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What is a Consumer Centric Mortgage Audit?
DEFINITION: A Consumer Centric Mortgage Audit is forensic investigation of a mortgage transaction between a consumer and a creditor beginning with the first point of contact and covering the entire lifecycle of the mortgage obligation as viewed from the consumer’s perspective.
The integration of the mathematics of finance, forensic accounting, mortgage compliance, auditing and investigative skills yields the newly emerging specialty known as Mortgage Auditing.
At its most elemental level, the mathematics of finance involves the study of the time value of money beginning with the formulas for computing simple and compound interest, present and future values, nominal and effective interest rates, annual percentage rates, and the compounding and discounting cash flows. In order to perform an audit, the Mortgage Auditor must have a firm grasp of these mathematical principles.
“Forensic”, according to the Webster’s Dictionary means, “Relating to the use of science or technology in the investigation and establishment of facts or evidence in a court of law.” Forensic accounting in this context provides a financial analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution.
Competency in the field of residential Mortgage Auditing requires that the Mortgage Auditor have a firm grasp of both the spirit and letter of the state and federal consumer protection statutes and regulations that govern these transactions such as the federal Truth in Lending Act, Regulation Z which implements the purpose of the Act, and the Official Staff Commentary which interprets the regulations. Additionally, since virtually all mortgages provide for the collection of escrow funds, knowledge of the Real Estate Settlement Procedures Act, and its corollary, Regulation X, is also necessary. The RESPA also addresses mortgage servicing transfer procedures and billing complaints. Both are common occurrences, which prompt consumers to reach out for professional assistance.
To validate the methodology by which the audit is conducted so that it is acceptable in a court of law, the Mortgage Auditor should follow the principles of Generally Accepted Auditing Standards when planning, executing, and reporting on their audit findings.
Finally, the Mortgage Audit should be approached as a fraud investigation and developing skills and competencies in this area will expose hidden and suppressed data that adds to the evidence, strengthens the consumer’s position, and enhances the outcome.
Key Components of a Consumer Centric Mortgage Audit
The scope of the Mortgage Auditor’s services, as they relate to the analysis of consumer mortgage transactions, should cover the entire life cycle of the loan over three principal periods: 1) from application to closing; 2) the loan servicing history from consummation to payoff; and 3) In the case of a default, through collections, loss mitigation, bankruptcy and foreclosure.
This requires a three-tiered analytical process that begins with laying the mathematical foundation for the credit obligation described in the mortgage contract. The second level requires that the Mortgage Auditor precisely reconstruct the lender’s loan servicing history. While doing so, the Mortgage Auditor must replicate the interest rate formulas and other mathematical operations actually used in administering the loan. In this way, the Mortgage Auditor creates an active matrix, which allows her to track the lender’s accounting to the penny. At the third level, the Mortgage Auditor should correlate data obtained from the borrower and other primary sources to evaluate whether conflicts, errors or omissions exist. This three-dimensional structure, when synchronized, reveals the exact transactional events that constitute breach of contract or consumer rights violations.
The above-described process involves the ability to translate the language of finance into its mathematical form and effect. Beyond that, it is of utmost importance, in the detection of consumer rights violations, to have a working knowledge of the mortgage lending process itself, and attendant regulations governing the industry.
Essentially, the audit begins with an interview with the consumer and an examination of the paperwork created by both the borrower and the lender in the process of originating, underwriting, approving, servicing, and terminating a residential mortgage transaction. It also requires both a contractual analysis and a mathematical analysis to determine whether the intent of the parties was adequately set forth in the mortgage contract and is being faithfully carried out as agreed. The three standard components of a consumer centric mortgage audit are as follows:
Truth in Lending Analysis
Escrow & Fiduciary Account Analysis
Why Do One?
Consumers are largely unaware that there has been a politically sanctioned paradigm shift in mortgage lending over the last 28 years that has weakened consumer protections to such an extent that lenders, especially those who originate loans for the securitization sector, have become emboldened by the imbalance in power. They have mainstreamed predatory lending, regularly manufacture defaults when servicing loans, and foreclose at will on loans that are current or have valid defenses with little to stop them.
Consumers need to think of their mortgage loan as the vehicle they drive on the road to homeownership. From time to time this vehicle needs a tune-up in order to function efficiently and to identify safety risks in advance; that tune-up is the mortgage audit.
Why Use a Mortgage Auditor, Not Yourself?
The consumer is ill-equipped to audit his own mortgage loan for breaches of contract and technical violations of state and federal statutes such as the Truth In Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, and the Fair Credit Reporting Act.
However, the consumer can greatly assist the Mortgage Auditor by writing up a narrative describing his experience; developing a timeline; organizing his documents; keeping a complete record of his correspondence with the lender; and maintaining a journal of all telephone communication regarding his mortgage account.
What Does a Mortgage Auditor Do?
A Mortgage Auditor is often retained to analyze, interpret, summarize and present complex financial and business related issues in a manner which is both understandable and properly supported.
Mortgage Auditors can be engaged in public practice or employed by insurance companies, banks, police forces, government agencies and other organizations. Presently, the overwhelming need is to help individual consumers, their advocates, and attorneys to understand the defects resident within the mortgage products that have been proliferated over the last nine years which have proven to be disastrous and have resulted in massive foreclosures nationwide.
To achieve the audit objectives, a Mortgage Auditor must do such things as:
In order to properly perform these services a Mortgage Auditor must be familiar with legal concepts and procedures. In addition, a Mortgage Auditor must be able to identify substance over form when dealing with an issue.
A Mortgage Auditor must be objective, independent, and open to consider all alternatives. He or she must be able to scrutinize the fine details and at the same time see the big picture. In addition, a Mortgage Auditor must be able to listen effectively and communicate clearly and concisely both orally and in written form.
What Does an Audit Consist Of?
Each mortgage auditing assignment is unique. Accordingly, the actual approach adopted and the procedures performed will be specific to it. However, in general, many Mortgage Auditing assignments will include the steps detailed below.
Meet with the client
It is helpful to meet or at least speak with the client to obtain an understanding of the important facts, players and issues at hand.
Perform a conflict check
A conflict check should be carried out as soon as the relevant parties are established as the Mortgage Auditor’s independence is essential.
Perform an initial investigation
It is often useful to carry out a preliminary investigation prior to the development of a detailed plan of action as this will allow subsequent planning to be based upon a more complete understanding of the issues.
Develop an Action Plan
This plan will take into account the knowledge gained by meeting with the client and carrying out the initial investigation and will set out the objectives to be achieved and the methodology to be utilized to accomplish them.
Obtain the relevant evidence
Depending on the nature of the case this may involve locating documents, economic information, assets, a person or company, another expert or proof of the occurrence of an event.
Perform the analysis
The actual analysis performed will be dependent upon the nature of the assignment and may involve:
Prepare the report
A low-cost screening will consist of the audit working papers and a simple statement of the Mortgage Auditor's findings. Preliminary audits consist of a brief letter of explanation and the audit working papers. An expert report is intensive, time-consuming, and expensive. It includes a section on the nature of the assignment, scope of the investigation, approach utilized, limitations of scope and findings and/or opinions. The body of the report consists of a detailed narrative that explains the Mortgage Auditor's findings, opinions, and conclusions supported by exhibits consisting of the documentary evidence, audit work product, and graphics necessary to properly support the Auditor’s conclusions.
How Do You Use The Findings?
The Mortgage Audit findings are extremely useful in resolving disputes with mortgage lenders and servicers because they help to explain the root of the problem. Fair-minded lenders will take on the responsibility of putting things right and have a sincere interest in making sure that they end up with a satisfied customer. Rogue lenders and servicers on the other hand will be obstinate because they have a profit motive in creating these problems. In those cases, the Mortgage Audit findings should be turned over to the consumer's attorney for further action.
What is a Qualified Written Request?
A “Qualified Written Request” is made pursuant to the Real Estate Settlement Procedures Act (12 U.S.C. § 2601-2617) and its implementing Regulation X (24 C.F.R. § 3500.21) and is an important communication tool by which the consumer can put the servicer on noticed that there is a problem.
If the borrower believes there is an error in the mortgage account, he or she can make a “qualified written request” to the loan servicer. The request must be in writing, identify the borrower by name and account, and include a statement of reasons why the borrower believes the account is in error. The request should include the words "qualified written request". It cannot be written on the payment coupon, but must be on a separate piece of paper. The Department of Housing and Urban Development provides a sample letter.
The servicer must acknowledge receipt of the request within 20 days. The servicer then has 60 days (from the request) to take action on the request. The servicer has to either provide a written notification that the error has been corrected, or provide a written explanation as to why the servicer believes the account is correct. Either way, the servicer has to provide the name and telephone number of a person with whom the borrower can discuss the matter. The servicer cannot provide information to any credit agency regarding any overdue payment during the 60 day period.
If the servicer fails to comply with the "qualified written request", the borrower is entitled to actual damages, up to $1000 of additional damages if there is a pattern of noncompliance, costs and attorneys fees.
How is an Audit Used in a Lawsuit?
In a lawsuit brought by a consumer over a dispute with the mortgage broker, lender, servicer, or assignee, a Mortgage Audit may be necessary or helpful in establishing the facts that support the consumer’s claims and damages. These issues are complex and are, for the most part, beyond the ken of most attorneys and accountants, never mind consumers. The Mortgage Auditor may serve as a fact witness or an expert witness depending upon his or her qualifications.
Under the Federal rules of evidence a designated expert witness must submit a written report during the discovery phase of the litigation. The strength of the expert’s report is often used as the basis for negotiating a settlement, thus avoiding the high cost and uncertainty of trial.
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