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Internal controls are a familiar part of mortgage operations, especially in the servicing sector.
Regulators, auditors, executives and rating agencies all expect to see strong and effective internal
controls in place to ensure successful mortgage operations, as these form the backbone upon which
policies and procedures are laid. Therefore, it is critical for lenders to periodically revisit this topic to
ensure all employees understand what internal controls are and their purpose inside the operational
environment.
While there are several types of internal controls, this post focuses on preventive internal controls.
When it comes to this type of internal control, the name says it all – these controls are designed to
prevent errors or irregularities in normal operations. For servicing, this can take the form of a matrix of
authorized signers for expenses or loan-level disbursements, requiring dual signatures for modification
approvals, and/or utilizing a foreclosure referral checklist. However, preventative controls can also be
implemented to ensure compliance with regulatory guidelines or to prevent activities that might derail
company objectives.
Like all best-laid plans, there are always opportunities for preventative controls to break down. After all,
nothing is fail-safe. Most often, breakdowns occur for one of three reasons:
- An employee tries to bypass an internal control;
- An employee executes a control incorrectly or erroneously; or
- An employee simply does not understand the policy/procedure.
Whatever the cause may be, it’s always a good idea to implement secondary controls to provide back-
up when the primary preventative controls inevitably fail. To ensure this set of controls performs its
intended purpose, these should be performed by other departments within the organization. Think of it
as a kind of checks-and-balances system. Using the matrix example above, a secondary control might be
requiring the Accounting Department to ensure disbursements have been authorized by the appropriate
parties outlined in the matrix before processing. Therefore, should someone in Servicing make an error,
or simply fail to obtain the proper authorization, the organization can catch what might be an improper
disbursement before funds ever leave.
In today’s operating environment, lenders simply cannot afford risks or errors like these. By anticipating
the worst and putting the appropriate layers of internal controls in place, lenders can rest assured that
their operations are as protected as possible. 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.
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