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Review Objective. Purpose of Audit and Review: To ensure the operational integrity of Sustainable Home Lending and to promote and maintain confidence from our regulator and potential purchasers and investors of loans or loan pools. Problem Statement: SHL is the fastest-growing business Credit Human has had in nearly two decades. While rapid growth can be exciting, it can also pose risks, especially when a company is not afforded a pace to hire, train, and deploy skilled resources to maintain the desired quality of work. In conclusion, the complexities of managing business operations and fostering portfolio growth present a risk that certain contexts within the SHL documentation may have gone unnoticed. This highlights the urgent need for a thorough review of the current state and continuous portfolio management. Deliverables: A PowerPoint presentation that summarizes the process, discoveries, conclusions, and recommendations that meet the objectives. A well-organized repository containing all the team’s work outputs for future reference and prosperity. Produce a due diligence resource that makes it easy for potential investors to evaluate our operational effectiveness and the portfolio’s risk profile.. 

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Purpose of Audit and Review:
 To ensure the operational integrity of Sustainable Home Lending and to promote and maintain confidence from our regulator and potential purchasers and investors of loans or loan pools.
 Problem Statement: 
 SHL is the fastest-growing business Credit Human has had in nearly two decades. While rapid growth can be exciting, it can also pose risks, especially when a company is not afforded a pace to hire, train, and deploy skilled resources to maintain the desired quality of work. In conclusion, the complexities of managing business operations and fostering portfolio growth present a risk that certain contexts within the SHL documentation may have gone unnoticed. This highlights the urgent need for a thorough review of the current state and continuous portfolio management.   Deliverables:
 A PowerPoint presentation that summarizes the process, discoveries, conclusions, and recommendations that meet the objectives. A well-organized repository containing all the team’s work outputs for future reference and prosperity. Produce a due diligence resource that makes it easy for potential investors to evaluate our operational effectiveness and the portfolio’s risk profile.

SHL Operations Review Discoveries Presented by: The Portfolio Managers, Andrew Wilson and Jamie Glazowski PM Ops Review and Feedback Quality Control Hybrid Loan Product Type Secured vs Unsecured Valuation of Collateral and allowable Loan Amount Analysis Securitization Method Loss Mitigation Verification and Documentation Standards Source Renewal and Conflict of Interest PM Ops Review Feedback. 

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SHL Operations Review Discoveries  Presented by: The Portfolio Managers, Andrew Wilson and Jamie Glazowski PM Ops Review and Feedback Quality Control Hybrid Loan Product Type Secured vs Unsecured Valuation of Collateral and allowable Loan Amount Analysis Securitization Method Loss Mitigation Verification and Documentation Standards Source Renewal and Conflict of Interest PM Ops Review Feedback

Agenda 2 of 2. SHL Loan File Review Discoveries for Non-Real Estate Secured and Unsecured Consumer Loans Presented by: The MOS Compliance Team, Lead by Meridith Hamar, Tricia McManamon-Adams, and Stacy Meadows Executive Summary Scope Loan File Review: Key Regulations Tested Loan File Review: Top 5 Regulatory Compliance Areas Loan File Review: Regulatory Details Loan File Review: Ops Details Other Outliers Identified Summary of Risks Conclusion. 

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SHL Loan File Review Discoveries for Non-Real Estate Secured and Unsecured Consumer Loans  Presented by: The MOS Compliance Team, Lead by Meridith Hamar, Tricia McManamon-Adams, and Stacy Meadows Executive Summary Scope Loan File Review: Key Regulations Tested Loan File Review: Top 5 Regulatory Compliance Areas Loan File Review: Regulatory Details Loan File Review: Ops Details Other Outliers Identified Summary of Risks Conclusion

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L3 Managers Operational Review feedback. Assessment Process: The team reviewed the procedures, guidelines, standards, and checklists provided by the business unit through a filter of quality control, risk management, oversight, tracking, and documentation. 2,000+ processes, procedures, reports, and supporting documents were reviewed, clarification questions were generated, and collaboration meetings were held to seek direct business unit feedback and perspective. Results and recommendations follow.. 

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Assessment Process: The team reviewed the procedures, guidelines, standards, and checklists provided by the business unit through a filter of quality control, risk management, oversight, tracking, and documentation.  2,000+  processes, procedures, reports, and supporting documents were reviewed, clarification questions were generated, and collaboration meetings were held to seek direct business unit feedback and perspective. Results and recommendations follow.

[Audio] Only 1 official procedure Welcome letter tracking log
Date-specific daily QC reports
Funding Findings Feedback spreadsheet
M-T-D daily funding spreadsheet. 

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Risk:  Potential for deficiencies in the processes, methods, or tools used to ensure that SHL products and services meet established quality standards.  Employee Responsibilities  Corrective Actions  Recommendation:  For origination and portfolio performance, implement quality control processes, such as routine inspections, testing, employee training, and continuous improvement initiatives.

[Audio] Legal and BK process – Feedback from 2 Attorneys regarding securing the unsecured portion of the loan (Risk related to loan structuring Only secured collateral is covered by U-C-C-)
The business unit states they do not abandon loan balances due to U-C-C--, however, no recovery process is in place and input from attorney does not align with the current stance
(10% overlap) Where is the GL reconciliation report for Secured, hybrid, unsecured hybrid – thresholds are not hard stops.. 

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Hybrid Loan Product Type
Secured vs Unsecured

Risk: SHL has 2 loan products - Miscellaneous Secured & Other Unsecured These product types have substantial term and loan limit differences that require monitoring.  In practice, utilizing a 51% / 49% rule for secured vs unsecured designation Policy states a 10% overlap is allowed for an unsecured portion of the total secured loan (Oversight) Portfolio Performance (Risk Management)  Legal and Bankruptcy Process (see Addendum D) Recommendation   Create a 3rd product for the Hybrid loan  File UCC on the secured portion of the loan.  The unsecured portion of collateral does not have the same level of protection as the secured portion. Ensure proper terms, performance, pricing, and risk management are determined accordingly given the blend of secured and unsecured.

[image] A screenshot of a document Description automatically generated

[Audio] If secured, mark-to-market may apply and would need to determine the valuation method for the market value of the portfolio (secured vs unsecured)
Solar loan example $150K (solar, qualified other, unqualified other). 

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Risk:  Financial risk – missing oversight to reconcile actual cost breakdown against purchase order roll-up, including establishing fair market value of the related costs, impact to sales, or participation expectations. Initial quote vs final purchase Order.  Reputation risk – no ceiling (impact on members)  Context: Secured Solar  Max Cost $20-$35k CFPB  https://www.consumerfinance.gov/data-research/research-reports/issue-spotlight-solar-financing/ As of 6/30/24 – Out of 12,941 secured solar loans, 26% (3,358) may be hybrid based on dollar amounts. (greater than or equal to 35k)  (See Addendum C) Recommendation  Require itemized breakdown of cost associated with work/collateral being financed. (See Addendum B)  Require a valuation method and Matrix to assist with oversight for determining outliers. (above average cost)  Identify LTV requirement for residence we are adding UCC to for overall LTV of home and improvements

Valuation of Collateral and 
Allowable Loan Amount Analysis

[Audio] The guide states that the asset value will need to match the amount requested. Is there any calculation or valuation that would determine the true value of the collateral being financed? There is no tools to get the appraisal which is why the UW list everything at 100% even when we sale. A UCC-1 gives the credit union a perfected security interest in “fixtures” but under the U-C-C (more details below), only certain kinds of property are considered a “fixture.” To be a fixture, the collateral needs to be integrated into the property, but it also cannot be “ordinary building materials.” Solar panels are generally considered fixtures, so a UCC-1 would perfect that security interest in those panels. But many remodeling projects like a kitchen or bathroom remodel largely utilize “ordinary business materials” so a UCC-1 will not give you a perfected security interest. That said, filing a UCC-1 can at least still alert a title company that there is at least some insurable interest, triggering procedures to pay off the home improvement loan as part of any transfer of the property. Example(Addendum D) the roof will be “ordinary building materials” so you could list it in a UCC-1 but it won’t give you a security interest in the roof, patio/fascia, or the radiant barrier. There is no way to have a security interest in the tree services as it is not tangible. You could list these things on the UCC-1, but they’re not going to perfect a security interest like you would be able to with the solar panels. In other words, the loan will not be fully secured, but partially secured. be careful about what promises may have been made in a loan participation agreement as to the extent of the security interest in the collateral.. 

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Risk: Reputation Risk, Loan Participation buy back risk: Due to inaccurately filling of the UCC 1:  UCC-1: Missing or generic language in filling Section 4. (See Addendum D).  Errors made when filing can result in loss of perfection. Potential to lose a portion of secure interest, on a blended UCC 1. A perfected security interest acquires significance only when paired with a meticulous collateral description, as Article 9 of the Uniform Commercial Code (UCC) outlines. Solar panels are typically classified as fixtures due to their permanent integration into real property. A UCC-1 would perfect a security interest in those panels. However, components used in common remodeling projects—often categorized as "ordinary building materials"—do not satisfy the criteria for fixtures under the UCC. Thus, a UCC-1 filing in such cases where there are blended materials would not grant a fully perfected security interest. Recommendation: Identify the mix of collateral being financed (Secured vs. unsecured) and obtain the itemized breakdown for various securitizing purposes.  Reconciliation process of initial quote vs. final Purchase agreement. (Addendum E) File two UCC 1 for Solar Fixture and one for the remaining Collateral.  UCC imaged into the Core due to limited access in Wolters Klowers

[Audio] *we were not able to find documentation pertaining to an Asset Recovery process and enforcing our lien
*if we issue a U-C-C with the intent of enforcing our lien, we may need a process to determine when to collect vs when to abandon *1009 documentation – Need to identify when 1009 was issued once determine if the balance is abandoned and no longer attempting to collect deficiency balance (charged off balance) (process for BK as it relates to 1099)
*Assumption could be one option to help with the transfer of ownership for primary residence Commoditization of collateral (market advancements) could lead to decreased costs and saturated markets which would need to have an asset recovery strategy to help minimize losses/ charge offs. 

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Risk: There is a potential financial risk associated with not having recovery processes in place to help mitigate losses as well as navigate various economic shifts.  May need to have a strategy in place to navigate market advancement leading to a decrease in costs for collateral financed.  Recommendation: Create Asset Recovery Policy and Procedure to mitigate future losses and collect deficiency balances (enforcing of lien) Include a process to help determine when to collect vs abandon a charged-off balance (tradeoff) Process and criteria for utilizing and filing judgments  Expand on 1099 Process and Documentation  Need to identify the point at which a1099 is issued when no longer attempting to collect the deficiency balance Create a Documented process for Transfer of Ownership situations (Assumption) LTV of residence may impact the ability of our lien to be satisfied. (negative equity) If ownership changes, UCC needs to be satisfied  Foreclosure sale, deceased member

Verification and Documentation Standards. Risk: Verification Standards Risk related to the use of stated income versus verifying actual income. This could be a hidden risk with customers overstating income. (dealer intermediary) Possible fair lending risk without documentation regarding when to use stated vs requiring verified. Recommendation: Create more robust document standards Stated Income vs Verified Income VOI -Requirement for income to continue for usage. (possible short-term income) Need a tracking system to monitor loan performance for stated vs verified income Tighter documentation related to the overall UCC process: UCC Filling, Monitoring, Renewing Document the 1099 process missing for the unsecured portfolio (secured) Underwriting guidelines stance on Judgement- response is that the loan would be declined. Need to reference stance. Exception Matrix covers Management oversight for exceptions Opportunity to expand boundaries with additional tiers for escalations (cap vs escalation). 

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Risk: Verification Standards  Risk related to the use of stated income versus verifying actual income. This could be a hidden risk with customers overstating income. (dealer intermediary)  Possible fair lending risk without documentation regarding when to use stated vs requiring verified. 
 Recommendation: Create more robust document standards Stated Income vs Verified Income  VOI -Requirement for income to continue for usage. (possible short-term income) Need a tracking system to monitor loan performance for stated vs verified income Tighter documentation related to the overall UCC process:  UCC Filling, Monitoring, Renewing  Document the 1099 process  missing for the unsecured portfolio (secured) Underwriting guidelines stance on Judgement- response is that the loan would be declined. Need to reference stance.  Exception Matrix covers Management oversight for exceptions  Opportunity to expand boundaries with additional tiers for escalations (cap vs escalation)

[Audio] For example, when S-H-L shifted pricing recently, it put some strain on dealers and their income possibility leading to some going out of business and/or in a situation of having to navigate a financial strain on their business Example, the customer’s company (roofing company) was doing the work on his loan. Oversite for conflict of interest with customer and work being completed. Separation Workmanship warranty document – (may be used if the debtor is the one that is applying and doing work) – Assuming this is the route to mitigate conflict of interest, may require additional independent oversight to validate output in addition to the signed completion certificate by the member.
*Looks like some loans may have completion certificates but not all loans.. 

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Risk:  Given the changing environment, there is a risk associated with renewing dealers without understanding how their financial situation may change over time as market conditions shift. (handle on market saturation and competition impact)  Situations in which contractors and vendors are working on projects when there is a personal conflict of interest. (check and balance) (addendum D) Recommendation:  Financial Review -Institute a financial review requirement to the dealer renewal process to ensure the partner is in good financial standing in addition to the Google and BBB market review. A financial review could also be an indicator of challenges the dealer may be navigating which could cause negative behavior.  Conflict of Interest – Require full disclosure and/or acknowledgment from the dealer or customer if there is a possible conflict of interest. Have proper controls to monitor and audit projects with independent oversight.

Portfolio Manager Operational Review feedback. Summary Feedback: The team found that the overall safety, security, risk management, and oversight are generally addressed through the existing policies, processes, and procedures. Opportunity exists for improved organization of content, capture/documentation of practices, and improved proactive quality control checks and balances throughout the operations.. 

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Portfolio Manager Operational Review feedback

Summary Feedback: The team found that the overall safety, security, risk management, and oversight are generally addressed through the existing policies, processes, and procedures. Opportunity exists for improved organization of content, capture/documentation of practices, and improved proactive quality control checks and balances throughout the operations.

SHL Loan File Review Discoveries
Non-Real Estate Secured and Unsecured Consumer Loans. 

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SHL Loan File Review Discoveries
Non-Real Estate Secured and Unsecured 
Consumer Loans

[Audio] Objectives
Using high capability SMEs,
Conduct an evaluation of S-H-L operational documentation to insure standards and risk tolerances and management are appropriately defined for risks related, but not limited to:
Dealer/Installer relationships and exception tracking
Credit risk and exception tracking
Verification standards and exception tracking
Legal documentation and exception tracking
Lien perfection and exception tracking
Collections and recovery and exception tracking
Perform systemic process review using multiple what-if scenarios to identify weaknesses in operational standards and processes that could present at some point in the future. Create a list of recommendations or conclusions
Conduct reviews in alignment with the audit design
Take a collaborative approach. This is for the benefit of Credit Human.. 

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Objective: Conduct an audit of 100 applications and closed loans to determine any regulatory or operational requirement inconsistencies.
 Key Findings: Potential regulatory gaps and operational inconsistencies exist. 
 Top Recommendations: Update processes and procedures regarding operational standards to ensure regulatory compliance requirements for SHL lending to include BSA CIP and Red Flags and staff training.

Number of Loans Reviewed: 100 Loan Types: Secured and unsecured (including UCC-secured solar loans) Regulations Reviewed: TILA / Reg Z ECOA / Reg B UCC FCRA CFPB and NCUA Regulations Operational Processes Reviewed: Loan Documentation Collateral Management Underwriting MLA BSA / CIP Financial Authority Limit. 

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Number of Loans Reviewed:  100

 Loan Types: Secured and unsecured (including UCC-secured solar loans)

 Regulations Reviewed:

 TILA / Reg Z

 ECOA / Reg B

 UCC 

 FCRA

 CFPB and NCUA Regulations

 Operational Processes Reviewed:

 Loan Documentation

 Collateral Management

 Underwriting

 MLA

 BSA / CIP 

 Financial Authority Limit

Equal Credit Opportunity Act (ECOA): Credit decision made within 30 days. Military Lending Act (MLA): All credit applicant are checked for MLA. Proper disclosures are used for MLA borrowers. Office of Foreign Asset Control (OFAC): All credit applicants are checked for OFAC. Truth in Lending for UCC Secured: Amount Financed, Finance Charges, Total Payments, and APR all within tolerance.. 

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Equal Credit Opportunity Act (ECOA): Credit decision made within 30 days.  Military Lending Act (MLA): All credit applicant are checked for MLA. Proper disclosures are used for MLA borrowers.  Office of Foreign Asset Control (OFAC): All credit applicants are checked for OFAC. Truth in Lending for UCC Secured: Amount Financed, Finance Charges, Total Payments, and APR all within tolerance.

Loan File Review: 
Key Regulations Tested with no issues

Federal Credit Reporting Act (FCRA): Unable to locate permissible purpose to obtain credit. E-Sign Act: Welcome Letter with full account number sent unsecure. UCC Filing: No evidence of UCC filing retained on a loan-level basis. Outstanding county and/or state filings. BSA ID Theft Red Flags: No evidence of clearing Red Flags. BSA CIP: Membership and loan funded with expired identification.. 

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Federal Credit Reporting Act (FCRA): Unable to locate permissible purpose to obtain credit. E-Sign Act: Welcome Letter with full account number sent unsecure.   UCC Filing: No evidence of UCC filing retained on a loan-level basis. Outstanding county and/or state filings.  BSA ID Theft Red Flags: No evidence of clearing Red Flags.  BSA CIP: Membership and loan funded with expired identification.

Loan File Review: 
Top 5 Regulatory Compliance Areas

Total FCRA E-Sign UCC Red Flags CIP 25 11 9 7 2

Federal Credit Reporting Act (FCRA): Unable to locate permissible purpose to obtain credit. The following was shared by SHL: Systematically, credit cannot be pulled without the permissible purpose granted/elected in the system. A copy of the permissible purpose disclosure was reviewed by compliance and appears to meet the requirement. A portion of this disclosure appears in the internal notes in the LOS. Systems and Applications Support may be able to build a report for SHL to utilize as evidence of permissible purpose obtained Risk: Low Recommendation: Retain evidence of permissible purpose. This is required for internal/external audits, as well as credit disputes and/or formal complaints.. 

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Federal Credit Reporting Act (FCRA): Unable to locate permissible purpose to obtain credit. The following was shared by SHL: Systematically, credit cannot be pulled without the permissible purpose granted/elected in the system.  A copy of the permissible purpose disclosure was reviewed by compliance and appears to meet the requirement. A portion of this disclosure appears in the internal notes in the LOS. Systems and Applications Support may be able to build a report for SHL to utilize as evidence of permissible purpose obtained Risk: Low Recommendation: Retain evidence of permissible purpose. This is required for internal/external audits, as well as credit disputes and/or formal complaints.

SHL Operations Review


Only 1 official procedure 
Welcome letter tracking log
Date-specific daily QC reports
Funding Findings Feedback spreadsheet
M-T-D daily funding spreadsheet

avatar

Legal and BK process – Feedback from 2 Attorneys regarding securing the unsecured portion of the loan (Risk related to loan structuring Only secured collateral is covered by U-C-C-)
The business unit states they do not abandon loan balances due to U-C-C--, however, no recovery process is in place and input from attorney does not align with the current stance
(10% overlap) Where is the GL reconciliation report for Secured, hybrid, unsecured hybrid – thresholds are not hard stops.

If secured, mark-to-market may apply and would need to determine the valuation method for the market value of the portfolio (secured vs unsecured)
Solar loan example  $150K (solar, qualified other, unqualified other)

 Risk:  Financial risk – missing oversight to reconcile actual cost breakdown against purchase order roll-up, including establishing fair market value of the related costs, impact to sales, or participation expectations. Initial quote vs final purchase Order.  Reputation risk – no ceiling (impact on members)  Context: Secured Solar  Max Cost $20-$35k CFPB  https://www.consumerfinance.gov/data-research/research-reports/issue-spotlight-solar-financing/ As of 6/30/24 – Out of 12,941 secured solar loans, 26% (3,358) may be hybrid based on dollar amounts. (greater than or equal to 35k)  (See Addendum C) Recommendation  Require itemized breakdown of cost associated with work/collateral being financed. (See Addendum B)  Require a valuation method and Matrix to assist with oversight for determining outliers. (above average cost)  Identify LTV requirement for residence we are adding UCC to for overall LTV of home and improvements 

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The guide states that the asset value will need to match the amount requested. Is there any calculation or valuation that would determine the true value of the collateral being financed?  There is no tools to get the appraisal which is why the UW list everything at 100% even when we sale. 


A UCC-1 gives the credit union a perfected security interest in “fixtures” but under the U-C-C (more details below), only certain kinds of property are considered a “fixture.” To be a fixture, the collateral needs to be integrated into the property, but it also cannot be “ordinary building materials.” Solar panels are generally considered fixtures, so a UCC-1 would perfect that security interest in those panels. But many remodeling projects like a kitchen or bathroom remodel largely utilize “ordinary business materials” so a UCC-1 will not give you a perfected security interest. That said, filing a UCC-1 can at least still alert a title company that there is at least some insurable interest, triggering procedures to pay off the home improvement loan as part of any transfer of the property. 

Example(Addendum D) the roof will be “ordinary building materials” so you could list it in a UCC-1 but it won’t give you a security interest in the roof, patio/fascia, or the radiant barrier. There is no way to have a security interest in the tree services as it is not tangible. You could list these things on the UCC-1, but they’re not going to perfect a security interest like you would be able to with the solar panels. In other words, the loan will not be fully secured, but partially secured. be careful about what promises may have been made in a loan participation agreement as to the extent of the security interest in the collateral.

*we were not able to find documentation pertaining to an Asset Recovery process and enforcing our lien
*if we issue a U-C-C with the intent of enforcing our lien, we may need a process to determine when to collect vs when to abandon  
*1009 documentation – Need to identify when 1009 was issued once determine if the balance is abandoned and no longer attempting to collect deficiency balance (charged off balance) (process for BK as it relates to 1099)
*Assumption could be one option to help with the transfer of ownership for primary residence 
Commoditization of collateral (market advancements) could lead to decreased costs and saturated markets which would need to have an asset recovery strategy to help minimize losses/ charge offs

For example, when S-H-L shifted pricing recently, it put some strain on dealers and their income possibility leading to some going out of business and/or in a situation of having to navigate a financial strain on their business 

Example, the customer’s company (roofing company) was doing the work on his loan. Oversite for conflict of interest with customer and work being completed. Separation 
Workmanship warranty document – (may be used if the debtor is the one that is applying and doing work) – Assuming this is the route to mitigate conflict of interest, may require additional independent oversight to validate output in addition to the signed completion certificate by the member.
*Looks like some loans may have completion certificates but not all loans.

Objectives
Using high capability SMEs,
Conduct an evaluation of S-H-L operational documentation to insure standards and risk tolerances and management are appropriately defined for risks related, but not limited to:
Dealer/Installer relationships and exception tracking
Credit risk and exception tracking
Verification standards and exception tracking
Legal documentation and exception tracking
Lien perfection and exception tracking
Collections and recovery and exception tracking
Perform systemic process review using multiple what-if scenarios to identify weaknesses in operational standards and processes that could present at some point in the future. Create a list of recommendations or conclusions
Conduct reviews in alignment with the audit design
Take a collaborative approach. This is for the benefit of Credit Human.