This final installment in our mortgage servicing series is an article discussing the audit guidance relevant to advance reserves. Our first article discussed ways to prepare your organization for the possibility of increased mortgage defaults, and our second article discussed what happens in the servicing process when a loan becomes delinquent. Article three included applicable accounting guidance for mortgage servicers. For more information on the subject, visit the Mortgage Center of Excellence.
When testing the advance reserve, it is common practice for engagement teams, both external audit and internal audit, to test management’s reserve model as opposed to performing an independent assessment or subsequent activity analysis. It can be difficult or inefficient to independently determine an appropriate reserve given the multiple data points and inputs needed for the advance reserve. Further, given the filing requirements for SEC issuers, performing a subsequent activity analysis generally does not allow for enough time to determine if the advance reserve was adequate. Outlined below are common steps involved in auditing the advance reserve.    Evaluating the company’s methods  When evaluating a company’s methodology for reserving for advances, engagement teams should first consider if the methods used to develop the advance reserve estimate are in conformity with generally accepted accounting principles (GAAP) and appropriate given the engagement team’s understanding of the company and its operating environment. For the advance reserve, auditors should determine if the reserve conforms with the accounting codification that is appropriate based on whether the losses are tied to credit or operating losses (see article three). The determination of the accounting guidance is concurrent with understanding the entity.   Many servicers believe that losses on advances relate to the precision of processing claims, along with the precision of loss mitigation procedures. As such, losses related to credit risk are trivial, and generally fall outside of an Accounting Standards Codification 326 (ASC 326) reserve evaluation. The auditor should confirm the client’s position through their understanding of the entity by reviewing the types of losses experienced, and how these losses align with investor and agency guidelines. If the auditor cannot confirm that losses are related to non-precise or untimely claim operations, or if the auditor discovers contradictory evidence such as losses related to credit exposure, then the auditor should evaluate if the company’s method was appropriate or if further assessment is required.  Testing data used  While all of the steps in testing the advance reserve are important, the procedures performed on “testing the data utilized” – including the completeness and accuracy of the information included in the reserve – is the step that is most often scrutinized. There are several pieces of information that go into an advance reserve:
Identification and evaluation of significant assumptions   The assumptions that most often drive the advance reserve, relate to recoverability verse non-recoverability, historical losses, agency type, and status.
Auditing the advance reserve estimate for mortgage companies involves evaluating methods, testing the completeness and accuracy of data, and assessing key assumptions. By challenging management's assumptions, reviewing historical performance, and considering industry guidelines, auditors can provide valuable assurance on the adequacy of the advance reserve estimate.  This article aims to help you better understand servicing advances from an audit perspective. Companies and interested parties should monitor developments in servicing advances and contact their accountants, consultants and industry specialists prior to taking instruction from this article. Baker Tilly professionals are available to discuss your questions and individual needs through our Mortgage Center of Excellence.  Baker Tilly created the Mortgage Center of Excellence to meet these challenges with an end-to-end suite of solutions designed to help organizations navigate the complexities of the ever-changing residential mortgage landscape. We assist mortgage lenders, banks, credit unions and other financial institutions with dedicated compliance and risk advisory, along with specialized financial services that produce meaningful outcomes.  Our multi-faceted team provides deep mortgage expertise and digital technology exposure necessary to support our clients from all angles – keeping them agile and sustainable in a constantly-evolving environment. Our mortgage specialists can help servicers traverse the ever-changing mortgage landscape. Discuss the state of the industry with our team and how we can help you prepare for the future, today.  
Co-author Matt Petrick, CPA is a senior finance and accounting executive specializing in the financial services industry, with a focus on mortgage and servicing entities. Matt has experience with REITs, financial institutions, business development companies and other funds. The discussions throughout the article should not be implied to represent the position, processes, or procedures of professional affiliations, current or former employers, or employer relationships.  The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.

Auditing the advance reserve estimate for mortgage companies involves evaluating methods, testing the completeness and accuracy of data, and assessing key assumptions.

Financial Services

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Regulatory Compliance: Alphabet Soup

Regulatory Compliance Review for Mortgage Lenders

Audit guidance for mortgage company auditors

Servicing advances can be recovered through borrower payments and payoffs, loss mitigation procedures, liquidation, and claims. With delinquencies expected to be on the rise, recovering servicing advances could become a greater issue, especially given the intricacies associated with servicing operations. Complicating the recovery effort is determining whether or not the advance is recoverable in accordance with the agency or investor guidelines, or whether it is not recoverable due to operational errors, if they occur. The government (Government National Mortgage Association or “GNMA”), Government-Sponsored Enterprise (Federal National Mortgage Association or “FNMA” and Federal Home Loan Mortgage Corporation or “FHLMC”) and private label investor guidelines dictate which advances are recoverable and not recoverable. 
This article is part of a series of servicing articles that Baker Tilly will be releasing in the coming months. Stay tuned for the next installment featuring accounting and audit guidance relevant to servicers and originators. Register for our upcoming Compliance+ webinar, Preparing your mortgage portfolio for the “What ifs,” taking place on May 17, 2023, from 2 - 3 p.m. ET.  Baker Tilly’s Mortgage Center of Excellence offers assistance with servicing, regulatory compliance, quality control and risk management – all in one place. Our mortgage specialists can help servicers traverse the ever-changing mortgage landscape. Discuss the state of the industry with our team and learn how we can help you prepare for the future, today. 
Co-author Matt Petrick, CPA is a senior finance and accounting executive specializing in the financial services industry, with a focus on mortgage and servicing entities. Matt has experience with REITs, financial institutions, business development companies and other funds. The discussions throughout the article should not be implied to represent the position, processes, or procedures of professional affiliations, current or former employers, or employer relationships.  The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.

This article in mortgage servicing series discussing what happens in the servicing process when a loan becomes delinquent. We review loss mitigation strategies, P&I advancing obligations and much more. 

What happens in the servicing process when a loan becomes delinquent?

CARLSBAD, Calif. (Nov. 9, 2021) – Leading advisory CPA firm Baker Tilly US, LLP (Baker Tilly) announces its intent to acquire California-based The Compliance Group (TCG), a one-stop-shop for mortgage lenders requiring regulatory compliance and seeking risk management. The combination will be effective Dec. 6, 2021. Financial institutions and independent mortgage bankers continue to shift their focus toward the modern borrower experience, defined by digitization and automation. At the same time, quality control services must keep pace with high demand and evolving compliance requirements. 
TCG’s deep understanding of managing the regulatory and risk obligations for the mortgage industry plus Baker Tilly’s extensive financial services specialized knowledge and solutions — internal audit, cybersecurity, digital transformation, regulatory compliance and financial modeling — creates a combination of skills, knowledge and bench strength to produce powerful outcomes for the financial services industry. TCG’s 110-person remotely located team will join Baker Tilly.
About Baker Tilly US, LLP (bakertilly.com) Baker Tilly US, LLP (Baker Tilly) is a leading advisory CPA firm, providing clients with a genuine coast-to-coast and global advantage in major regions of the U.S. and in many of the world’s leading financial centers – New York, London, San Francisco, Los Angeles and Chicago. Baker Tilly is an independent member of Baker Tilly International, a worldwide network of independent accounting and business advisory firms in 148 territories, with 36,000 professionals and a combined worldwide revenue of $4.0 billion. Visit bakertilly.com or join the conversation on LinkedIn, Facebook and Twitter.  About The Compliance Group (TheComplianceGroup.net) The Compliance Group (TCG) is a service-oriented company supported by unrivaled expertise. The TCG mission, since inception, is to provide quality service to clients while offering cutting edge solutions that resolve the complexities of today’s compliance and credit risk. TCG is passionate about assisting all types of financial institutions within the mortgage industry. Applying decades of state and federal regulatory compliance and risk management experience, niche expertise, and common sense, TCG assists clients in easily navigating evolving regulatory channels by mitigating risk through their Enterprise Risk Management platform.

Leading advisory CPA firm Baker Tilly US, LLP (Baker Tilly) announces its intent to acquire California-based The Compliance Group (TCG), a one-stop-shop for mortgage lenders requiring regulatory compliance and seeking risk management. The combination will be effective Dec. 6, 2021.

Compliance for Mortgage Lenders

Loan Servicing Quality and Compliance Solutions for Mortgage Servicers

Mortgage Electronic Registry System (MERS) Annual Review

Quality Control for Mortgage Lenders

Baker Tilly Creates Mortgage Center of Excellence with Acquisition of The Compliance Group

Operationalizing compliance management, quality control and technology

Managing risk associated with mortgage lending, servicing, and financial services requires attention each day, every day, with a strategy to bring together diverse compliance management categories into one compliance platform.

If your current platform is built on policies and procedures, it is a good start, but it likely is not comprehensive enough to satisfy federal regulatory agencies and GSEs.

Baker Tilly’s mortgage compliance team brings together a compliance and readiness platform assessment that can identify the most critical points for mitigating exposure to risk and subsequently provide the guidance and plan to strengthen your business across the entire platform.

Programs, policies, training, monitoring, reporting, corrective action

Policies, procedures, quality control, board oversight

Network security, external threat assessment, access to consumer information, continuity planning

Baker Tilly’s regulatory compliance review assesses:

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Baker Tilly’s mortgage compliance team has built best practice assessments for its platform from other audits and exposure to interpretations from the CFPB. Your team benefits from exceptional insight and experience that will prepare you for your examination and balance your compliance platform.

Preparation and assessment practices from across the industry

With the banking industry (and world) in a state of digital transformation and change, you need a team that can assist in navigating challenges and charting a new course. 

Baker Tilly banking practice leaders collaborate with a wide range of financial services companies on financial statement, internal audit and capital markets advisory services.

Faced with changing regulatory requirements, intense technology disruption and an accelerated M&A environment, community banks need specialized financial and operational solutions tailored to their size.

Baker Tilly banking practice leaders work with community banks to help them maintain profitability, comply with changing regulations and grow their institution.

Baker Tilly lending industry professionals collaborate with mortgage, student loan, automotive and other lending organizations to enhance analytics and process governance.

Baker Tilly financial institutions practice leaders work with credit unions to help them enhance member experience, deliver on their mission and grow their institution.

The financial services industry continues to diversify, but competition and more complex vendor relationships make determining business strategy more complicated.

Baker Tilly financial services practice leaders collaborate with a wide range of financial services companies to help move organizations toward the future they envision.

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Baker Tilly’s mission through our Mortgage Center of Excellence is to provide quality care to our clients while also staying on the cutting edge of the complexities of mortgage regulatory compliance.

Mortgage Center of Excellence | Mortgage Compliance & Quality Control Solutions

Michelle Doyle is a principal with Baker Tilly.

Jim McCracken is a director of business development with Baker Tilly.

Kevin has been serving financial institutions since 2000 with significant emphasis on banking operations.

Janet Twombly is a compliance director with Baker Tilly’s financial services practice.

The key to a successful mortgage enterprise is to establish a proficient compliance and quality control foundation.

Baker Tilly’s mortgage compliance team conducts a review of your policies, procedures, controls, and practices in place to validate compliance with the MERS Membership Agreement requirements, including data standards.

Regulatory Compliance Review for Mortgage Lenders

Audit guidance for mortgage company auditors

What happens in the servicing process when a loan becomes delinquent?

Baker Tilly Creates Mortgage Center of Excellence with Acquisition of The Compliance Group

Banking & Capital Markets

Community Banks

Consumer Lending

Credit Unions

Financial Services

Compliance for Mortgage Lenders

Mortgage Electronic Registry System (MERS) Annual Review

Mortgage Center of Excellence

Michelle Doyle

Jim McCracken

Kevin Schalk

Janet Twombly

Operationalizing compliance management, quality control and technology

Baker Tilly’s regulatory compliance review assesses:

Compliance management

Operational controls

Technology management

Preparation and assessment practices from across the industry

Key leaders