling adequate policy statements is reactive; that is, the demand comes about in order to meet a regulator's expectations or in anticipation of a forthcoming examination.


Many brokers simply make it their business to always be prepared, especially in this highly regulated financial services industry. I have said many times, preparation is protection!

Jonathan Foxx
President and Managing Director 
The 'Manual Mill'

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In this article, the first of a two-part series, I am going to provide a chart of certain core policies and procedures that mortgage brokers should obtain and continually update, as regulations change. I will also provide some useful policy implementation guidance relating to preparing for a state banking examination.

In part two of this series, I will address the central policies and procedures that are needed by mortgage bankers.

Examiners have long since past the point where they're seriously willing to accept as viable a standardized policy from a 'manual mill.' In fact, some examiners keep a list of these one-size-fits-all policies, and they are keenly aware of the stratagem of using an off-the-shelf policy to satisfy a regulatory mandate.

I have a friend who is now a senior regulator with a federal agency. These days, he does not go to field examinations. However, he once told me that, when he previously conducted banking examinations, sometimes he would go from one institution to another and he found the same policies - only the company name had changed on the documents! When he saw that happening, it vexed him sorely, and he would then challenge the institution to prove that it was in fact following the guidelines specifically stated in the policy statements. Needless to say, the results were - to put it mildly - quite a bit mixed.
Focusing on Risk

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Assembling the appropriate policy statements and implementing them is a principal feature to risk management. Our firm deals with such engagements all the time for our clients, and I can vouchsafe that banking departments these days understand fully a focus on mitigating risk. For instance, management's lack of such focus on risk inevitably leads, among other things, to consumer complaints, licensing violations, defective advertising, and disclosure deficiencies. Compliance and loan production are cemented together and the success of both is dependent on the success of each. Therefore, examiners will conduct both a loan level review of loan files and also consider many other aspects of the company's loan flow process.

Consider this example: unlicensed loan activity is a significant challenge to mortgage brokers. An institution's risk management should contain a formal policy and procedure that outlines the requirements for conducting licensed activity. The Examiner always has the edge, because the department is able to reconcile the field examination findings with actual licensable activity, which, by comparing the two, may inevitably uncover unlicensed activity. A "loan processor," who is acting as a loan officer without having obtained a license, is conducting unlicensed activity. Management demonstrates a clear failure to prevent unlicensed activity, when an employee loan officer takes a loan application prior to the licensing date or during a period of time when the license was allowed to expire before renewal. The policy statement associated with licensing, therefore, must state the requirements and boundaries to the company's licensing procedures.

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the United States specializing exclusively in outsourced mortgage compliance and offering a full suite of services in residential mortgage banking for banks and non-banks. We are pioneers in outsourcing solutions for residential mortgage compliance. We offer our clients real-world, practical solutions to mortgage compliance issues, with an emphasis focused on operational assessment and improvement, benchmarking methodologies, Best Practices, regulatory compliance, and mortgage risk management.
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