Newsletter 117: Warehouse Lender Counterparty risk is beyond the surface level

Issue 117: March 29, 2017



Total loan value of verified, validated and certified loan closings to date


Total dollar amount of transactions identified as erroneous / fraudulent and then corrected and/or redirected with FundingShield Certification


Cost of FundingShield Certification versus Dollar Value of Potential Client Loss Exposure:


Top 25 mortgage lenders clients serviced


~ $100 Billion+


~ $17 billion+






“In light of the recent hacks and cyberattacks hitting closing agents which impacted some of our mortgage banking clients we began dialogue with several vendors for added cost effective solutions including FundingShield.  FundingShield created a customized WAVS (Wire Account Verification System) solution that works within the parameters of our warehouse lines business execution timeframes, adds common sense and workable controls, and enhanced our oversight of all closing parties interest of getting closing funds to the correct account,” – Warehouse lender client of FundingShield


FundingShield is a settlement / closing certification provider to bank and non-bank mortgage lenders that has a vast database of settlment agents and track record that shows 17% of files reviewed have an inconsistency that could lead to lack of title insurance coverage.   In a closing/settlement this could be due to E&O coverage limit levels being insufficent, a CPL mismatch, the use of unauthorized / unlicensed entities, use of incorrect state forms, unregistered dba’s or legal entities & much more. Our tools can be leveraged by warhouse lenders specific risks which allow fo greater control over their own couterparty risks.  The WAVS solution is an effective, customizable and affordable fund disbursement control, third party oversight/audit and wire verification system that works well for warehouse lenders or high volume lenders with 100’s if not 1000’s of loans funding per day.


Warehouse lenders and top 50 mortgage lenders have the unique position of having to fund loans extremely quickly and in high volume, they must diligence and onboard a mortgage banker client but essentially take on their mortgage banker’s QC / QA / Compliance / funding / closing / settlement control risk without much visibility and protection beyond contractual agreements.  All parties want to see that the settlement goes smoothly to foster a productive ongoing relationship at the warehouse lending level.  Many warehouse lenders have solutions in house to verify some elements of best practices being employed at the mortgage banker level however these systems do not provide a live snapshot, are not linked to active control and audit procedures and likely only check a small percentage of the elements that a thorough and technology driven approach could achieve.

A sound approach:

  1. A warehouse lender should have a strong screening process for mortgage brokers and mortgage banking companies as well as their third parties who handle the funds to close loans.
  2. A warehouse lender should be able to confirm real time that a lender is only using third parties that conform to the mortgage bankers and warehouse lenders requirements to “play”. If you are financing a mortgage banking company, make sure that they have a strong screening process of their own or recommend one that meets your own requirements.
    1. Best in class would be setting:
      1. Combined agreed minimum diligence standards by vendor or third party type.
      2. Combined agreed approved party lists by vendor
  • Warehouse lender audit level access to monitor controls are being applied real time
  1. Fund only those loans for which you have the documentation in house that has been reviewed by either your staff or an authorized and capable third party that can screen for such items in detail:
    1. Hiring an outside independent third party for reviews can be beneficial as fraud schemes tend to penetrate funding and settlement control areas to operate.  Recent hacks monitored procedures and communication flow of closing / funding room personnel as well as the closing agents.
    2. In house staff is motivated to manage risk but do so quickly which can lead to oversight issues or mistakes that require additional eyes to oversee.
    3. Dealing with problematic or potentially fraudulent scenarios is much easier to handle when a warehouse lenders third party verification agent is challenging the warehouse lenders’ client vs the warehouse team who is focused on risk but also balancing client relationships.
    4. Fraud risk experts know the signs to look for vs warehouse operations staff that have multiple hats to wear
    5. Keep control of the money coming in from investors. The money should go into a separate account that only you control.
    6. Require funding documentation ahead of closing for closing parties.
  2. In house operations can be enhanced by third party data providers but a detailed loan level analysis can be achieved with groups such as FundingShield at prices that can be cheaper than performing similar level of service in house.


 McKinsey – Many papers and write-ups on this subject (including the major US audit firms E&Y/PWC and regulators) are highly focused on consumer facing vendors and TPSPs entities only.  A risk regime based on consumer focus is a good start but a solid risk management protocol should include enhanced monitoring on TPSPs that could have potential harm to the lender itself such as settlement agents and attorneys who handle lenders funds.  These groups are highly professional but given the disparate state level conventions, licensing, forms and corporate status as well as legal frameworks monitoring the activity surrounding these groups is a key way to avoid having high severity losses.  See below from McKinsey’s paper that despite being written years ago still hits the points being referenced by regulators and top risk managers today:


A best in class vendor & third party risk management system should include the following which FundingShield incorporates into all of its current products and services for its clients, the system should:


  • Be “Supplemented with compliance and QC metrics to ensure monitoring of risks in addition to performance


  • Include the “Involvement of independent teams in oversight activities”


  • Contain details of escalated incidents to ensure transparency with risk management.


  • Leverage technologytools should be used to act as comprehensive source of third party performance and risk based data to clearly record and articulate to risk management.




About FundingShield

FundingShield is a leading software enabled services company and the only provider of active loan level diligence for closings to the residential mortgage industry.  The Company’s array of services provides active verification and validation at the loan level for mortgage closings and detailed analysis of the documentation used. Our products & services include:


  • Verification and validation services at the loan level of closing documents for lenders, insurers and title companies
  • Confirmation of title insurance coverage for lenders backed by FundingShield’s GUARDIAN CERTIFICATE
  • Automated audit compliance management systems for 3rdparty service providers of lenders, title & state agencies & appraisers.
  • Pre/Post close QC QA and audit preparation.
  • Cyber security, IT Theft, online brand reputation monitoring and brand protection, 24/7/365 tracking of key property, personnel & vendors with threat reporting automation leveraging millions of public data points.
  • Specialized underwriting services to insurance companies and lenders as well as closing process audit reviews.

For more information on FundingShield, to schedule a WebEx demo or to see what other services we provide the residential mortgage industry please email or call (949) 706-7888