By Luana Slettedahl, Principal at BlackFin Group
Welcome to the second in a series of articles designed to help home lending CEO’s work more effectively with the GSE’s (Government Sponsored Enterprises) – Fannie Mae and Freddie Mac. Today’s article provides key insights to preparing your firm for applying to Fannie Mae or Freddie Mac for Seller/Servicer Approval.
As I prepared this article, I quickly recalled early in my career when the CEO of my firm purchased every employee a simple plexiglass house with the words on it “Glass House.” This occurred while the mortgage company was under tremendous pressure to be exceedingly successful in managing a significant increase in loan production. In effect he highlighted that it’s always easier to ‘complain’ about what was not working than to ‘analyze’ broken processes between departments and make sound recommendations to help solve those issues. Sending a clear message to remember that we live in a “Glass House” before thinking to throw a stone.
So, let’s talk about how the ‘Glass House Effect’ (GHE) is a resulting phenomenon brought on by an awareness that one is now subject to ubiquitous surveillance when applying for seller servicer approval with the GSE’s. In the end, this best describes how the GSE’s will be looking at your firms Corporate Governance. In other words, is your “House” finely tuned, working in an orderly fashion with total transparency among departments? Taking it one step further, the ability to demonstrate your controls and governance is of mission critical importance to gaining approval.
A leadership team who has a knowledge base, appreciation for various controls and holds each other accountable to meet GSE standards should be the very foundation for Corporate Governance. Corporate Governance also looks for current, and tested Policies and Procedures, Risk Management, Change Management, Internal Audit Processes, Business Continuity, and eliminates the potential for conflicts of interest. Yes, that’s a lot to think about, so let’s dive into this more.
Policies and Procedure? Ask, does your firm have written, tested, and current Policies and Procedures? Offering the GSE’s “cookie cutter” bought off the shelf Policies and Procedures is not the direction I would recommend. The documents must reflect how your firm manages its own Policy and Procedures and must be in your words – telling your story.
A Policy statement should cover the “what”, including areas of responsibility for management and reporting. Policy documents are solid, define the topic, show leadership responsibility, reporting and oversight. They are not loosely written and should also show methods in which controls are in place. An example would be an Underwriting Policy Statement that outlines the standards for underwriting, levels of responsibility, reporting processes, Guide references, and escalation methods, i.e., second look process and denied loan processes.
A Policy document is different than the Procedures, as the Procedure document is more detailed and outlines the “how” of getting the “what” accomplished. The Procedure document is where the control process for a workflow begins. Procedure documents should encompass the actions that are done by an employee(s) to get to the result of what they are being asked to accomplish in their job. These documents would also demonstrate granular controls in the activities that reside – such as a control that would conduct an OFAC check on a borrower prior to generating a loan approval.
Procedure documents also provide overarching controls that insulate your business from the risk of an employee safekeeping their knowledge and basically holding the firm hostage with that knowledge in the event they were to leave the company. Sounds like an unfortunate way to think – right? However, how many times have each of us been in a work environment when someone left the company, and the result was a mad dash to figure out what they did? The subsequent impact and risk to the firm could have been avoided.
And lastly, as a matter of Corporate Governance – there should be an overarching area within your firm that assures Policy and Procedure documents are updated and tested on the very least once a year.
Risk Management and Change Management. I have chosen to speak about these two areas together, as when there is not a standard process to implement change within your organization this gap increases the risk to the organization in making sure all the business processes meet any investor or GSE standard that exists within the mortgage lending model.
The best process that I experienced in this area was when the firm had a formal Change Management Committee. Areas impacted included compliance with GSE Guide Announcements, Ginnie Mae APM notices, technology enhancements, and loan program changes. The linkage that existed within this working group spanned Regulatory Compliance, Technology, Legal, Loan Production, Operations, Loan Servicing, Finance and Capital Markets. Everyone in the room was held accountable for understanding the “change” and coming back to the table with any concerns about the “change” would have on their area of responsibility. Beyond the “change” part of the discussion and implementation, it provided a forum to identify potential risk to the business, changes to workflows (including policies and procedures), employee training, and ongoing evaluation regarding kinks in the system that surfaced as the result of the “change.” The process in and of itself demonstrated the firm was cognizant of Change Management and Risk Management.
Internal Audit. If you have a culture that thinks of Internal Audit as the “bad guy” this is the first red flag to address. I will co-mingle my comments here to include in this discussion Quality Control and Compliance. The individuals in these roles should be familiar with and adept in understanding what the GSE requirements are. This is not limited to loan origination as this discussion goes beyond the life of loan cycle. The internal stakeholders who manage this process, are in fact your firm’s best advocate to make effective change that trains and motivates leadership and staff to recognize those empowered in these roles are in fact working to allow “you” to do better!
Internal Audit should conduct periodic audits of departments to meet investor (including GSE) requirements, test Policies and Procedures, and be independent of the areas it is auditing. It is important to also identify potential conflicts of interest, an area that is addressed by the GSE’s. An example would be if the Quality Control Department reports to the Loan Production Manager. This would be a GSE gap as one would ask how can the Quality Control Department not have a conflict of interest when this area would report to Loan Production?
In closing, the intent of this article in our series is to prompt you to ask various questions. Getting approved to do business with either Fannie Mae and Freddie Mac is not as simple as filling out an application …
Stay tuned for my next article to continue the discussion and provide key insights for working directly with the GSE’s, Fannie Mae and Freddie Mac.
Luana Slettedahl is a Principal Consultant with BlackFin Group in the Mortgage Strategy Practice. Luana brings forty years of diversified experience in Capital Markets, Mortgage Servicing Rights, GSE and Ginnie Mae relationship management and Seller / Servicer requirements. Her understanding of how to successfully do business with the GSE’s and Ginnie Mae, has made her a significant asset to her clients. For more information contact info@blackfin-group.com