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As we continue our ongoing coverage of Internal Controls as they relate to Loan Servicing, it is important
to reiterate that regulators, auditors, executives and rating agencies all expect to see strong and
effective internal controls in place. Internal controls can fall into several categories, the most prominent
being preventative (which we previously discussed here) and detective. Lenders should periodically
revisit this topic to ensure all employees understand what internal controls are and their purpose inside
the operational environment.

This post focuses on detective internal controls. The purpose of the detective type of internal control is
to identify errors or irregularities that may have already occurred. Loan servicing requires numerous
exception reports and tools for every area of loan servicing. These are designed to identify things such
as illogical data (escrow payments on non-escrowed loans, date fields populated with alpha characters,
etc.) or monetary value tolerance variations that fall outside the pre-determined ranges, as well as
instances when process timelines have been exceeded. Additionally, detective internal controls can also
include:

• Monitoring of live or recorded customer service calls;
• Quality control audits;
• Daily balancing of cash processing; and
• Monthly bank reconciliations.

In many companies, the monthly production/status reports (also known as month-end reports) that
each area prepares for management review are also an example of a detective control. Effective
implementation of detective internal controls provides insight into on-going best practice improvements
as well as potentially identifying the need for any corrective measures.

In today’s operating environment, lenders simply cannot afford to leave risks or errors undetected. Even
the best-laid plans fall through, and mistakes are bound to occur. However, by putting these types of
controls in place to identify process failures, training opportunities or just plain human error, lenders
can demonstrate their commitment to striving for excellence in loan servicing operations. If you are
concerned that your internal controls aren’t what they should be, let us put your mind at ease. Contact
resources@mqmrnews.com to discuss how MQMR and our servicing focused sister company,
Subsequent QC, can help you identify your risk and recommend the appropriate controls to leave your
organization better protected.