As a force working toward educating accountants, bookkeepers, CPAs, and small business owners, the Rules of Thumb blog from MoneyThumb has recently also taken on the responsibility of trying to help educate and inform banks and lenders as well.
In that vein, this blog post, For Lenders: Expert Advice on Reducing Loan Fraud in the Underwriting Process, is our effort to inform and educate bankers and lenders on ways they can avoid fraud by making sure their underwriting process is streamlined, efficient, and literally fraud proof.
The essential principles of a lenders procedures for the detection and prevention of fraud has one guiding principle; everybody along the lenders process is involved; there is no central starting point or central figure in charge; and there is a seamless connection between underwriting, operating, monitoring and collections and the prevention and detection of fraud and corruption. The procedures for the prevention and detection of fraud is heavily dependent upon a cultural awareness throughout the lender of the dangers of fraud and corruption in transactions.
There must be vigilance by all parties. The primary bulwark against fraud and corruption in lending transactions is underwriting. The various programs are underwritten in different ways. Some rely to a significant degree on underwriting by lenders and others are more directly underwritten in-house. In addition, different programs have different fraud and corruption-risk profiles just as different programs have different credit-risk profiles. However, the lender encourages and expects all participants in transactions to be aware of the risk profiles of the programs in which they participate, to be vigilant regarding such risks, and to report any suspicions of fraud or corruption in transactions.
HIGH PERFORMANCE UNDERWRITING RESULTS: EXPERT ADVICE
One of the best ways we at MoneyThumb can help lenders become more aware of ways to prevent loan fraud during the underwriting process is to turn to the experts. One of the best articles we have found on this topic comes from Nolan Management Consultants. The article, titled Achieving High Performance Underwriting Results takes a deep look into the process of loan underwriting. For instance, one small section of a long article is quoted below:
Tune-Up Time: The Underwriting Health Check
Achieving optimal underwriting performance requires taking the time to thoroughly understand every aspect of the operation. This extensive process can be simplified by first dividing the assessment into five logically related stages, along with their associated focal points:
1. Assess strategic alignment
- Clarity of product focus and market intentions
- Change management practices
- Target marketing effectiveness, niche profitability
- Individualization of products by target market
2. Examine underwriting foundation
- Current performance metrics (loss ratios, trends, productivity, etc.)
- Staff levels, performance, experience, decision quality, accountabilities, authorities, roles
- Flow of work, control points, process management, service levels, analytics
- Technology availability, currency and relevance, gaps to industry standards, utilization
3. Evaluate existing artifacts
- Guidelines, checklists and cross-reference tables
- Audit methodologies, portfolio management definitions and practices
- Competitive intelligence and monitoring mechanisms
- Feedback loops with actuarial, claims and product management
4. Review implementation methods
- Clarity of product definitions, intentions, pricing/rating plans and coverage limitations
- Adequacy of risk sharing and retention programs
- Service level performance (FNOL, adjusting, loss control, subrogation, recovery, etc.)
- External communications and training programs (product explanations, loss control, etc.)
5. Clarify distribution integration
- Distribution channel selection and strategy fit with product and service strategies
- Role of distribution within organization, consistency of alignment with defined role
- Degree of partnership with distribution channel
Each stage of the assessment sets the starting point for the next, flowing from strategy through operational considerations to properly align with the distribution channel. Underwriting is rightfully being viewed as a dynamic flow of information through checkpoints throughout which knowledge is being applied to enhance the end results. Clearly the depth of results will extend far beyond what could be achieved with a file-based snapshot of guidelines interpretation and application.
Once all the stage assessments are done, documented and, most importantly, validated with a cross-functional team of subject matter experts, the broad situational assessment can be drafted. The goal here is to bring all of the various parts together to clearly communicate key issues, performance gaps, root causes and specific opportunities for improvement. Taken in total, this information can be used to prioritize the needed decisions and the improvements that should be expected as a result.
If you are a banker or other lender and want to improve your chances of detecting and preventing fraud in the loan process, read the full article here and take the information to heart. Also, please share this blog post on your social media pages so that your fellow lenders can take advantage of this wealth of knowledge.