Chairman & Managing Director
Many clients have credit risk management committees, sometimes referred to as loan committees, lending committees, or credit committees. Let’s just call them “credit committees” or, for the purposes of this article, “Committees.” For small mortgage lenders, the Committees wind up consisting of the owner and perhaps a second company official. Howsoever this internal entity is configured, it is very important to ensure continuity between the origination process flow and, where possible, the interaction with a loan committee that sets policy standards and, as needed, makes decisions on whether to approve a risky loan transaction.
When we are retained by a client to review its departments and functions, for instance to conduct an internal audit or a GSE readiness audit – one of the factors we consider is the lending function itself. This activity is in fact actually distributed over many departments. But the loan flow process must come under a set of review criteria which, when challenged, often requires resolution by a committee constituted to manage the loan transaction’s risk.
First and foremost, it is important to emphasize that an institution’s quality control, compliance, and audit procedures should focus on mortgage lending activities that pose high risk. Controls to monitor compliance with underwriting standards and exceptions to those standards are especially important.
To break this down further, the quality control function should regularly review a sample of loans from all origination channels. A representative sample of underwriters should be subject to quality control auditing in order to confirm that policies are being followed. When control systems or operating practices are found deficient, business-line managers should be held accountable for correcting deficiencies in a timely manner. This means, in effect, that the deficiency should be identified, mitigated through system and training solutions, monitored, and periodically tested.
Since some loans permit a borrower to defer principal and, in some cases, interest payments for extended periods, institutions should have strong controls over accruals, customer service and collections. Servicing must be an intrinsic part of the loan committee’s considerations. The exceptions made by servicing and collections personnel should be carefully monitored to confirm that practices such as re-aging, payment deferrals, and loan modifications are not inadvertently increasing risk. One suggestion would be to have servicing and collection personnel involved in the Committee. At the very least, servicing should be informed of credit decisions that affect its purview. Customer service and collections personnel should receive product-specific training on the features and potential customer issues with these products.