Custodial Reconciliation : Reduce Risks with Automation

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

Analysts are drowning in data. Every month, they spend the majority of their working hours gathering data from various sources, entering it all into a massive spreadsheet and manually producing reports. This is a reality for most custodial reconciliation operations, making this process an obvious candidate for automation: eliminating all these manual touchpoints could save enough FTE hours to make a material difference.

Yet, while other parts of the mortgage industry have embraced technology, mortgage sub-servicing remains behind. We often find that sub-servicers have cobbled together a custodial reconciliation process that relies on rudimentary tools built on Excel and Access, with some provisional automation from in-house feeds or macros. If this sounds like your current process, it’s time to consider introducing more robust automation to your operation. After all, automation has already proven an ideal means to significantly decrease regulatory risk, and it can also eliminate numerous operational and business risks.


   At the heart of the conventional custodial reconciliation process are analysts who manually gather, enter, and manipulate data in applications like Excel or Access. This approach carries two primary risks: the potential for introduction of errors and the inability to “lock” data with a reliable audit control once a reconciliation report is submitted.

    Complete automation of data gathering and import eliminates both these issues because it reduces human need, and opportunity, to manipulate data. When the reconciliation work template is automatically populated with the correct data, analysts have more time for value-adding activities, such as researching the root causes of reconciliation outages. And the data is essentially “locked” by the system, which prevents purposeful or inadvertent tampering.


    Custodial reconciliation processes tend to vary widely, not only among different sub-servicers, but also among analysts within the same organization. This lack of a consistent process for all analysts creates the potential for inconsistent procedures and ad-hoc solutions when challenges arise. Often only one or two employees will “own” and understand the idiosyncrasies of the process, which creates a potential key person risk. Variations in procedure also contribute to lengthier training time for new FTEs.

    Introducing automation also brings the standardization of processes, which ensures the same procedure across reconciliation types, resulting in reduced training time for new FTEs and eliminating key person risk. Furthermore, standardizing the custodial reconciliation process can also help to standardize upstream and downstream business processes that require manual data and cross-department communication, such as processing remit adjustments.


    Until chaos breaks loose, custodial reconciliation is a frequently overlooked process because it tends to lack adequate visibility. Managers have little means for tracking analysts’ productivity and progress, other than self-reporting. Spreadsheet-based processes also make it cumbersome to accurately track and age outages. Reconciliation reports are often prepared manually and delivered as hard-copy printed documents, which are difficult to share more widely in the organization. This lack of visibility creates a constant risk of “gotcha” moments, where managers may not know about an outage or issue until its Regulation AB deadline is looming.

    Automated outage identification allows for automated tracking and aging of outages, along with the ability to track individual analysts’ progress and performance. Meanwhile, electronic report generation can also be automated. Improved visibility of custodial reconciliation at every level of the process, from individual outages to overall department productivity, facilitates more proactive business decisions


    How much time do your analysts dedicate to outage trend analysis? Do they have an opportunity to look back and identify, for instance, outages that recur every month, requiring repeated write-offs? This sort of value-adding activity often remains undone because a manual custodial reconciliation process leaves insufficient time for this kind of proactive research and analysis.

    Even the identification of root causes can often be largely automated according to a set of predefined rules, so analysts can devote their time to researching more complex or uncommon issues. Automation of root-cause identification frees up analysts to spend their time on research that reduces write-offs and risk of audit findings.


    A mostly manual custodial reconciliation process requires extensive Quality Assurance (QA) from analysts before they submit their work, and another round of Quality Control (QC) prior to formal audit. These processes are both time intensive, and because they still rely on humans, there is still a risk of errors that can result in audit findings.

     Automation of any system requires you to define controls and rules, and workers cannot operate outside those parameters. Introducing automation to various aspects of the custodial reconciliation process eliminates human-introduced errors. Automation can also be used to prevent analysts from submitting incomplete or inaccurate reconciliation reports. Combined, these two functionalities significantly reduce the risk of costly mistakes, in addition to the time analysts often spend on their own QA, and the time spent for QC.

     As the mortgage industry continues to evolve, automation will undoubtedly become a vital means for improving efficiency and mitigating risk in the custodial reconciliation process. Forward-thinking leaders will embrace automation as a sound strategy for ensuring regulatory compliance, standardizing processes, increasing visibility and much more.