For centuries, the mortgage lending industry has been plagued with fraud and misrepresentation.  With the age of technology, fraudsters were getting even more creative.  Subprime guidelines were designed to make loans for difficult to document borrowers, yet the programs themselves left openings for fraud scams.  Consumers were placed in properties or put in a position they could not handle.

Due to the abuse of the market’s guidelines and the massive number of consumer foreclosures, Brokers will have to accept the responsibility and scrutiny that will be placed in their laps by today’s funding lenders and regulators.  Lessons have been learned, and lenders have changed their broker agreements and quality control checks to avoid future bad investments. 

In history, anytime the consumer is negatively affected to the extent we have witnessed over the last two years the government will come in and regulate the offenders.  The state and federal legislatures are drafting bills to attempt to protect the consumer.  One common theme to the legislation is licensing, education requirements, and accountability.

To handle the changes in the industry, mortgage office structures may need to change, and yes get ‘back to basics’.  The ‘landlord’ days of mortgage brokering are over, as the liability will require managers and Brokers to put in proper ‘checks and balances’.  They will properly oversee all aspects of originations and employee ethics.  Management’s enforcement of the office’s policies and procedures will set the pace for their entire office staff. 

CHECKS AND BALANCES
What can a Manager do to survive the regulatory and lender scrutiny that will be coming over the next few years?   

• Structure the office to encourage federal and state compliance.
• Set definite expectation for employees, with consequences for non-performance.
• Ensure employees have a proper education and the level of knowledge required for their jobs.

OFFICE STRUCTURE TO DETER FRAUD

Sales and Support - Brokers should structure their office to deter fraudster rather than breed them with lacks compliance and no procedures in place to identify problems.  Sales and operations need to be separated for proper checks and balances.  Commission based employees should not be tempted to commit fraud by allowing them to process their own loan files.  Processing is a salaried operations position.  Processors are there to support and enforce compliance.  If someone is checking their work, the commissioned sales staff is less tempted to risk their job and license to do fraud. 

It also frees up your sales staff to produce more originations by prospecting for leads.  The loan originator and processing positions are two full time jobs.  When someone is doing both jobs, they will be less productive as their time will be spent getting the loans approved and closed rather than prospecting for the next loan.  This causes productions to come in waves rather than a smooth flow of business. 

The Broker is the person who signs the Broker Agreement, and is the one who is responsible for all files that are submitted to the lender.  It is the Broker that will buy back the loan from the funding lender if problems are discovered.  It is then the Broker who decides who they trust to send files from their office to their wholesale lenders.
Experienced Processors may assist in the training of the Loan Originator with what the lenders want for documentation.  With no Processor, there is no one to check the files prior to submitting to the lender. 

Most experienced Processors can effectively process 60-80 files.  Generally, over that amount the Processor will need an assistant to help with the follow-up, or a Closer to handle the loan funding.  This will keep the files moving and not dying in the drawer.  When a Processor is too busy, the old saying stands – ‘the squeaky wheel gets the grease’.  If no one is calling on the file, it will be forgotten. 

As it was done in the past, Processors should be paid a salary with only a small bonus for closed loans.  The Processors’ dependence for the bulk of their income on closed loans often breeds tolerance for fraud rather than compliance.

Contract processing can be useful for busy boom months to efficiently control the flow.  Using contract processing may allow you to avoid layoffs when the market dips.  Since the Broker has to rely on the Contract Processor to identify problems or discrepancies in the files, the agreement to process should be with the company and not the Loan Originator.  Again, someone with their income dependent upon the loan closing will be less willing to disclose issues.  If the Contract Processor knows they will not get future business from your office if fraud or problems are not brought to your attention, they may not turn a blind eye to discrepancies.

Management - Production will determine the layers of management to have an efficient office.  Managers should be able to estimate the production and staff their office efficiently.  Production drives the business making the sales staff productivity essential. 

Sales Managers - are good to help support and monitor a larger sales force.  They can review the company’s advertisements and marketing materials for compliance.  Oversee new hires and train the sales staff on office procedures and effective sales techniques they learned from their own experiences.  If required by the State, they can ensure the Loan Originator’s license is current. 

Sales Managers can identify areas of weakness in the sales staff.  Then recommend educational courses or bring in trainers to improve sales production.  Most importantly, the sales managers set expectations and motivate the sales staff.  Many people are self-motivated, but when goals are set the sales person is more apt to meet these expectations.  It also allows the Broker to depend more on the office production to support the office expenses.  If you expect nothing and do nothing to motivate your sales staff, they generally will meet your low expectations. 

With the liability the Broker has for every person on their staff, non-producers are an un-needed responsibility.  When people get hungry ethics may be set aside for survival.  When the employee believes the consequences of their actions do not out-weigh the risk, they become your weak link or crack in your office defenses.  Fraud does not always come from internal sources, but external sources such as unethical real estate agents and/or borrowers who are looking for a weak link to commit their crime.

Operations Managers - oversee the processors, receptionist, closer, and any other support staff.  They should ensure the office runs smoothly, handle conflicts between support and sales staff, handle the daily operations, and set up educational training where needed for support staff.

When someone handles the daily operations, it leaves the Broker free to handle the upper management issues along with production and advertising.  Too often managers get bogged down in the daily operations of the office which can cause an office to become stagnant or decrease production.  Not many offices can survive without promotions, advertising, and marketing.  Someone in your office has to have sales production goals as their primary focus to ensure future success of the operations.

For larger offices, upper management needs to be focused on the future of the company rather than the daily or monthly operations.  The Broker is responsible to oversee the Operations Manager and Sales Manager limiting the interruptions to their day.  In many offices the Broker is the Sales Manager as that is generally their background.  The amount of layers of management will depend on the office size and production.  The Broker is then able to handle compliance, wholesale lenders, and state paperwork.  They can work with the CPA or bookkeeper to monitor the prosperity of the office. 

The Broker needs to plan on the company’s growth and how large to make their office.  An efficient productive office doesn’t have to be big.  The Broker does need to decide what they want to manage and how much production is their goal.  How many sales people and support people do they need?  Determine when to use contract employees or hire employees.  It’s nice to have the time and confidence in your office staff to enjoy a golf game or vacation once in a while.

Closer - One of the most important aspects of the mortgage cycle is the closing.  A Closer or Funder in large offices allows the Processors to handle a larger load of files, and places additional checks and balances in an office.   Once loan docs are ordered, the file is passed off to the Closer.  As a specialized area of responsibility, a Closer may increase your closing ratios since many problems can happen at closing. 

A Closer can be proactive to ensure the borrowers knows when and where to be at the closing.  They can get the Loan Originator’s calendar to coordinate with the Closing Agent and the borrower when the Loan Originator can attend the closing.  This is an important step in the mortgage cycle and the Loan Originator should be present.  They can ensure the borrower understands the terms of the loan, which document is the first payment letter, and when their first payment is due.  Most importantly, the Loan Originator may obtain the referrals they should have asked for at the beginning of the process.  Closing is the time to collect on the borrower’s support and obtain those referrals to keep their business thriving.

The Closer will review with the borrower what information they are required to bring to closing, and the expectations for the closing are explained to the borrower.  If any issues are apparent, the Closer can notify the Loan Originator or Sales Manager who can work with the borrower to explain or reinforce the transaction.  This keeps buyer remorse, confusion, and stress to a minimum.

The Closer reviews the file to make sure all lender requirements are met and no fraud is evident, purges the file, obtains the needed forms from the Closing Agent, and stacks the file for state compliance audits.  Having a Closer is an asset for large offices, and wholesaler lenders appreciate having someone experienced handle the closing.  It makes the closing smoother and less complicated as the title representative and wholesale lender know who to talk to in your office to get the loan funded.  The Closer also makes sure the Broker’s check is received for the accurate amount, and reduces audit problems.

Another aspect of a Closer is handling borrower exit surveys.  Surveys are a wonderful management tool which can identify internal problems.  Exactly how was the borrower’s experience with your office?  This information allows management to determine the need for additional staff, gives them valuable information for employee reviews, and identifies weak areas of the process.  It may also allow management to identify borrower fraud when surveys are returned or completed inaccurately.

Receptionist - This seems like a ‘no brainer’ yet often is overlooked in its importance.  This person will handle all the calls and people coming into your office.  Do not under estimate the importance of first impressions.  The receptionist should be knowledgeable in the processing flow, and who to direct calls to properly. 

In this day of technology, many companies have opted to use computer answering services.  Although this is convenient from a management perspective, it is not convenient from the borrower’s perspective.  Having a live person answer and direct the calls is much less stressful, and inviting to the public.  Often the options with the automatic answering systems give choices that do not meet the borrower’s needs or the borrower does not remember or know how to spell the person’s name.  These systems are not recommended in such a hands-on personal business as the mortgage business.  If they wanted this type of impersonal service they would have made application on-line.

Smaller Offices - Small offices will not have the luxury of such a division of labor.  There is nothing wrong with a small operation, as it’s definitely less stressful.   Having a small office is not an excuse to put sales production staff in charge of operations.  Contract processing is available, and can give you similar ‘checks and balances’ when the Contract Processor is contracted with the Broker.  The Contract Processor needs to know who to report problems to, and the expectations to remain an approved service for the company. 

When possible, offer to pay them for all files submitted whether the file closes or not.  Pay a nominal fee which takes the pressure off not to ignore compliance or fraud issues.  The Loan Originator can cover this fee from their income which may encourage them to properly qualify and structure their loan files before submitting to processing.  Increasing the Loan Originator’s closing ratios in the process. 

If you do not want to pay a Contract Processor for unclosed loans, review the files from the Loan Originators yourself prior to submitting to processing.  The Broker will need to check the Contract Processor’s references and state regulatory agency notices to ensure the processor’s reputation represents the standards of the company. 

An Office Manager can be helpful to oversee office issues, order supplies, office equipment maintenance, answer phones, and the most important functions of closing.  If the office has no Office Manager, the Broker may consider handling the closings themselves or give the responsibility to someone on their staff to handle the closings.

With small offices it is important to not have your processor, receptionist, or opener leave borrower personal information on the office’s front desk.  This is a violation of the Privacy Act and Gramm-Leach-Bliley Act of 1999.  The borrower’s personal financial information must be kept private, and locked up after hours.  What impression are you giving the borrower’s coming in your front door, when they can read other people’s private information off the desk or computer screen?  If your Receptionist is the Opener or your Processor is the Receptionist, have some type of privacy barrier to block the visitor’s view of the work they are performing. 

Employee Expectations - Much like children, employees should have structure in their work environment with expectations for performance.  How much production is acceptable?  What is the company’s mission statement?  Is gossip tolerated?  Do you allow employees to steal office supplies?  Is it OK to do fraud if it benefits the borrower?  Is it acceptable to not show up for work and not call in?  What is acceptable attire – shorts and flip flops or suit and tie?  The office atmosphere and tolerances will encourage production or mayhem.

These issues and many others need to be lined out in a policies and procedures statement.  When employees do not know how to behave, they may not behave within the expectations you have set for yourself as the Broker or your office.  How can you measure an employee’s behavior if they do not know what is expected?  Will staff employees have evaluations to determine their annual increases?  If no opportunity for an increase in pay, what is their incentive to keep office production moving?  How do you motivate your employees to follow the policies and procedures?    

Advertising is expensive and important in the mortgage business.  More so now than in the past as the market has shrunk, and many of the borrower’s previous contacts may no longer be available.  They will be looking for a mortgage company that they trust will meet their needs.  My suggestion is joint office marketing campaigns.  Have all the Loan Originators pool their resources along with management to build recognition.  Then the Loan Originators can take turns on ‘floor duty’ answering the incoming calls from the advertisements.  This will help build teamwork with a policy to identify if the caller was previously working with someone else in the office.  Then they can forward the call when appropriate or approach the prospect for a prequalification.  Joint advertising is also easier for the management to oversee to ensure state and federal compliance of the ads.

Within the policies and procedures, a zero tolerance policy for fraud and definite expectation for employees should be outlined and reviewed with each employee.  Properly educated employees are important to keep the office in compliance, and give the best service to the consumers.  This in turn gives the Broker a good reputation in the community.

Whistle blowers should be encouraged, but take caution with this approach.  Complaints need to be valid and not gossip laced.  The whistle blower should be praised when fraud or misrepresentation is brought to management’s attention.  Often this has been a weak area in the mortgage industry as employees feared for their job if they complained or didn’t know exactly who to take the issue to.  There should be clear procedures for how to handle fraud or misrepresentation issues, and encourage disclosure for the good of the entire company.  Many Broker offices may still have been open and able to survive the last eighteen months, had they had this type of ‘whistle blower’ policy in place.   

Education is the Key to Success - The push in 2008 will be education.  Already 40 states have adopted a commitment for requiring mortgage lending continuing education.  Mortgage Loan Originators have neglected being properly educated over the last decade, and the government will now step in and most likely make education mandatory for all mortgage loan originators. 

There are many training sources available for managers to educate their staff.  On-demand internet training, live training in your area, industry conventions, informative seminars, and in-house training opportunities may all be available to train your staff.  Mortgage Trainers of North America is a reliable source for employee training at www.mtgtna.com.

The Broker needs to ensure their employees have proper education and the level of knowledge required to be a Loan Originator.  When a Loan Originator does not know how to properly structure a file, education is a must.  After they learn the Loan Originator will understand how education has made them more effective in identifying a viable borrower.  It should also increase their production and income, or the mortgage industry may not be the business for them.   

Loan Originators that have too low a closing ratios waste everyone’s time.  They need to have additional education to learn the lending guidelines, and understand how to structure files.  Education and training will improve their weak areas.  They should have goals of more than 50% closing ratios (full applications taken compared to funded files).  Often part-time Loan Originators need the most education and structure.

That’s not to say hiring part-time Loan Originators is not good, but part-timers have even more distractions.  Expectations have to be set on how much time they are required to invest.  Part-timers need to have follow-up, training, and hand-holding.  This should not be placed on the Processor to handle as office production will suffer from this distraction.  If you expect nothing from part-time employees, then you’ll get nothing.  Have a set training regiment of classes they are required to complete, time frames set, and production requirements.  Have them sign a commitment or contract of employment – they agree to put out an effort.  This is not an easy business to learn, but an excellent opportunity to make a high income for the right motivated person.

With proper checks and balances in place, management can better oversee their operations and ensure they will be viable in the future as the market continues to change and shift in the wake of the coming scrutiny.  Taking a proactive approach to their office and earning the publics trust will be essential for growth.  Lenders and regulators will be looking for properly structured offices that promote compliance and look to prevent fraud.  There are many reputable Loan Originators and Brokers that will also benefit from a sound structure and joint team efforts to build their business.  After all, the mortgage business is a profession that affects people’s lives and full-fills the ‘American Dream’ of homeownership for thousands.  This is a great industry and very self-gratifying to be able to assist in this important factor of our economy, and be paid well in the process.

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