mental accounting principals. When we ask why the owners do not implement comprehensive accounting protection, we usually hear one of three reasons: 1. The most common answer … the warehouse lender doesn’t make me do it. We work for many of the significant warehouse lenders, and I can state from firsthand experience that if this ever was the case, it is no longer the perspective. With the regulatory scrutiny the warehouse lending community is receiving, they are very aware of the importance of having properly prepared monthly financial statements from their mortgage bank borrowers. I predict that the warehouse lenders will soon require all mortgage bank borrowers to not only submit monthly financials, but to prove they have a dual entry accounting system with proper loan level posting. 2. The second answer we hear is: Our CPA told us this was okay. Recall the reference to the heart doctor above? Not every CPA understands mortgage banking. Please make sure your CPA is a mortgage expert. Unless a CPA is regularly and significantly associated with this business, it is possible they may not understand the intricacies of how a dual entry loan level posting procedure provides protection from corporate fraud in mortgage banking. As a small bonus, the more detailed and clean your accounting system is, the less expensive your annual audit will be.
and Great Plains are more sophisticated and more expensive accounting systems that can support an automated interface from a mortgage operations system. If you use Excel for your accounting, then you do not have an accounting system. We suggest that you switch to a system that deploys dual entry accounting; otherwise you are exposing yourself to a higher probability of corporate theft among other catastrophic oversights. Metric management is an essential element of an accounting system. Metrics of mortgage banking include: profit per loan, cost per loan, profit per branch, margin per product, profit per originator and on and on. If you are not getting this information, then your accounting system is not giving you sufficient information to run your business. Every business entity needs a system of checks and balances regardless of its size. We have worked with both large and small companies across the country. We find that virtually every company has an opportunity to improve their accounting processes in ways the owner had not seen. It is important to understand that no one is immune, regardless of experience or size. We’ve seen the ramifications of an inadequate accounting system have catastrophic consequences to a business. The proper recording of each loan transaction, strong internal controls, and a thorough review of your monthly financial results is the best defense against corporate theft.
Mortgage banking controls
1. Two people must approve large transfers of money unless to a pre-approved title company or other pre-approved vendor. 2. When writing checks, if one person prepares the check, then another person signs the check and another person reconciles the bank statement. If you only have one person in accounting, then it is best to hire another company to perform the bank reconciliation. The bottom line is there should be at least two people involved in your accounting department to have minimal checks and balances.
6. Have a monthly financial review with all owners and your chief financial officer. Ideally, your CFO is a CPA with 10plus years of experience in mortgage banking. If you do not have a qualified CFO, it is possible to hire a contract CFO.
Concepts to minimize exposure to corporate theft Corporate fraud is also called white collar crime because it doesn’t take a gun to rob you if you give someone absolute control over money. As noted above, the saying “absolute power corrupts absolutely” means that someone with unchecked control is more likely to abuse the system to their benefit. Controls are designed to keep honest people honest and make it more difficult for purposed corporate theft to occur. In most cases, the incidents of corporate fraud occurred because of a breakdown in, or a failure to, implement a proper accounting system. The risk of corporate fraud can be minimized by implementing proper controls which include: 1. Strictly control who can approve wires and checks.
4. Have a qualified CFO review your books monthly. Your auditor is usually not able to be your CFO because “independence” rules prevent them from participating in the management of your company. 5. Calculate financial metrics each month to make sure the numbers make sense. Ask lots of questions. 6. Have a budget and compare your actual result to your budget. If there are any unexplained deviations in the numbers, don’t stop asking questions until the answers make sense. This may seem like a lot to implement, but remember the corporate fraud loss that I mentioned above was in the millions. With such a significant potential consequence, it seems reasonable to implement all of these steps together to minimize the risk of corporate fraud and create transparency in your accounting system. There is a lot to digest in this article. The most significant to take away should be: 1. Check the checkers: Make sure someone is watching accounting. 2. Accounting systems matter: Have a strong set of controls over your accounting procedures all supported by a dual entry accounting system with loan level accounting. 3. Every company needs a qualified CPA/CFO to keep the numbers on track. continued on page 38
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O JANUARY 2010
3. For online banking, if one person enters the payment online, then someone else should approve the payment and another person reconcile the bank statement. If you only have one person in accounting then it is best to hire another company to perform the bank reconciliation. Again, you should have at least two people
5. Record loan level financial detail for each loan in your accounting system to track all cash-related events created by or anticipated by the lock registration, closing statement and purchase confirmation. This will include tracking mortgage insurance premium (MIP) payments, impound funds and investor proceeds. Without loan level data capture, it is not possible to properly track branch profitability.
3. Make sure your accountant/bookkeeper records loan level entries including the creation of an asset when the loan is closed.
MISSOURI MORTGAGE PROFESSIONAL MAGAZINE
As an important side note, some companies use Excel as their accounting system. Excel is an amazing spreadsheet tool, but it is not an accounting system. The dual entry nature of an accounting system creates embedded controls and reconciliation points to keep the numbers on track. QuickBooks is a simple accounting system that uses dual entry accounting. The dual entry process is somewhat hidden by the nature of the posting process. Accounting for Mortgage Bankers
In an accounting system with proper controls, there are a number of procedures or rules to protect the business. Recall I’m a musician and generally don’t like rules, but in this case, it will protect your business from theft and failure. Here are just a few basic procedures to implement:
4. Never have the same person prepare the check, sign the check, and reconcile the bank statement. There are no circumstances that justify having one person with uncontrolled assess to the company’s money. There must be oversight.
2. Implement a robust accounting process with a dual entry system and loan level recording. Do not use Excel as your accounting system; it does not have dual controls.
3. The third answer we hear is: I own a $5 million a month mortgage bank and I do all the accounting myself; no one but me can get to the money. If this is the case, please be sure to have proper loan level posting in a dual entry accounting system to reduce the potential for errors. This way, when your company grows and you need to have someone else in accounting, you’ll already have a wellstructured accounting system. All that aside, we usually see the owner of a company helping the sales team increase volume, looking for new branches, working on getting better pricing and planning the vision for the company. It will be challenging to get all of this done while wearing a green accounting eyeshade.
involved in your accounting department to have minimal checks and balances.
Published on Jan 29, 2010