Posted by: Jonathan Foxx

From CAMELS to CORE™

     For thirty years, a supervisory risk rating has been used by federal regulators to evaluate the overall condition of the country's banks. The Uniform Financial Institutions Rating System (UFIRS), adopted by the Federal Financial Institutions Examination Council (FFIEC) on November 13, 1979, set forth the rating system that provided a unique and methodical way to determine bank stability.

     Under the UFIRS a bank is assigned ratings based on performance in the following five areas: Capital Adequacy, Asset Quality, Management Capability, Earnings, and Liquidity. Given the acronym CAMEL, this system has been used ever since by federal supervisory agencies to evaluate the safety and soundness of a banking institution. In January 1997, the FRB revised the UFIRS by adding a sixth component for Sensitivity to Market Risk. This CAMELS rating system provides a composite of a bank's condition and overall performance, and it has been adopted by many countries, including, of course, Hong Kong.

The Core™ is the Cure

     However, no similar rating system has ever been devised or federally mandated for entities that originate residential mortgage loans. If such a system were in place, standardizing all findings, the regulatory and state licensing agencies as well as the public would be assured of the kind of oversight that will serve to strengthen the mortgage industry and consumer confidence.

       In 2007 we developed a risk rating system to evaluate the safety and soundness of loan originating entities. Called the CORE Compliance Matrix™, our procedures assess four critical components and five composite ratings that must be considered when evaluating the safety and soundness of an entity originating residential mortgage loans. We evaluate a company's Compliance Program, Organizational Structure, Regulatory Risks, and Enforcement Strategies.

     The CORE™ review findings are derived through the risk rating protocols of our CORE Compliance Matrix™.

About the Author: Jonathan Foxx is the President and Managing Director of Lenders Compliance Group, a risk management firm specializing in all areas of mortgage and lending regulatory compliance.