Although risk management has been divided into specialty areas such as quality assurance, quality control, vendor risk management or fraud prevention, many are transitioning toward a more holistic approach, according to Michael Larkin, director of risk management at
Larkin said limiting what departments like quality assurance, quality control and fraud prevention share can limit a company’s view of potential risks. Information from a loan file should be shared “as instantaneously as possible” to get a clear view of risk, Larkin said.
Some companies are going so far as to combine these different departments and Larkin said this can work, but notes that if this is done the expertise in these specific areas needs to be retained, potentially through cross-training.
“A lot of the teams have subject matter experts who train the others so there is sharing of information instead of niche knowledge bases,” he said.
Larkin said there may be consolidation and cost savings in such a move which can be made internally or by shifting to an outsourcer like his company, but he notes that cuts too deep or reliance on too few parties can be inefficient.
He compared optimal analysis of possible risks highlighted by manual review or automation as similar to the use of a watchdog, where the dog will bark frequently, and the owner has to judge whether there is a real threat present. The trick is not to stop the dog from barking but for the owner to be able to discern false positives, said Larkin.
Besides maintaining expertise in all specialty areas, he recommends that a company or an outsourced provider maintain staff for manual review as well as automated tools such. He also advocates for the use of multiple fraud prevention/loan quality tools as a way to get a more complete and balanced picture of a loan’s potential risk. Alerts in the risk management process also can be prioritized through giving certain ones more weight than others, he said.
But he also noted that risk management can get too detailed to the point where one cannot see the forest for the trees. While a questionnaire used in audits/reviews or its equivalent may average 150-180 questions or so and that may be appropriate, the upper extreme around 450 questions may be overkill.
When about the state of fraud risk today, Larkin said, “Fraud numbers are down, depending on who you listen to” but he does believe this risk will rise along with interest rates as the impetus to find a way to get borrowers approved for loans grows.
“It’s one of those areas lenders can never afford to downsize,” he said.
Larkin said in some cases managing fraud risk can sometimes be more about paying attention to situations where loans seem too perfect than finding ones with flaws. If a loan looks too good to be true, it may be, he said.
He also advises ongoing reviews of risk management measures as risks to tend to change with the times.
