Running a Loan Shop: Preparation Leads to Performance

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I'm winding down a two week trip to the Mid-West where I've been performing warehouse lender audits. Something that's really stood out to me lately is the correlation between financial performance and the preparations taken before a scheduled audit.

The relationship is really quite simple though. When management prepares well for an audit, their operations tend to report much better financial results than companies that don't prepare. These high performers understand the risks associated with being a mortgage banker and have taken the steps necessary to mitigate those risks by constantly staying ahead. Here are some observations I've noted when auditing unprepared companies:

  • Complaining about the information that is required by the auditor prior the onsite visit
  • Not providing the information required by an auditor
  • Not being truthful during the onsite visit. This includes providing misinformation
  • Not providing accurate financial statement and updated metrics
  • Not providing information requested after the auditors onsite visit
  • Not addressing or explaining issues noted in the written audit report
  • Responding to audit issues with corrective actions, but not implementing them

In my opinion, loan level performance is an indication of management's involvement in the production cycle. Does management understand the risks associated with operating a mortgage bank? Do they understand the ramifications that might follow the announcement of new policies? Have they implement procedures to manage potentially unexpected influences? Areas of risks include credit, compliance, collateral, interest rate,and counterparty.

There are no trees to hide behind. Audits are going to be a part of every mortgage banker's routine in the not-so-distant future. Audits will be required by HUD, the GSEs, warehouse lenders, secondary market investors as well as state regulators. Some will focus on loan level issues; others will focus on management strategy.

Operating your lending shop in a safe and sound manner means putting processes in place to manage risk and ensure compliance with the guidelines of loan investors, the covenants of warehouse lenders, and the regulations of state and federal agencies.   Preparing  for an audit and addressing the deficiencies discovered in that audit will give operators a leg up when it comes to better managing risks.  Better financial results will surely follow.