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To kick off 2021, CWDL held the next webinar in our ongoing mortgage banking series, Accounting Department Efficiencies. Moderated by our Director of Business Development, Kasey English, speakers included our Accounting and Consulting Director, Susan Volpe, our Mortgage Banking Partner, Dustin Pfluger, and our guest Carl Wooloff, Director of Sales and Marketing at Loan Vision (with a surprise cameo by our Managing Partner, Mark Wilson). The following is a summary of the discussion on why investing in your accounting department is so crucial to the health and profitability of your business.

Evaluate the way you receive data from your accounting system. Are you getting loan level accounting data?

Loan level accounting is the tracking all the revenue, expense, assets and liabilities associated with the closing and sale of a mortgage loan. What profit resulted from each loan? What expenses were incurred? What commissions were paid out? While it sounds so simple, many lenders do not have that level of understanding. Most of the time, to do this properly you need to have your accounting system set up to in the most efficient and effective way to maximize reporting.

When lenders move to loan level accounting, they will allocate each revenue and expense item to a particular loan. This may seem like a daunting task for those who haven’t done it before, but through automation, this can be done fairly simply. Through a system of best practice steps and process improvements you will be able to achieve this as an important step toward making better informed decisions about your company. Loan level accounting is critical to running a mortgage bank.

When is it time to upgrade to a mortgage specific accounting system?

Our speakers all agreed that there is no magic number of loans per month that necessitate a move to loan level accounting, and therefore a migration to a mortgage-specific accounting system. However, they proposed two indicators that you’ve outgrown QuickBooks (or a similar non-mortgage industry-specific system):

  1. You’ve had to grow your accounting team or your team is working extra hours or overtime to keep up with loan level accounting in QuickBooks. Think about all the manual entries you need to make in QuickBooks in order to do loan level accounting (or as close as you can) and the spreadsheets you have to manage. There comes a point where too much transactional data is being keyed into a system that was not built for it.
  2. You’ve become a more complex organization; for instance, you’ve started hedging or selling into the GSEs. Your compliance obligations dictate the need to produce more sophisticated financials.

Beyond compliance requirements, loan level accounting – and using an accounting system that makes that possible – is also about maximizing profit. Loan level accounting provides lenders with insight to manage leakage, understand actual vs. anticipated gains and examine concessions by loan officer, among other details. The foresight and information you can pull from your loan level accounting data can help you make critical business decisions for the future that you may not see otherwise.

The Relationship Between Accounting and Operations is Critical

While the move to a system that allows loan level accounting is critical, our speakers all agreed that it is not the silver bullet. After all, the data coming out of your accounting system is only as good as the information going into your LOS. You can spend thousands or hundreds of thousands of dollars on technology, but if the data going into that technology is garbage, that technology (and money) is wasted.

Carl Wooloff of Loan Vision shared a client case study that exemplifies this issue. A client doing about 1,000 loans per month had moved to Loan Vision, but the CFO was frustrated by the data errors that were coming out of the LOS. He and his team had to spend hours cleaning up the data in order to produce good data from Loan Vision. Once he shared this with the CEO, and the CEO saw first-hand the potential of Loan Vision should the data be clean, the CEO immediately changed his mindset. Where he had once been hesitant to ask the loan officers and processors to improve their data input into the LOS, he now saw the power of the data (and realized his ask of the loan officers and processors wasn’t significant to begin with!) The CEO also appreciated that the accounting department could now operate at a higher level because they wouldn’t be cleaning up LOS data – or hand-keying data into QuickBooks any longer.

Beyond enlisting your CEO to talk with the loan officers and processors, what more can be done to ensure that the data coming from the LOS is accurate? Education and relationship development. Susan Volpe of CWDL shared that she and her team focus on helping their clients’ accounting staff teach everyone using the LOS to enter the information correctly. They may not realize their mistakes! Also explaining that the information that they enter drives the financials can help them see the bigger picture.

According to Wooloff, the accounting departments who close the quickest at month-end and have the cleanest data are the ones that have the best relationships with the rest of their business. Accounting is the end of the line, so whatever comes before it has to be controlled and managed. It can be a difficult conversation to have, but oftentimes the reason you’re having accounting issues is because of everything that comes before – data is not being entered correctly or is missing in the LOS, controls aren’t there, etc. As he said, “If it’s a wild west in your LOS, it’s going to be a wild west in your accounting system.”

Dustin Pfluger of CWDL gave even more reason to ensure that the data going into the LOS is correct. From an auditor’s perspective, he said, when your data is incorrect, even if it’s immaterial, it raises a “red flag” for your auditor. What else is going on? The little issues can add up to bigger issues.

Right-Sizing Your Accounting Department

Volpe is often asked, what is the “right” size for an accounting department? While there is no formula, she shared that the ideal size and make up of your accounting department depends on a few things: are you automated? Do you have sufficient processes in place? What does month-end close look like? Answering those questions can lead you to better understand your staffing needs.

And beyond size, having the right skillsets in the right positions is key to a healthy accounting department. As Pfluger shared, if you have a CFO doing journal entries or even more than a basic review of financials, your CFO’s in the wrong spot. CFOs should be focused on strategy, sometimes secondary – the big picture. Sometimes companies believe they need a CFO, when really they need a strong controller instead.

You should also factor the role of software into your accounting staffing needs. While software can be expensive, it’s a one-time expense. Evaluating that cost – and the lift you get from properly implemented and functioning software – against staffing costs is critical. How much you are spending in salaries, benefits, training, rehiring/replacing staff, etc.? During this pandemic, Wooloff shared that he knows companies who have tripled in volume yet haven’t added staff to their accounting department because they’ve simply scaled the technology they’re using.

Transcending the concept that the accounting department is a cost-center (or, as Wooloff termed it, the “red-headed stepchild of mortgage, viewed as an unpleasant necessity”) is essential to fully understanding your accounting staffing and technology needs. Mark Wilson of CWDL believes that your accounting department holds the answers to making profitable decisions. If you’re not investing in your accounting department, you might not be getting the answers you need to anticipate a market shift. For example, looking back to the incredible margin compression in 2018, the accounting departments that saw that and were able to report that back to management quickly because their data was good and solid – that was the difference for those companies. While mortgage companies are coming off of the incredible volumes of 2020, there’s a bit of a market shift going on right now – are you getting the information you need from your accounting department? Or are you just getting by? In the long run, sophisticated companies survive because they make the investment into their accounting department.

Trend: Outsourcing Accounting Functions

The mortgage industry is realizing that they outsource a lot of other functions, so why not outsource some of your accounting function? While the speakers agreed that there are some tasks that aren’t suited for outsourcing, there are a lot that you can – and outsourcing allows you to fluctuate as your business changes. You don’t pay benefits, you don’t pay full burden costs. And it’s difficult to find and hire staff who are specialized in this industry, which is really important. With outsourcing, the person or team steps right in – there’s no learning curve, no training period. Your outsourced team knows the industry language and can help you right away. But it’s key to have a key member or members on your accounting team who can run the day-to-day.

But is outsourcing alone the answer? Of course not. To wrap up the webinar, the speakers agreed that software, outsourcing or internal accounting staff are not the answer alone – they must work in unison to create and sustain a healthy and high-performing accounting department.