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Contact Us The Hilltop Companies is headquartered just outside our nation’s capital in McLean, Virginia at:

The Hilltop Companies8300 Greensboro DriveSuite 425McLean, VA 22102Phone: (703) 356-3350Fax:       (877) 271-1650Information@thehilltopcompanies.com

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Home About the Hilltop Companies

The Hilltop companies include six separate companies, each of which focuses on providing professional services to either a specific industry segment or provide specific services (accounting, compliance and internal audit and data technology) to many industry segments.

Hilltop Advisors provides professional services to financial services companies with special focus on lenders of all types, loan servicers, capital markets entities that sell, securitize and buy loans and other assets.   Hilltop Federal Services provides professional services to the finance sector of the Federal government (agencies that make loans, guarantee borrower repayment, securitize loans or are financial services regulators.  Hilltop Government Solutions provides outsourcing and staff augmentation services to various Federal agencies and Prime Federal contractors.   These services do not require specialized education, certifications or significant industry experience but are critical to assist our client agencies that need operating support.   Hilltop iSolutions provides professional services to all companies that have IT/Data controls, compliance, governance needs.  Hilltop   Accounting provides professional services to all companies needing accounting, compliance and specialty audits, fraud investigations and CFO duties (when still too small to have a full-time CFO).  Hilltop Advisory Partners provides professional services to the real estate and hospitality companies.

Hilltop’s delivers the following services to our entire client base:

Strategy Consulting Services – assessing current strategies, identifying new opportunities, brainstorming involving our clients in discussions that should impact the course of the business (market place changes, competition, delivery systems, customer base, risk appetite, costs and profit targets, regulations, technology, etc.), assisting in designing and implementing new strategies, helping with change management,

Risk Management Consulting Services – related to all enterprise risks (with special emphasis on credit risk), identifying risks, designing, implementing and testing controls (internal and operational controls, internal policies, contract terms, lease calculations and any other compliance testing needed to ensure that our client is meeting all business, regulatory and contract requirements),

Regulatory Compliance Consulting Services – including designing, implementing and testing (performing compliance exams audits & pre-exam readiness reviews) the compliance management system, our client’s policies, procedures and controls and providing remediation help when our client needs to “fix” regulatory compliance exceptions.

Litigation Support and Expert Consulting Services  – Expert Industry and Audit/Accounting testimony, damage calculations, settlement claims disbursement/monitoring, research, etc.

Fraud Investigations and Forensic Accounting Services  – assessing fraud vulnerability, controls design and implementation, identification of frauds and related losses/damages, reconstructing financial data (including “follow the money” assignments,

Performance Analysis & Performance Improvement Consulting Services – using PerforMetrics© (our proprietary methodology and tool to measure operating and financial metrics) and our business process improvement consulting efforts,

Finance, Accounting, Reporting, Specialized Audit and Compliance Services – designing, implementing and testing accounting policies, processes, internal controls and financial systems, assessing or assisting with audit readiness, providing internal audit support, providing finance and accounting activity support, CFO services, etc.

Information and Data Technology Consulting Services – designing, implementing and testing IT and/or data controls, assessing data governance/integrity/security/compliance, designing business requirements, assessing eNote and MISMO utilization, SDLC assessments and user testing,

Mergers, Acquisitions, Due Diligence Consulting Services – assisting with diligence, valuation, contract compliance, purchase price calculations, purchase accounting, post-merger integration activities.

Organizational Effectiveness, Project & Change Management and Training Consulting Services

Our management members are all thought leaders, experts in one or more functional skill areas and all are active in various industry segments. Our leaders both identify and contribute to market changes and innovation. The Hilltop companies are transforming organizations through the skillful alignment of vision, people, process and technology solutions. Our solutions are implementable and with our unique philosophy of collaboration with our clients, we can unlock under-utilized resources, assets and competencies and identify issues which may be preventing our client from operating at a “leading practices level of efficiency and cost control”. By aligning the right consulting/accounting resources, implementing innovative but proven processes and identifying the proper technology solutions, we can change and reshape our clients’ businesses. Hilltop solves our client’s business challenges and enables them to take advantage of market opportunities!

News & Events The Hilltop Companies’ senior leaders are known throughout the industry for their extensive knowledge and expertise.  They frequently speak and present at key industry events and have authored numerous papers on issues affecting the Banking & Capital Markets, Real Estate and Federal & State Government Agencies industry segments.  Our published articles focus on the core areas of our practice including; Finance & Accounting, Regulatory Compliance, Risk

Management, Operations, Information Technology and Transaction Services. To access our library and archive of reports and papers, please visit Resources.

For current news about our company including; press releases, new business engagements, hiring news and more, please select from the categories to the left.

Our Services Hilltop’s services reflect our employees’ “experience and knowledge sweet spots”.  Any employee of a Hilltop group company will be deployed to a client engagement based on the requirements/needs and the employee’s ability to contribute to the engagement team’s value added solutions.  So each of the services noted below can be provided to any client of a Hilltop company.   Click on any of the services listed and it will describe the service and the benefits to our clients:

Strategy Consulting Services Risk Management Consulting Services

o Credit Risk o Counterparty Risk o Regulatory Risk o Contract Compliance Risk o Fraud Risk o Operational Risk o Technology Risk o Finance and Accounting Risk o Interest Rate/Hedge Risk o Other Risks

Regulatory Compliance Audits & Pre-exam Readiness Review Services Litigation Support and Expert Consulting Services Fraud Investigations and Forensic Accounting Services Performance Analysis & Process Improvement Consulting Services Organizational Effectiveness & Change Management Consulting Services Finance, Accounting, Reporting, Specialized Audit and Compliance Services Information and Data Technology Consulting Services Mergers, Acquisitions, Due Diligence Consulting Services

Strategy Consulting Services Hilltop’s tag line is “Transforming organizations through skillful alignment of vision, people, process and technology solutions.”  Our team understands that a business strategy must have

alignment of these business components or else it is likely to fail.  Further, Hilltop understands your business and has worked with many clients – some of which are strategic and all operations are aligned, others that are not aligned at all.  Some strategy firms claim they know your business but have never worked within the industry and cannot identify how to align the “big white board ideas” with the business operations.

Defining a business strategy that is effective and by design can be aligned with the business operations requires the strategy to be:

easy to explain what the strategy will do to meet very clear stated vision, goals, and objectives (what will the strategy achieve?),

has clear and measurable rewards for successfully meeting the goals (will know when it is a success),

is not too controversial (all employees can support at least part of the strategy), it must involve a longer-term plan of action (not the old 5 year plans but not 3 months

either), the strategy has strong foundational elements (assumptions) that the Company will build

upon (strengths of the company – people, process, technology, product, etc.), and there is a clear strategy design (i.e. at the “plumbing level”) that shows how to implement

such.

If your company’s strategy cannot meet these criteria, a “refresh” review of the strategy is a good idea.

A strategy framework is management’s “overall game plan” for enhancing the performance and positioning the Company to be more competitive, while meeting the customer’s needs.  While individual strategies are then established to address the various aspects of the overall game plan, each strategy must be integrated with the other strategies in order to be successful.

Hilltop’s business strategy consulting is not “pie in the sky” or “white boarding business ideas that cannot be implemented”.  We work with clients to review and refresh their business strategy to ensure that they meet the baseline requirements of a strategy and given our knowledge of the business – provide feedback on whether the strategy will produce targeted the business enhancements.

Hilltop views the details of a strategy to be very important.  Here are some of the many detailed questions to be answered when we help review a strategy:

Who is the target customer? What is the value proposition to that customer? What are the essential capabilities needed to deliver that value proposition? Can the company grow? Is there value in growing i.e. is it profitable or does it meet a customer objective? What is the demand to support the growth? Can your company grow by taking market share? How do you attract millennials to use your company? What is the company’s market share? Market position?

Does brand awareness matter? What is the target profitability? How does the company achieve such in a competitive market? Do customers perceive the company’s services positively? Are the Company’s business processes efficient – cost, timely, high quality, compliant,

etc.? Is technology expected to provide a competitive advantage and if so – how? Is the Company a leader or a follower in the market? Where should your company “play” in the market? How can your company “win” over its competition? What will help your company to be “nimble” to react to market and customer changes?

Ultimately, the strategy is the road map to meeting your vision, goals and objectives, while also answering in practical terms how your company differentiates itself from competitors, how it earns revenues, and what business earns the best profit margins.

Risk Management Consulting Services Hilltop’s Risk Management practice can evaluate your company’s enterprise risks as noted below.  Most often, our client engagements involve one or two related risk areas.  While we can assess an individual risk, we would always recommend that our clients be aware of the other overlapping/related risks that may also be of concern (i.e. mitigating one risk may increase another).  We recommend that an approach which identifies, assesses, prioritizes and mitigates various related risks is the best way for our clients to address “enterprise risk”.

Hilltop’s professionals (including risk managers, auditors, fraud investigators, litigation Experts, etc.) have extensive risk management experience, whether servicing our clients or having performed risk management duties at previous employers.  Our depth of risk knowledge and management policy/techniques is heavily concentrated in the financial services, real estate and the Federal financial sector agencies.

Hilltop’s Risk Management Assessment methodology can be applied to any risk type.  A summary of the steps used in our risk methodology includes:

Assess the Company’s financial, operational and technology risks and compare to the risks that the Company has identified.

Assess the Company’s policy for completeness of risk coverage, clarity and consistency related to all identified risks,

Identify those risk(s) that do not have a related Company policy, set of control procedures, monitoring capability, etc.

Identify event(s) that have occurred which have a risk that was not previously identified or is a larger risk than previously anticipated.

Assist in creating/revising Company’s risk policy as needed to achieve leading practices: o Policy to cover all aspects of the identified risk,

o Specific controls are designed and implemented to prevent, detect and mitigate risks and ensure that the policy is adhered to,

o Monitoring process is designed and implemented to regularly assess policy compliance,

o Test procedures designed and implemented to test compliance with risk policy. Test the risk monitoring and detection procedures to evaluate the controls’ effectiveness

and compliance, Assess Internal Audit and/or other risk teams’ activities in identifying, monitoring,

quantifying and reporting risks to Management, Evaluate Management’s risk oversight:

o Completeness, accuracy and integrity of data contained in the risk reporting,o Definition of the risks that Management has defined,o Comprehensiveness of the measurement process and the risk levels (acceptable,

requiring a warning, and requiring significant attention/action), ando Actions taken and their effectiveness in mitigating identified risks.

Assess the technology applications that support the risk management process (risk analysis tools used by the company),

Evaluate management’s response to identified high risk areas, non-compliance with risk management or compliance controls, handling of risk concerns raised by regulatory examiners, external auditors, etc. and assessing the reaction time, mitigating steps taken and effectiveness in reducing the risk level and mitigating the risk impact.

Overall, risk management relies heavily on financial, operational and technology controls.  Hilltop’s Risk Management Assessment methodology addresses other important questions such as:

defining various risks and how they impact the Company, identifying what key risk elements are and how Management detects such, assessing the probability of a significant risk occurring, assessing the frequency of the risk occurring, determining how big the risk could become, determining the financial or operational impact to the Company if the risk grows to

certain levels, identifying different actions, involvement, sensitivity and/or response times as risks

increase, and reporting increasing risk levels and Company response to the Board, Regulators, etc.

Hilltop is particularly qualified to address the above questions as we understand the financial services, real estate and Federal agency risks.  Our risk management team has the experience and knowledge for your business.

Click on the title of any risk management category to read more about Hilltop’s services in the risk area of interest:

Credit, Counterparty, Regulatory,

Fraud, Interest rate and Hedge, Operational, Finance and Accounting, Liquidity, Debt and Capital, Market, Economic, and Political, and Reputational.

Credit Risk Credit risk is Hilltop’s “strong suit” as we have significant depth of knowledge and experience with the extension of credit in all lending areas (Commercial, Multifamily, Residential mortgage, home equity loans/lines, consumer, SBA, education loans), servicing and monitoring credit risks, loss mitigation and assessing the recoverability of distressed loans.  Our services incorporate every aspect of the credit risk cycle i.e. origination to payoff:

Credit Policies, Credit Review and Controls

Our credit policy and review methodology includes:

o Understanding Management’s risk appetite and its expectations for the Company’s credit policy,

o Assessing credit policy design and effectivenesso Assisting with the re-design and/or documentation of the credit policy, if needed,o Designing and implementing loan procedures that adhere to the credit policies,o Creating monitoring efforts to determine that credit risks are being managed in

accordance with Management’s risk appetite,o Performing credit reviews and controls testing,o Analyzing the portfolio’s risk trends, delinquency performance, loss frequency

and severities,o Assessing the loan loss mitigation efforts that were executed,o Reviewing the loan status, borrower financial position and collateral valuation to

identify potential loan loss,o Identifying the impact of projected loan losses on the ALLL and overall financial

statements, and

Analyzing risks, deploying loss mitigation activities and understanding loss frequency and severity will help your company with understanding how to change credit and underwriting policies, loan origination and/or loan shipping/delivery (to investors) procedures, as well as, ongoing loan servicing techniques.

Underwriting Policies and Procedures

Hilltop’s focus on underwriting policies is to analyze and test whether underwriting is consistent with the Company’s overall credit policies, including investor requirements for sold or securitized loans.  We often find that underwriters use processes and/or credit policy from their past employers.  Our typical underwriting engagements include:

o testing loan decisions (approvals and denials) to assess adherence to credit policy,o assessing early payment defaults (EPDs) and any trends of such EPDs,o assessing prepayment experience and identifying underwriting factors that may

identify potential early prepayment loans,o determining that the credit approval decision is properly supported/documented,o determining if “underwriting exceptions” have documented approval in the loan

file,o assessing whether all significant credit risks for the loan are appropriately

identified, ando assessing whether all tested loan underwriting decisions were made in compliance

with the Company’s policies, investor requirements (where applicable) and regulatory requirements.

The Company’s underwriting policies and procedures are a “first line of defense” in the overall controls process to ensuring the its Credit Policy is begin adhered to.

Quality Control (QC) and Compliance Efforts

The Company’s “second line of defense” for its overall credit controls is their QC and Compliance efforts.  Hilltop has helped many lenders establish these functions and help maximize the effectiveness of such control efforts.  A sample of our services are listed below:

o retest a sample of loans that QC and/or Compliance have reviewed to ensure the findings are accurate and complete,

o assess Management’s responses to either the QC or Compliance teams’ findings (were they supportive, pro-active or not),

o assess the completeness of the review performed by QC i.e. are the test procedures consistent with assessing compliance with the Company’s credit policies and/or investor requirements,

o assess the completeness of the review performed by Compliance i.e. are the test procedures consistent with assessing compliance with the Company’s policies and regulatory requirements,

o assess QC’s review of loans where “reps and warranties” have been granted by the Company,

assess whether QC or Compliance have consistently identified those loans where buyers have asked for the loan to be repurchased

Loan Ratings Assessment

Loan ratings are required by the Federal and other regulators.  Hilltop’s credit risk team members have performed many independent loan reviews which resulted in recommended loan ratings.   Some of our typical services include:

o perform Hilltop’s “independent loan review” (which includes all of the following individual services),

o review and critique the loan ratings policy, procedures and rating results,o assess whether the loan rating definitions are well documented,o determine if the Company provides training to internal loan resources who

perform the loan ratings,o assess the scope, test procedures and report content of any independent loan

reviewers that the Company may use,o identify major trends over the past several years that suggest any improvements

that have yet to be made by the Company,o assess Management’s response to regulatory, internal loan review, internal audit

or other loan rating reviews, and

assess on-going monitoring processes to determine the effectiveness of identifying new or recurring credit risks.

Independent Loan Reviews

Our “Independent Loan Review” for banks is well received by examiners due to the completeness and accuracy of the reviews and their independent nature.  Such review is normally provided to the Board, Senior Management (specifically the Chief Credit Officer) and Internal Audit where applicable.   Hilltop has designed its “Independent Loan Review” to meet or exceed the requirements of the bank regulatory agencies.  The review can be “truly independent” (i.e. where Hilltop sets the scope, procedures and reports findings without any direction from the Company) or can be completed in conjunction with the Company’s Internal Audit or Loan Review groups.  Our review can be completed on either an annual or other periodic basis.  The scope of the review can include all of the components noted below or can be limited to specific/combination of components.

The “full scope” loan review will include the following components:

o Review the Credit Policy and establish the scope/procedures for a complete review of the Company’s compliance with its’ policies.

o Analyze the loan portfolio risk segments and trends (with particular focus on new types of loans or new credit trends).

o Select the loan sample using both random (for performing loans) and “biased” (for non-performing or high risk loans) sampling processes. The higher risk loans should be identified given the above portfolio risk analysis and the Company’s risk assessments.

o Assess the Company’s Loan Rating policy and process to determine whether it meets the typical standard used by regulatory examiners.

o Test the sample of loans for compliance with both the Company’s loan origination (underwriting, approvals, documentation, etc.) and loan servicing (collections, customer communications, loss mitigation, default activities, etc.) requirements.

o Test the sampled loans to determine if loans have been appropriately rated in compliance with the Company’s policy and/or regulatory requirements. Perform the loan rating review as of a point in time.  The full scope Independent Loan Review includes, but is not limited to, the following steps:

Reviewing/testing the payment status, Assessing Management’s risk evaluation and how risk is identified (loan

type, portfolio trends, etc.), Test procedures to determine compliance with origination, approvals,

sales/securitization/own portfolio requirements, loan servicing policies, Assess the value of the collateral using the Company’s information and

comparing to Company’s assessment, Review the borrower and guarantor financial information and economic

factors to assess credit risk status, ability to pay, etc., Identifying any risks that may have not been identified at origination, Assessing the borrower’s compliance with loan covenant terms and

conditions, Assessing the Company’s continuous review efforts and rating updates to

ensure timely action if the borrower’s credit position changes, Assess the scale of ratings and their definitions (5, 8 or 10 point scales)

and any instructions of how reviewers should apply such ratings, Perform the loan review and identify Hilltop’s independent loan rating.

o Assess the overall credit management activities to determine level of management oversight, actions taken, remediation steps taken for non-compliance issues, etc.

o Determining the potential loss related to such loan that accounting rules would require to be included in the ALLL.

Our report will indicate the procedures performed, the findings, Hilltop recommendations and loan ratings (for commercial/multifamily loan reviews).   Where Hilltop’s rating may differ from the Company’s, our team will provide the rationale for its rating and indicate where possible information that the Company may want to consider.   For non-commercial loan reviews – ratings are not typically provided but compliance with policy and regulations are the main focus.

Portfolio Credit Risk Analysis and Asset Management

Our credit risk professionals and financial modeling team work together to perform risk analyses of our clients’ loan portfolios.  We assess the risk analyses and asset management policy/techniques used by our clients to determine if their risk identification efforts are complete and accurate.  We assess the loan portfolio’s credit performance to determine if the Company has identified all of the relevant portfolio risks.  Our loan portfolio credit risk analyses include, but are not limited to, the following:

o identifying all significant risk components of the loan portfolio and building a credit model to track such risks:

loan type, loan characteristics, geography, borrower strength, collateral type/strength, real estate value trends, economic cycles, waived credit exceptions vs. losses incurred, roll rate analysis, econometric factors, other specific risks to the type of loan or borrower.

o Identifying risks (such as defaults, early payment delinquency, fraud, etc.) by loan originator, loan process or underwriting tool used, vendors used, response rate of loan servicer to first delinquency, other processes or personnel consistently involved in high risk loans.

o identifying new and continuing trends in the loan portfolio performance and comparing such to National trends,

o assessing the data quality and integrity,o assessing the Company’s loss frequency and severity calculations (accuracy,

completeness, support for assumptions, etc.),o reviewing the Company’s cost of restructuring/modification calculations,o evaluating the personnel and tools used by the Company to perform the

portfolio’s credit risk analysis and performance trends (including actual vs. expected performance),

o assessing whether the loss frequency and severity is measured the same for portfolio analytics and financial accounting calculations, including any loan loss risk related to repurchase and indemnification risks,

o assessing the risk of Regulatory or Investor penalties/fines related to regulatory non-compliance (especially for mortgages i.e. HAMP, HARP, State required workouts or modifications, Investor compensatory fees, violations of the loan sales, securitization or servicing agreements,

o assessing the impact of funding, reconciliation and recovery of all required mortgage advances – escrows, foreclosure, P&I, property preservation, etc.,

o assess the impact of recovery efforts for mortgage related anti-repurchase efforts, insurance claims and investor reimbursements.

Hilltop’s risk analytics uses our various modeling and data tools to identify delinquency trends, understand payment dynamics, calculate portfolio by vintage, calculate loss severity and loss frequency, etc.   Our independent calculations are used to compare to the Company’s assumptions, assess the accuracy of the Company’s calculations and the probabilities of loss (frequency and severity) which are needed for the ALLL calculations.   Our portfolio analytics modeling will also identify the portfolio

components that are subject to higher credit risk, higher probability of delinquency, higher loss per loan, etc.  The benefit of identifying higher risk loans in the portfolio is that it provides the Company with prioritization in its loss mitigation efforts and better information for its ALLL calculations.

In simple terms – synchronizing the assumptions used by Management for the ALLL calculation with the loan portfolio analytics, loss mitigation impact and NPV calculations is critical.  We know that it also provides auditors with a significant “red flag” if there are significant differences between the credit risk analytics and the assumptions used in the ALLL calculations.  Therefore, Hilltop has integrated elements of our independent loan review services (all loan types), our default servicing and loss mitigation services and our loan portfolio analytics and valuation services to be able to provide a strong analytical approach and supporting documentation for all ALLL and reserve calculations made by our team to support the Company’s calculations.

Our credit risk analyses go beyond the owned or serviced loan portfolios.  We are also very focused on lenders who have sold loans with recourse, have representations and warranties on loan performance (repurchase risk), and/or have agreed to indemnify purchasers of such loans for losses incurred. This type of credit risk was a significant component of the “mortgage crisis”. Our approach to these types of credit risk is to analyze from many perspectives – risk management, accounting, regulatory net worth, and overall exposure to credit losses.

Loss Mitigation Efforts

A lender may have excellent credit risk policy in place but without effective controls over compliance with such credit policy and/or appropriate loss mitigation techniques – credit losses will accumulate and likely attract the attention of the regulator.  Our consultants with operational experience in the credit loss mitigation area have “hands on” knowledge of the credit loss mitigation efforts that are expected to be performed (whether dictated by bank policy, Federal or State regulators or the investors who own such loans).

Our loss mitigation efforts include assessing whether the lender/servicer is using proven techniques that will reduce credit losses as well as make your company compliant with the applicable regulations.  Hilltop assesses all aspects of the Company’s loss mitigation and default servicing processes.  We review the policies, walk through the operational processes, interview the key people executing such efforts, assess the technology in use, conduct testing, identify investor or regulator comments, analyze losses taken, etc.  We will often suggest using a “triage” concept which “rates” the severity of the borrower’s credit issues and identifies whether more complex work-out efforts are needed.  This allows the loan servicer to gain efficiency and effectiveness by having their more experienced credit employees involved in restructuring the serious delinquencies/defaults.  Less complex work-outs are handled by less experienced default employees.

Fair Value Accounting for loans and securities

Given that many financial institutions carry some or all of their loans and other assets at fair market value, Hilltop has the accounting knowledge and the valuation skills to assist our clients with fair value accounting requirements.  Our valuation accounting expertise is deepest for the following asset types:

o Residential mortgageso Commercial mortgageso Multifamily mortgageso Commercial loanso Home equity lines/loanso Auto and other consumer loanso Credit card portfolioso Financial instrumentso Derivativeso REMICs, CMOs, other MBS or ABS structured finance assetso CDO, CLO investmentso Mortgage Servicing Rights (MSRs)o Other loans and intangibles.

ALLL Analysis and ALLL Calculations (New CECL rules coming in 2020/2021)

The Allowance for Loan and Lease Losses (ALLL) is a critical requirement for regulated financial services companies.  A typical finding by regulatory auditors is that the ALLL is not consistent in its assumptions with the credit risk management’s loan ratings and overall portfolio status assessment.  Our credit risk consultants and accountants can evaluate the ALLL process to determine the following:

o Is the ALLL calculation performed in accordance with Credit Risk Management policy?

o Does the ALLL calculation consider all of the Credit Review team’s findings i.e. portfolio risk level, trends, new risks, etc.

o Is the ALLL calculation performed accurately and are significant changes tracked as to why such may have occurred?

o Does Management need to document the rationale for any “portfolio risk” adjustments (i.e. “portfolio-wide” reserves)?

o Does Management need to document its rationale for any differences between the ALLL calculation and the balance per the financial statements?

Valuation tools and databases are also an important component in quantifying credit risk.  Our credit risk team has worked with and created many credit loss models (especially the NPV models and the modeling of financial alternatives related to loan restructuring).  We understand how such models should work, how the results should be used and how the regulators will interpret such.  Of course, our focus on the accounting impact of credit

losses is never lost.  Our credit risk management assessment will review the process from identifying potential credit losses through to the final entries for the ALLL.  We have found examples where clients have established the right credit policy, completed the appropriate credit risk analysis and quantification, only to then misinterpret such results when calculating the ALLL and thereby misstating the allowance for loan losses or the reserves for repurchases, warranties, indemnifications.  As former CFOs, bank examiners and auditors, we understand the financial and operational aspects of the credit risk function.

Loan loss accounting is also about to change dramatically in 2018 with the implementation of Current Expected Credit Losses (CECL) calculations being completed for the ALLL.  Our accountants can help your Company plan for the appropriate loan loss accounting and assist in your transition to the CECL standards for loan losses.  Transitioning from the current accounting guidance’s incurred loss approach to CECL will require a significant amount of thought and discussion with key stakeholders. Two key changes that may impact credit modeling include:

o Life-of-loan estimates – one of the most talked about aspects of CECL is the use of a life-of-loan concept, thus creating the potential that estimates need to cover a longer loss horizon.

o To determine the life of the loan time horizon, an institution could take the weighted average life of the loan (by portfolio) to estimate the time horizon over which to forecast losses.

o Banks can then begin developing life-of-loan loss estimates and justify adjustments from the historic average losses.

Reasonable and supportable forecasts will be key to implementing the CECL model.  Management’s assessment of current conditions and forecasts about future conditions will become more important and will need to be justified.  Forecasts may require:

o Significant reliance on Management’s judgment where detailed long-term forecasts are not available.

o Regulatory “stress scenarios” are not intended to be used for accounting purposes.o Processes to support the macroeconomic scenarios used in ALLL estimates under

CECL will need to be developed and documented. Such processes will need to be used consistently.

Hilltop’s senior management members have been involved in one or more of the aspects of loan review throughout their careers.  However, the differentiator for Hilltop is that our professionals conduct such reviews from a number of different perspectives – credit policy backgrounds, risk management, accountant, auditor, bank examiner, etc.   We are not just “underwriters” or “due diligence document reviewers”.   We understand the various idiosyncrasies of credit risk that impact how regulators, auditors and investors think.  We also understand the loan underwriting and monitoring processes that are required to maintain the appropriate credit reserves.

Counterparty Risk Hilltop’s Credit Risk team assists our clients with counterparty risk which involves situations where one party engages with another (Counterparty) to enter a transaction (sale/purchase, merger, loan, services, etc.).  Depending on the role that the counterparty plays – it may be a vendor, asset trader, borrower, subcontractor, subservicer, etc.).  The counterparty risk is the risk that measures whether the counterparty is able to execute the transaction, service, repayment as promised i.e. the counterparty fails to perform.

Our significant engagement experience includes:

performing surveys of leading practices by companies that are in the lending, loan servicing, loan trading/sales and securitization, warehouse lending, procurement and others,

assisting in identifying the Company’s counterparties and the related risks that are involved in such a relationship,

assisting in creating counterparty risk policies and related controls needed to ensure compliance and assess the controls ability to prevent/detect/minimize the counterparty risk,

assisting in performing some/all of the counterparty assessment efforts to prevent/minimize the counterparty risk,

designing/implementing or reengineering initial counterparty risk assessments and on-going monitoring of counterparties,

testing the Company’s counterparty risk controls and adherence to policy.

Regulatory Risk Hilltop’s Regulatory Risk and Compliance practice is the second largest component of our business.  We are very familiar with the regulatory environment for banks, lenders, loan servicers, securitization issuers, credit unions, insurers, etc.  Regulatory risk is significant for all of these companies, especially given the recent years of expanded regulation.  The following Federal/state agencies and GSEs have direct or indirect requirements that require specific regulatory compliance:

OCC, FDIC, Federal Reserve, Treasury, State regulators for consumer compliance and licensing requirements, FHA, VA, HUD,

Federal Home Loan Banks, Ginnie Mae, Fannie Mae, Freddie Mac, and FHFA

Our compliance personnel are very familiar with the on-going changes in requirements as communicated in the Federal Register, Federal and State Agency websites, FHA guides, VA guides, GSE Seller/Servicer guides, HUD and FHA audit guides, MBA’s USAP, etc.

Hilltop’s focus in the compliance risk area is to provide our clients with advice on the following:

identifying our client’s “total exposure” i.e. what are the compliance requirements that apply to their business,

identifying our client’s specific exposures i.e. where the Company may not/is not in compliance with specific regulatory requirements,

assessing whether the regulatory compliance policies are in compliance with the Federal/state/GSE regulations (we often team with legal counsel on this assessment),

assessing our client’s definition of the compliance requirements and what controls have been implemented to monitor, prevent, detect and remediate compliance exceptions (defining the requirements is one of the top reasons for non-compliance),

testing compliance – policies, procedures, controls, documentation, quality of personnel, technology tools applied, data utilized to monitor compliance, etc. (execution of the compliance policies is usually the biggest area where compliance is an issue),

assisting our client in identifying issues prior to the examiner finding such (issues relating to the compliance requirements definition, application, inaccurate or incomplete policies, process exceptions, technology problems, people, culture and the overall compliance management system concerns),

helping with redesign of the compliance policies, processes and/or remediation of compliance exceptions.

Our goal is to help our clients with “staying on top” of their compliance requirements while also managing the efficiency and cost aspects of being compliant (i.e. assessing alternatives to comply without being excessively expensive).

Regulatory actions are generally serious actions taken by regulators to force a change in the entity’s financial position, operations, and/or technology to effect compliance with the applicable regulatory requirements.  The regulatory action can take the form of one or more of the following:

Regular examination comments and recommendations that are typically made as part of the final report.

Supervisory letters that make “strong” recommendations and/or mandates for the entity to implement (Memorandums of Understanding (MOU) or Memorandums Requiring Action (MRA),

Consent orders that are a legal mandate for the Company to respond, submit a remediation plan and perform such within a given timeframe.

Such regulatory actions are hopefully not common occurrences but they are a result of regulatory compliance risk.  However, when they do occur, our clients have engaged Hilltop to assist with the response to the regulator, as well as, design and implementation of new policies and procedures and performing any necessary remediation efforts.  We are comfortable working with the banking regulators, mortgage investors and/or other third parties who may require action by our client.

Our Regulatory Risk and Compliance team can assist your company with planning the response, planning the changes to be made, assist in implementation of the changes and monitoring of the overall remediation activities.   The consent order issued that required hiring of an independent consultant to assess the top 14 mortgage servicers’ foreclosure compliance activities is an excellent recent example.  We deployed over 150 compliance auditors to assist with this effort.

Hilltop can also perform compliance risk reviews by providing pre-exam readiness assessments for all of the various regulatory requirements (lending, loan servicing, anti-money laundering, BSA/privacy, safety and soundness, etc.).

Contract Compliance Risk In addition to regulatory compliance, there are also compliance requirements relating to loan sales, securitizations, investor purchase and servicing requirements, etc.  Example compliance risk engagements that our compliance team has been involved with include, but are not limited to, the following:

Contract risks which are those risks related to compliance with all aspects of a contract (purchase, sales, performance, etc. which includes asset repurchases and/or loss indemnification),

reps and warranties on sale of loans, required loan servicing activities if the seller remains as the loan servicer, warehouse lending lines of credit and loan covenants, investor compliance requirements, pooling and servicing agreement (PSAs) requirements, Trustee agreements, construction contracts, lease agreements, other.

Fraud Risk

Fraud is a common occurrence, especially in the financial services industry.  Fraud can happen to any company and it does not always mean cash or other valuable/negotiable assets are taken.  Hilltop’s Fraud & Forensics team provides services that address fraud controls, investigations and fraud mitigation efforts (once a fraud has occurred or there is a significant vulnerability).  Our services include, but are not limited to, the following:

assessing “prevent” controls which include having a fraud policy, Management communications regarding awareness, specific fraud risks and controls to prevent identified,

assessing monitor/detect controls for effectiveness (monitoring efforts are performed, potential risks identified/reported to Management, actions taken, “complete resolution” occurs),

assessing internal or external resources used to investigate potential fraud situations, assess the procedures used, the data analyses completed, hardware and software reviewed, etc. to reach a conclusion regarding the fraud existence and impact,

assessing Management’s mitigation efforts for any fraud or significant vulnerability which includes assessing any new policies, procedures, prevention/detection activities and reporting, and

assisting with design and implementation of specific policies, procedures, monitoring efforts and/or mitigation activities.

Operational Risk Operational risk is the risk that arises from a number of operational situations:

operational errors (underwriting errors, documentation errors, rep and warranty errors, compliance errors, control failures all caused by operations personnel not executing properly,

process failures, backlogs that cost money/profits, system or process delays, any other business process failure/slowness.

Our Operations professionals have “been there, done that” and have addressed/resolved these and many other operational risks.  Our highly-experienced Operations team knows where to look for the issues/risks, how to mitigate the risk, how to solve the longer-term issues and establish the risk policies, procedures and mitigation activities that are needed.

Technology Risk

Technology risk is not just the risk that the software does not perform as desired.  Technology risk includes the following:

general control failures – mostly focused on inappropriate access to hardware and/or software, network failures, resource issues, etc.

application control failures – focused on software failures, improper use of data by the software, processing irregularities, back-up failures, etc.,

wrong data definitions used by various users, system implementation failures – implementation management, testing,

inaccurate/incomplete business requirements, poor integrations with other up/down stream systems, etc.,

too many or uncontrolled EUCs performing operational system capabilities, privacy controls not in compliance, Cyber risks involving “system or data attacks”, system hacking, downloading viruses,

“phishing”, other unauthorized access to a Company’s applications and/or data.

Hilltop’s CISA and Cyber auditors can assist your Company with designing, implementing and testing a technology controls framework that will help prevent, detect and monitor possible technology risks.

Finance and Accounting Risk Finance and/or accounting risk is not simply a material misstatement of a Company’s financial statement.  Finance or accounting risks typically arise from, but are not limited to, the following issues/situations:

Poor oversight of junior resources and/or inappropriate delegation of authority to employees that are not prepared,

Accounting policies are incomplete, inaccurate, not documented or clear, etc., Training is not adequate, Insufficient resources with the responsibility of assessing new accounting literature and

its impact on the Company, Poorly planned and executed projects to design, implement, and go live with new

accounting or payroll systems, Inadequate internal controls (SOX compliance) such as not identifying material

weaknesses, improperly designating “significant or key controls”, etc. Accounting resources have not been recruited to fill key positions.

Hilltop can assist with many of these situations by providing deep experience to our clients, as well as, less experienced accountants that can supplement our client’s staff.  Further, we have a number of former auditors who understand the need for proper management, well documented and updated policies, providing help with training, implementing new technology, designing/implementing the appropriate controls for any new business process and related technology, etc.

Interest Rate and Hedging Risks Our consulting team has been involved in identifying and mitigating interest rate risk.   Several of our consultants have had secondary market and/or hedge execution positions and can assist our clients with the following:

Detecting interest rate risks within the Company’s operations (portfolio management, trading, hedging, mandatory delivery contracts, future loan sales, rate locks on loans in process of being origination, etc.),

Identifying policies that are in place to address such risks, Testing procedures and controls in place to ensure that the policies are being adhered to, Implementing risk mitigation tools, actions to reduce the risk, Remediating actions when controls do not appear to be working.

Other Risks Hilltop’s approach to identifying, monitoring and mitigating risks such as:

Competition Management & Employee Staffing Liquidity Debt covenant compliance Capital Market Economic Political Reputation

Our approach is as noted above:

1. Detect the risk and quantify such,2. Identify current policies that are in place to address such risks or help create policies to

address such,3. Implementing the procedures and/or tools needed to monitor and mitigate these risks,4. Testing the procedures/tools to assess whether the risks and risk levels are identified by

the procedures/tools and remediating any controls risk that may become apparent.

Regulatory Compliance Audits & Pre-exam Readiness Services Hilltop Advisors deep experience in the financial services industry has helped build its Regulatory Compliance practice.  Add the fact that many of professionals are auditors (Big 4, Government, and former bank examiners), it strengthens our compliance audit capabilities.  Specifically, our Regulatory Compliance team has helped clients with the following:

identifying the regulatory requirements that apply to our client, determining whether our client’s existing compliance policies and/or procedures need

changes (we often team with law firms who we recommend for regulatory compliance issues),

designing, implementing and testing new policies and procedures, performing “pre-exam” or “mock” reviews to assess our client’s readiness as we always

recommend that our clients identify items that the examiners will likely identify and begin working on remediation efforts before the regulatory exam starts,

assisting Compliance or Internal Audit groups with the compliance testing, and assisting with selecting, implementing and testing technology applications used for

compliance,

Our Regulatory Compliance team has helped clients with the following efforts:

assist our client with Exam (or audit) Strategy which includes but is not limited to the following:

o planning on how the exam will be coordinated – Client’s internal lead, areas of likely focus, who the SMEs will be, who will be responsible for responding to the examiners, established meeting protocol, etc.,

o identifying possible/probably exam findings and creating responses that should be started in anticipation of results,

o managing response times,o escalation process and protocols,o exit meeting – who, what, how, when etc. answered,

assisting our client with gathering information as requested by examiners, assisting with response drafts to exam questions, performing agreed upon remediation steps and implementing new controls to help ensure

compliance going forward, and helping prepare final responses to examiner’s report.

Our Regulatory Compliance practice provides compliance assistance in the following areas:

all bank compliance related to Bank Secrecy Act (BSA – privacy requirements), all bank compliance related to Anti-Money Laundering (AML requirements)

controls/procedures, all bank compliance related to tracking foreign asset movement (OFAC),

all Federal and State regulatory requirements for lenders (requirements to protect the borrower for all loan types including TRID, Fair Lending, RESPA, HMDA, GSE Seller/Servicer Requirements),

all Federal and State regulatory requirements for and loan servicers and asset managers (including HAMP, HARP, HAFA, Fair Credit Reporting, Fair Debt Collection Practices, GSE and other investor Seller/Servicer Requirements),

all Loan/asset securitization requirements (Regulatory AB) for disclosures, process, etc., all servicing requirements to protect the Trust that holds the underlying assets (primary,

special and master servicer requirements),

In addition, this team provides compliance and other services for the parties that have entered contracts as follows:

Purchase and Sale contracts (assets, corporate entities, lines of business or products, etc.), Performance contracts, Loan covenants, Investor Seller/Servicer requirements, Loan securitization “trigger” event tracking and execution requirements, Loan sale repurchase requirements, Loan indemnification requirements, Purchase price calculations as required by purchase agreements. Any other transaction related agreements that require one or more parties to comply with

terms and conditions therein.

Our iSolutions technology team has created a compliance audit tool that can be configured to test any of the regulatory requirements noted above and is often used by Hilltop’s compliance audit teams.  The benefit of the Compliance Audit System (CAS) is that it standardizes the audit process, specific audit steps to be taken, provides “drop down” menu choices for findings and a free form text area to note any other issues that the auditor deems important to support our conclusion.  The CAS tool can easily be updated when any changes in the regulations are released – the new/changed audit steps can be uploaded quickly and our teams can immediately begin testing to such new regulation.   We have used the CAS tool for the OCC Consent Order work, litigation, on-going compliance reviews, State Attorney Generals’ settlement orders, etc.

 

Litigation Support and Expert Consulting Services Hilltop Advisors Litigation Support Practice includes providing a number of different services that support our clients’ litigation efforts.  We have assisted numerous clients and their attorneys with our litigation support services in which we assist with the following types of activities:

helping our client prepare for litigation – o Gathering information that your attorney has requested (financial, operational,

compliance and other data),o analyzing and assessing information to support our client’s case,o research on industry related topics,o providing experienced staff to augment our client’s normal operations while

Company employees are committed to the litigation efforts,o supporting our client’s preparation for depositions,o providing critiques of the opposing side’s Expert report,o providing topics/questions to client’s attorney to cover in opposing side’s

providing financial calculations (damages or other analytical results) that may support the case,

performing forensic accounting activities that may be needed if financial information is not available,

providing accounting research, standards, disclosures, etc. that may be helpful to the client’s case,

providing fraud investigative efforts, identifying fraud controls effectiveness, vulnerabilities, etc. performing operational assessments, performing data analytics and validity testing, other finance, accounting, audit, operational and technology activities as needed.

Hilltop Advisors and affiliates have several Experts that have testified in the past.  Our Experts are typically engaged when client’s counsel requires an Expert opinion to support the client’s case.  Expert topics can involve, but not be limited to, the following:

industry expertise for financial services, lending, loan servicing, fraud, policies and controls, etc.

financial services regulatory compliance, financial services best practices (especially in the areas of lending, loan servicing,

securitization, compliance, etc.), accounting technical advice on issues raised, interpretation of accounting literature,

assessing completeness and accuracy of financial statements or presentation and/or assessing GAAP compliance,

analyzing specific financial statement components, creating methodology for damages calculations, calculating damages for the case, critiquing valuation of specific assets and liabilities, conducting forensic reconstruction of financial information, if possible, to support our

client’s case, conducting compliance audits that provide facts for the case, including but not limited to:

o loan underwriting reviews to assess compliance with Company policy, investor requirements, securitization requirements, regulatory requirements, etc.,

o reviews to assess the effectiveness of the Company’s QC or Compliance efforts (scope, review quality, personnel, sampling, findings, reporting, etc.),

o loan servicing loss mitigation activities and compliance with policies/regulations,

o assessing loan covenant compliance,o assessing vendor compliance with service agreement and regulatory requirements,o assessing Trustee and Document Custodian activities and compliance with service

agreements and regulatory requirements,o IT and data controls including assessing general controls, application controls,

data integrity/completeness/accuracy and identification of significant intentional data manipulation,

assessing the independent auditor’s financial statement audit or compliance report: o review of workpapers that support the audit,o review of compliance with Generally Accepted Auditing Standards i.e. was the

audit conducted properly in accordance with such standards,o assess compliance with AICPA and PCAOB professional standards,o review of specific audit process to identify any significant concerns (i.e. process

was not complete, auditor did not reach the appropriate conclusion, did not meet appropriate review and quality standards, audit documentation was not complete or accurate, the audit findings were not supported, scope of audit work and controls reliance was inappropriate, etc.),

analyzing any contract costs for real estate construction projects/buildings/houses, assessing acquisition or sales contracts that may involve breach of representations and

warranties, purchase price disputes, or compliance with other contract terms (non-compete, pricing issues, “earn-out” payments, etc.),

performing document reviews – loan files, underwriting files, loan servicing files, collection files, securitization and trust documents, Pooling and Servicing Agreements (PSAs), other performance or employment contracts, etc.,

gathering and analyzing the accuracy, completeness and overall quality of the data to be used in the litigation,

providing data analytics (“slicing/dicing” the data in different ways to identify trends, unusual activity, etc.) especially for loan portfolios and loan servicing data,

identifying “key words” for electronic file searches, reviewing electronic files (Word, Excel, PowerPoint, Access and other documents as well

as email and other correspondence vehicles), assessing controls over financial information, transaction data, fraud, operations,

technology and providing the attorneys with independent assessment reports to support the client litigation if possible,

providing lending or loan servicing industry analysis, benchmarks, best practices, etc., analyzing specific operational aspects that are the subject of the litigation such as

assessing the underwriting standards applied to the loans being originated, or determining whether pricing of loans was done without bias, etc.,

calculating and monitoring any settlement payments/payout as to accuracy of amount and payment timeliness.

Fraud Investigations and Forensic Accounting Services Hilltop’s Fraud Investigations team has identified, investigated, quantified and reported on over 250 frauds in the financial services, real estate, other commercial companies and Federal agencies.  Hilltop’s investigative efforts utilize our business consultants that understand the operations and processes, our accountants to understand the financial process, financial applications and financial statements and our auditors to “dig up” the details of how the fraud was consummated and how much of a dollar impact there was.

Given our team’s extensive experience, Hilltop has developed a fraud risk assessment methodology in dealing with all types of fraud and/or fraud risks.   Hilltop’s methodology addresses various aspects of a fraud or the risk thereof.  Our “fraud diagnostic” methodology assesses the following (minimum):

if/where your Company has a fraud vulnerability, whether your Company’s fraud efforts (policies, process, controls and technology) will

help Prevent, Detect, Mitigate and/or Remediate fraud risk across the enterprise, if the Company’s fraud policies are documented and senior management’s commitment

to such policies is evident as this is the first step to prevention, organizational assignments have been made to identify specific senior management

responsibility for fraud risk policies and controls, ability to gather and continuously monitor the Company’s electronic files (hard drives,

other storage media, email drives, social media, software, databases, network drives/stores, servers, etc.) and if needed, we will engage a major data investigation firm,

whether operational and financial processes were designed with the appropriate controls designed and implemented to prevent and/or detect a fraud event,

whether controls have been tested on a regular basis, if “mock fraud events” were used to test the Company’s preventive and detective efforts, whether the monitoring and reporting of possible fraud events were communicated to

Senior Management and whether their response was appropriate (scale of effort or follow-up, timeliness, commitment to resolution),

whether remediation/action plans for a fraud event to diminish its impact were implemented comprehensively and timely,

whether the investigation and/or team had adequate skills and experience to perform a fraud investigation, controls assessment and/or a fraud remediation process,

whether technology applications are utilized to help prevent, detect/monitor and mitigate a fraud event.

Hilltop’s fraud investigation efforts (in those cases where a fraud is suspected/confirmed) include:

confirming whether a fraud has occurred, stopping certain activities, communications, transactions, etc. to lessen the impact of the

fraud,

identifying/implementing immediate controls processes to help identify any other aspects or unknowns about the fraud event,

identifying the type of fraud that has occurred (embezzlement, financial statement errors, financial misrepresentations, mail fraud, inventory fraud, fraudulent loan ratings, fraudulent trading activities, sales or revenue overstatement, bonuses miscalculated, etc.),

identifying impact of the fraud (cash missing, financial misstatement, compensation errors, etc.),

identifying the operational, financial and/or technology processes used or likely used to commit the fraud and designing/implement changes to be implemented,

determining the depth/amount of the fraud (corporate or department wide or type of transaction, etc.),

gathering the evidence of the fraud (all documents supporting the what, how, when, why, and who questions),

identifying all parties to the fraud, if possible, identifying “what went wrong?”, and implementing all remediation activities needed to avoid a similar event.

Critical to any fraud risk assessment and/or fraud investigation, is the constant communication with the Company’s leadership to update them on the status of the fraud investigation and mitigation efforts.  These parties include:

Board of Directors, Audit Committee, if applicable Selected management personnel – usually a small group, In House counsel, External counsel, Law enforcement (FBI, State & Local police), or SEC, as needed.

Why Hilltop? Most companies do not have internal resources to handle a fraud event and its consequences.  The investigation of a fraud, the assessment of how the fraud was perpetrated, what prevention controls were missing or ineffective, what detection controls were effective or not, what remediation efforts need to be implemented immediately and over time to avoid another such event are all activities that require special skills, training, tools, proper level of skepticism and creativity in determining the cause and the resolution of any fraud.  We approach a fraud investigation with the perspective that “anything is possible” and conduct our independent investigation accordingly.

Forensic Accounting Services

Forensic Accounting Services are often required when the financial statements have been misstated by material amounts.  Often as part of the fraud, the “fraud architect” will create bogus transactions, caused reconciliations of certain accounts to go undone, use clearing accounts to hide temporary “resting places” for fraudulent amounts, etc.  When the accounting has been purposely mis-recorded, the accounting records need to be reconstructed.  Hence, a forensic

accounting process will need to be implemented where transactions, data processed, and accounting entries may have to be recreated.

Other reasons for forensic accounting to be completed include when a company has “lost control” of its record keeping, has had a major catastrophe (fire, earthquake, flood, etc.), had major operational or financial systems crash, had purposeful destruction of data and transaction information, etc.  Our experience allows us to quickly conclude on what needs to be done, who is critical to work with and how the results will be used.  Our forensics process includes the following:

identifying what data, transaction information or financial records are impacted by the event,

assessing the resources needed to rebuild the financials – people, data, systems, documents, etc.

identifying various alternatives, if possible, to reconstruct the financial information given the minimum level of “must have” financials,

performing a “follow the money” trace to help assess the most effective way to restore all or substantially all the accounting information,

determining if the event was too massive and/or too costly to reconstruct, executing the plan for reconstruction to meet at least the client’s minimum financial

information requirements.

Performance Analysis & Process Improvement Consulting Services Hilltop’s primary services in this area are as follows:

Performance Analysis (PerforMetrics©)

Operating your company at the highest level of efficiency and effectiveness will reduce costs, enhance the customer’s experience and provide employees with more satisfaction – all equating to being more competitive.  Hilltop understands the importance of efficiency and its various benefits which is why we have developed a sophisticated tool, PerforMetrics© that assesses our Client’s operating and financial metrics and provides the insight as to where our Client should begin to change/improve its business.

Our competitive differentiators in this area are –

o We have the leading benchmarking consultant in the industry who designed KPMG’s MorPro and MorServ (that date back to the early 1980s and has continued to specialize in this area since then). Our founder, Jeff Oliver has done this for 40 years – he understands the industry and the operational/ financial

metrics that should be focused upon.  Jeff and the benchmarking team have been using and improving PerforMetrics© to become a powerful tool to improve the business process and reduce costs (especially the cost of regulatory compliance).

o While process improvement methodology (i.e. re-engineering) is not unique to any one consulting firm (often similar between firms), our BPI/BPR teams are powered by very senior, highly experienced industry veterans.  They have “been there and done that” first hand.

Hilltop’s Performance Analysis and Process Improvement consultants use the following basic steps to achieve enhanced efficiency and reduced costs for our clients.  The steps are as follows:

o identify the Client’s weaknesses and/or opportunities to be a leading performer by having our highly experienced process improvement (BPI) consultants perform an in-depth assessment as follows:

inquiry of Management and line operations personnel as to their perspectives and recommendations,

observations of the organization’s structure, communications, actions and specific accomplishments,

performing a comprehensive analysis of the Company’s policies, analyzing and testing processes to determine purpose and effectiveness, identifying the controls and analyzing their effectiveness (is there

duplication, too much risk management, “overkill” in executing, monitoring and retesting controls,

assessing technology organization, communications between the business and tech teams, applications and versions being used,

assessing use of any workflow analyses and technology to automate the processes,

discussing opportunities to enhance technology with the client’s vendors, assessing the use of Business Intelligence and Data Management.

o measure the operating metrics (PerforMetrics©),o measure the costs and revenues for the business (PerforMetrics©),o calculate the cost of regulatory compliance and address whether compliance can

be achieved with less effort and people (more technology and exception reporting),

o prioritize the Client’s opportunities for improved efficiency and lower costs (target areas),

o assess the Client’s willingness and ability to “make changes”,o propose the scope of Hilltop’s BPI program,o identify the “future state” for each prioritized target area that is in scope,o identify the operating and financial metrics that should be possible if the future

state is achieved,o identify the “gaps” between the “future state and current state”,o plan for the changes and solutions needed to eliminate the “gaps”,o execute the BPI implementation,

o reperform the PerforMetrics© analysis to determine if the target metrics have been achieved and begin the next set of target area analysis and BPI efforts.

PerforMetrics© is Hilltop’s tool to identify the operating metrics, financial metrics including key profit drivers and the Client’s dependencies in achieving such.  The metrics can be used to identify specific business units, products, delivery channels, operational areas, customer relationships, technology applications, etc. that need change as they do not meet leading performer levels of performance.

PerforMetrics© can also be used to analyze more detailed aspects of our Client’s business.  An example may include where Hilltop analyzed the cost of servicing a non-performing loan, the amount of escrow and foreclosure advances that are typical, the recovery rate of such advances in insurance or investor claims, identifying the overall claims recovery rate, the cost of REO management, the loss per loan for various resolutions (foreclosures, deed in lieu, short sales, rate and term modification, principal reduction or any other forbearance structure).  Another example is using the tool to analyze detailed aspects of the loan origination business.

PerforMetrics© primary difference from other benchmarking tools is that it captures operating metrics and analyzes such to identify the correlation to the cost and other financial metrics.  So, if we know that the costs are for a given function are equal or lower than average and we also assess the direct operating metrics that affect that business function, we can determine what operational processes need to change in order to reduce costs and be more competitive.  For example, in the default servicing area, we can assessed the efficiency measured by cases handled per default servicing FTE, the timeline to complete each type of default resolution, number of calls made, number of physical visits (common on large commercial or multifamily loans), number of “cures” i.e. the success of reinstatement, the number of actions completed on time (within regulatory requirements), the success rate of modification, the number of attempts made with the borrower to modify, etc.  If the operating metrics are better than average, PerforMetrics© can project what range the company’s cost of default servicing should be.

PerforMetrics© also helps our clients with answering these types of questions:

o Market share and volume strategies – will increasing volume improve profitability?

o Customer strategy – are your biggest customers profitable? Which customers are profitable relationships? Is it profitable to have a national or regional customer base? Cross sale penetration?

o Distribution strategy – retail, on-line, purchase business – what makes the most sense for your company given its current performance?

o Operational platform strategy – operating structure design, centralized –v- decentralized, geographic location, etc.

o Technology strategy – are current technologies effective?  Have they been maximized? Are there new technology investments that are needed and what is the priority?

o Growth strategy – organic or acquisition?  Which way is best?  Does an acquisition help or hurt the company’s performance?

o Pricing strategy – are products and services being priced to market or to make money?

o Disposition or down-sizing strategy – informing you of the who, what, where and how should your company execute such strategy

Based on our PerforMetrics© and BPI assessments, Hilltop has identified automating process workflows will increase efficiency, lower costs, decrease the impact of market changes in business volume and it enables a “triaging capability” (or prioritization of what needs to be done first).

Simply put, PerforMetrics© and our BPI efforts have helped our clients to do the following:

o increase profitability through cost reductions or cost avoidance (reduce need for cost increases when volume increases significantly),

o eliminate unnecessary “hand-offs”,o streamline existing processes,o reduce the number of times any person in the process “touches the loan”,o increase flexibility of processes to handle new business & products,o eliminate reports that do not help manage the business and reduce the size of such

reports,o eliminate controls processes that do not enhance compliance i.e. reducing the

“check the checker” syndrome,o reduce Management and overhead costs,o eliminate “buying the newest technology” while at the same time ensuring that the

Company uses the right technology version and “add-ons”.

Hilltop’s BPI consulting can also be utilized to enhance the ongoing client monitoring of its business and identifying when/how/what changes need to be made.  Our clients learn from the PerforMetrics© and BPI methodology to also address operational challenges such as operating or process backlogs, customer service problems, merging operations, changing from decentralized to centralized processing to closing, implementing new technology, etc.

The Hilltop Companies’ business process analyses are intended typically to achieve a target state different from your current operations.  The objectives of achieving the target state can include, but not be limited to:

o Improve competitive position in the market with lower cost delivery,o Ability to attract more customers with lower priced services,o Enhanced controls in one or more of the operating units,o Improved operating efficiency,o Eliminate unnecessary processes and “hand-offs”o Accommodate reductions in force,

o Improve customer service and response times,o Responsiveness to market movements,o Ability to automate processes through workflow automationo Position the company for forthcoming market change and increase flexibility of

processes to handle new business & productso Eliminate reports that do not help manage the businesso Eliminate “checking the checker” processeso Assess management and overhead cost structureo Other reasons that generally improve the company’s operations and profit

margins.

As part of our business process analyses, we also will often assess people and technology.  In our experience, most companies have core capabilities but also have areas of operations that either need significant change and investment or be considered as a candidate for outsourcing such functions.  We can assist in the methodology to identify your company’s strengths and weaknesses and determine what the solution alternatives are in the short and long term.   We are often drawn into the vendor selection processes if outsourcing or new technology is being considered.

Loan Origination Consulting Services

Hilltop’s industry focus on financial services allows us to attract experienced consultants and industry participants in the lending business.  Our credit and lending process teams are integrated to be able to provide our clients with operational, financial, technology applications and control perspectives.  The following is a summary of some of our Credit/Loan and Lending process services:

o critiquing the credit policies and lending processes that support such,o assessing loan origination process for all loan types including

commercial/industrial, commercial/real estate, multifamily, residential, consumer, credit cards, leases or any other loan types,

o loan origination – loan officer responsibilities, processes used and compensation policies,

o loan processor responsibilities and processes used,o loan underwriter responsibilities, processes, use of automated underwriting

technology,o performing loan reviews (credit worthiness, documentation, examiner preparation,

etc.) for Commercial, SBA, CRE, Multifamily, Residential, Consumer and other credit types,

o assessing the completeness and accuracy of underwriting to determine whether credit policy and investor compliance (for Rep & Warranty purposes) were met,

o loan closing responsibilities and processes used,o loan post-closing and investor delivery responsibilities and processes used,o performing loan portfolio analytics and credit risk assessments for the overall loan

portfolio and specific loan types to identify credit and other risks,

o identifying backlogs or process “hold ups” and quantifying impact of such,o calculating and assessing the operational performance of the loan production area

(operational and financial metrics) to enhance efficiency, increase transaction/process speeds, customer satisfaction, eliminating process duplication, increasing automation and use of eMortgages, more effective use of technology, etc.,

o assessing the use of the Loan Origination System and any workflow applications to identify inefficiencies, outdated technology, high levels of control risks, PII compliance, cyber security issues, etc.,

o calculating the cost of Regulation for originating a loan,o identifying ways to increase profitability in specific areas, ando making specific lending process improvements that were identified by

PerforMetrics©.

Our consultants don’t need training on how a loan is originated and we work every day on identifying new leading practices that may be effective for our clients.

Secondary Marketing & Loan Sale Consulting Services

Hilltop has both performed consulting services for Secondary Marketing and “sat in the seat” of a Secondary Marketing employee for some of the largest companies in the mortgage business.  A summary of the services that have been performed include:

o Policy analysis to sync such to Management’s or the Parent company’s risk appetite,

o Inquiries to determine whether the people understand the policies,o Process analyses to determine if the procedures adhere to the policies,o Assess whether the policies and procedures comply with regulatory (where

applicable) and investor requirements for selling loans,o Test the loans delivered to investors for compliance with their respective

requirements,o Assess the pipeline reporting capabilities including the accuracy and

completeness of the information,o Assess the gains/losses that have occurred and determine if the amounts could

have changed if certain actions were taken,o Assess the need and execution of hedges against “lock risks”,o Determine the appropriate accounting for the hedges, locks and

repurchase/indemnification risks,o Assess delivery times, investor payments, rejected delivery submissions or

changes made or additional investor requirements as a result of shipping issues,o Assessed the pricing process and the ability for loan officers to set their own

prices and risk inconsistencies/HMDA/Fair Lending issues,o Any other risk related issue that Secondary Marketing has dealt with.

Hilltop knows the risks, has seen many scenarios of how to mitigate such risks and has helped many of our clients streamline the processes while increasing market efficiency.

MBS, CMBS, ABS Securitization Consulting Services

Our senior team members have been involved in the asset backed and mortgage backed securitization business over the past 30+ years.   We have worked with issuers, securities dealers, trustees, servicers (regular, special, and master servicers), investors, guarantors, etc.  We understand this highly complex business, its risks, its operational issues, and the accounting for such.  We can assist your company if you are involved in or need help with any of the following activities:

o Design, implement and/or test the policies, procedures, technology, people skills required for securitization and/or delivery to various investors (i.e. Fannie and Freddie both have their own seller/servicer guides or the large banks have their compliance requirements),

o Help with understanding and planning the issuance of Ginnie Mae MBS (Ginnie Mae has compliance requirements for an issuer and servicer),

o Review of the Offering document to assess accuracy and completeness of disclosures,

o Understanding the additional elements of compliance for issuers,o Perform deal due diligence on the underlying assets, the data validation,

determining or validating the disclosures, etc.,o Perform deal cash flow modeling (financial engineering of the “waterfall” for

each tranche of the securitization transaction), identifying assumptions, assess and compare results to the issuer, Trustee and/or guarantor (involves comparing/contrasting to other third party models),

o Assessing compliance with the Pooling & Servicing Agreement (PSA),o Assessing compliance with the Trust and other legal documents used in the

transaction,o Perform an “indication of value” for loans, asset or mortgage backed securities

(residual and/or individual securitization tranches), financial instruments,o Identify and remediate any asset servicing issues – with any of the servicing

functions – regular servicer, special servicer, master servicer,o Perform servicer compliance reviews (for PSA, investors, Trustee and regulatory

requirements)o Perform Document Custodian compliance reviews,o Perform Reg AB compliance review,o Assess Reg AB disclosures and loan level information,o Perform special issuer reviews on behalf of investors, guarantors, insurers,o Recalculate Special Servicer Incentive Compensation, where applicable,o Calculate quarterly or semi-annual Trustee payments,o Perform review of Trustee’s function,o Perform stress testing of deal – assumptions, cashflows, potential losses of value

for various tranches,

o Perform other specific document, data, process or functional assessments related to a securitization transaction.

Our senior management expects that the future of the securitization market will see new expanded demands upon both issuers and servicers, notwithstanding the Trustees, to provide more loan level data, more risk analysis, portfolio performance updates and overall risk ratings of the quality of the underlying assets.  Our senior team understands the impact on issuers, servicers, dealers, rating agencies, trustees, etc. and can assist with these challenges when they arise.

Loan Servicing Consulting Services

The loan servicing business can be quite complex given the different types of loans that are serviced, the loans’ payment performance, customer interaction (SPOC abilities), technology deployed, and the regulatory compliance requirements.  Further, assets that have been securitized often have a set of Security requirements contained in the Pooling and Servicing Agreement (PSA).  The PSA can also be very complex given requirements for special servicers to be involved, “trigger events” to be identified and monitored, and monitoring/reporting of the Security’s financial performance.  Issues that arise for loan servicers that Hilltop and its teams have addressed include but are not limited to the following:

o call center has issues with SPOC implementation, outbound call effectiveness, multiple calls from the same borrower (especially those not delinquent), poor dial choices and too heavy a reliance on phones versus the internet (emails and texts),

o escrow management issues with year-end reconciliation and adjustments to T&I payments, tax service or insurance outsourcers not providing what servicer needs,

o collections and early loss mitigation efforts being performed for borrowers that the borrower’s payment characteristics are consistent and do not require early intervention,

o servicing compliance functions being overstaffed, not properly trained, not sufficiently familiar with the regulatory or investor requirements,

o servicers are not keeping up with transaction volume and reconciliation of investor accounts, training is inadequate, poor default and modification reporting, etc.,

o default servicing functions not properly staffed, training is lacking, systems are not using the current capabilities of many loan servicing software firms,

o suffered negative financial impacts due to a change in the underlying types of loans being serviced such as new FHA business or addition of subprime loans,

o focus exclusively on metrics such as Loans serviced per FTE or Cost per Loan serviced has created mismatches where increasing risks were not met with increasing personnel with experience in dealing with such risks,

o believing that loan servicing has unlimited scalability has major risks,o integrating mortgage and other consumer loan servicing together without

considering the people, process, training and technology impacts,

o regulations/requirements by investor or regulator for new loans being serviced or new states that business is done in – all create new risks,

o weak compliance efforts including not building operational processes for loan modifications that specifically address CFPB and State regulations.

o asset recovery functions are weak in the following areas: repurchase or indemnification defense accounting for losses and claims made to insurers and/or investors for P&I

advances, escrow advances, foreclosure advances, waived fees, etc. Foreclosure claim maximization REO asset management and sale

As noted in the above, operational efficiency and cost reduction is a major focus of our servicing expert teams.  Most loan servicers do not have the breadth and depth of experienced resources who also have multiple disciplines (finance, operations, compliance, technology, fraud, etc.).  But Hilltop does – we combine our servicing operations, investor knowledge, securitization, accounting and finance, and technology experience to bring integrated solutions to our loan servicing clients in each of the areas noted below:

o onboarding loans efficiently and accurately,o identifying and monitoring the overall credit and other risks in the servicing

portfolio by investor, loan type, location serviced, state, etc.,o customer interface relative to implementing SPOC efficiently and analyzing “root

causes” for the number of borrower contacts (all types),o investor reporting and cashiering is easy to lose control given the volume of

transactions and is one of the major fraud risks (not reconciling properly various clearing accounts),

o default activities especially involving all of the alternative activities to foreclosure are very challenging and high risk from a compliance perspective,

o making insurance or investor claims and/or dealing with “compensatory fees” (which are really GSE penalties on the servicer) is often a difficult area,

QC (quality control) or Compliance efforts that should monitor compliance with Company policies for servicing, investor requirements, Federal and State regulations, etc. has become a major endeavor for most servicers and the challenge today is how to maintain compliance and quality while reducing the cost of such.