Best Practice: 5 MORE Considerations for Custodial Reconciliation

--By Christian T. van Dijk
President, Integra Mortgage Solutions

Thanks to all the responses to our previous article, Best Practice: 5 Considerations for Custodial Reconciliation, I was inspired to share five MORE Considerations for a sound custodial reconciliation process. Please share your thoughts and let me know what you think of this list.

6. Clearly classify current reconciling items into research buckets.

Aside the standard TOEC formulas, an additional set of calculation that may be included within the bank reconciliation process is an automatic classification of reconciling items by research bucket. This classification applies to current outages and is intended to help analysts in their research activities when identifying reconciling items. The following list represents a highly generalized classification of reconciling items, classified by research category using data that should already be present to fuel the process. Far more refined research categories (and perhaps even automatic reconciling item identification!) may be accomplished depending on the overall quality, consistency, and detail available within the source data inputs. The research categories provided below also represent a hierarchy, meaning that items are classified as they meet the criteria of each bucket per the order below:

  • Paid in Full: Check for ending actual remittance balance to be zero, along with a payoff date provided in the source data.

  • Liquidation: This  classification applies to S/S remittance deals only. It is given when the actual remittance balance is zero, and neither the beginning and ending scheduled remittance value is zero.

  • Reinstatement: Check for the beginning scheduled remittance balance to be zero and the ending scheduled remittance balance to not be zero. Also check for the beginning actual balance to be zero and the ending actual balance to not be zero as either of these conditions can be true for a reinstatement.

  • Modification – Simply check whether there is a modification date provided in the data.

  • Stop advance – Similar to a Modification, check for a stop advance date provided in the data.

  • Miscellaneous – This category catches any outages not linked to a research category above.

7. Apply a standard description to reconciling items.

This one is key. Any outages or reconciling items resulting from the bank reconciliation process should be identified and categorized using a standard description that is meaningful to the business (i.e., reason codes). We suggest defining a comprehensive list of coded values representing all the different types of reconciling items in a typical reconciliation cycle. For example, consider grouping all reconciling items related to liquidations under a standard notation - LIQ1 to represent liquidation net loss, LIQ2 to record a service fee outage, and so forth. Another important detail to add to this master list of standard descriptions is the expected resolution type, in other words, if the item is expected to be resolved via wire, remittance adjustment, or perhaps a system-level adjustment as would be the case for non-cash outages. Maintaining discipline with this consideration helps in fulfilling #8 below.

8. Meticulously clear ageing reconciling items, starting with the oldest first.

It is both tempting and (theoretically) time effective to simply bump the list of reconciling items against wires/remittance adjustments by amount and delete these off the spreadsheet as resolved items. Unfortunately, any virtue found in this approach quickly goes away when a discrepancy is identified a couple months later (i.e., clearing a wrong item) and an analyst is tasked with trying to unravel the components in an effort to correct the issue. We recommend implementing a mechanism for tracking the resolution of reconciling items, which also ensures that the correct wire/remittance adjustment is paired with the intended outage. Adopting a practice of applying standard descriptions, along with an expected resolution type as suggested in #7, addresses the first part of this recommendation. A solution to the second part of the recommendation related to pairing wires/remittance adjustments to outages is offered below.

9. Optimize wire/remit adjustments for future clearing.

This suggestion may require some coordination to accomplish and some discipline to maintain, but the added value of this effort will be well worth the work. The simplest and most effective way to properly pair wire/remittance adjustments to corresponding reconciling items is to link these together using a common reference number. Implement this consideration by assigning a unique reference number to outages identified during the current period. If a standard description and corresponding resolution type is assigned to each reconciling item as suggested above, a listing of required wires and remittance adjustments should be readily available at the conclusion of each cutoff.

Passing along this unique reference number to the wire/remittance adjustments request as the transaction identifier creates an immediate link between both items that can be leveraged for clearing. The real trick in having this work is convincing the downstream processors (i.e. Investor Reporting and Treasury, or the team responsible for wires) to include this value as part of their process from request through transaction settlement.

As an extra credit bonus, include a unique identifier for these transactions at the account level as well ( remember, items in TOEC are at loan- and pool-level, but these settlements typically disburse as a rolled-up transaction by bank account). This additional step will save a lot of time pairing bank statement items to corresponding book wires, thus enabling book-to-bank reconciliation for Cashbook.

10. Track and measure the process.

All the considerations leading up to this one focus on ensuring a sound bank reconciliation end result, which is fantastic. However, visibility and metrics gathering over the process as it is happening in real-time distinguishes a proactive team vs. a reactive team. What’s the difference? A reactive team sees smoke and eventually reaches the fire with whatever tools happen to be on-hand to try to extinguish the flames, and a proactive team sees the spark that started the fire – this level of visibility is afforded by adopting well-defined work assignments and developing a dashboard to track the resulting metrics.

We recommend doing what most companies already do: create a spreadsheet to assign analyst resources to specific bank reconciliation reports, but we push it one step further by suggesting the inclusion of triggers to track the progress within a cutoff as it is happening. Create a spreadsheet or tool that listens for status changes in bank recon reports (e.g., Pending to Approved), as well as a means to collect metrics (e.g., number of reconciling items by ageing or number of items resolved vs. outstanding) in an effort to get a meaningful pulse of the process as a whole.

The development of the dashboard is certainly an evolutionary process; the trick is to subscribe to this mentality or management overview philosophy if the terminology is more fitting. Either way, evaluating the health of a process needs to occur as the process is happening and not after the process is completed; test this statement by applying it to a living body. Find creative metrics (and corresponding triggers) to track the process as it is unfolding to prevent a spark from becoming a forest fire.