I am working on a closed-end Reg Z audit and unfortunately it will have to be limited to transaction testing only this year. The scope so far has been - LE and CD completion of disclosures and timing of delivery and closing, delivery of booklets as applicable to the transaction, ATR, QM, HPML, and HCM compliance, APR accuracy, delivery of appraisal and notice, ROR, NMLS # disclosure, TIL disclosure requirements for non-real estate and ARM disclosure compliance.

I've already tested LO compensation and steering earlier in the year.

Is there any other "higher risk" items you recommend I should be checking?

Are you a large servicer?

Also, how much advertising do you do?

We are not a large servicer and I review the advertising as presented throughout the year. I'm adding mortgage periodic statement to the review, but we haven't had ARM loans long enough to have any notices to review. We don't sell our loans.

Then I'd say you have most of the higher-risk items covered. If you didn't review non-RE loans, you might consider looking at a few to check the TIL. For example, I can't tell you how many times I've seen an incorrect required deposit disclosure on deposit secured loans, though I wouldn't put that in the same risk category as some other Reg Z items.

New product lines--especially complex products--are high risk until you're satisfied they aren't. ARM loans, in particular, offer numerous ways to violate the law, so you should be 200% sure that all of the pre-consummation disclosures are perfect. This is a common source (high risk) of reimbursable (possibly high remediation cost) FC and APR violations (substantive violations that would become headlines in your next compliance exam report and haunt you until the following exam.)

During your first comprehensive review of a new ARM product line, it's best to recalculate everything by hand for a representative sample--especially the payment schedule. Review Section 1026.17(c)(1), OI #8 and #10 and confirm that these methods are being used by your production system to build the payment schedule. Regardless of the way you are required to disclose payment summaries, OI #10 describes the payment schedule that is being summarized, totaled (TOP), used to compute the FC, and used as the P&I component of the payment streams with which the APR is calculated.

Assuming you use PMI, the other major component of the payment schedule is MI renewal premiums. Confirm that your pre-consummation payment schedule/TOP/FC/APR disclosures observe any "steps" in renewal premiums and the automatic termination requirements of the Homeowners Protection Act. If you have a HPA problem, then your TIL payment schedule, TOP, FC, and APR are wrong, too.

Now's an excellent time to review every up-front fee to be sure you're classifying them (FC vs. non-FC) correctly and calculating the AF accurately.

Now that you've proven the AF and payment schedule are correct, run APRWIN. If your numbers differ in any way from what was disclosed, use yours--because you know you can prove they are right.

You aren't quite done yet. The worst reimbursement case I ever saw was caused by an ARM servicing error. Be SURE your servicing staff has a reliable source for interest rate index values. Even if you haven't gotten to the first adjustment date for your first ARM loan, test the procedure and math that will be used. You want to find that the right index will be used, the "as-of" date conforms with the requirements of your notes, the correct margin will be added, caps/floors/ceilings will be observed, and the sum will be rounded exactly as the note specifies. The last step is to confirm proper procedure for calculating the adjusted P&I payments. If you aren't matching what's being disclosed, what's causing the difference? Who's right, you or the origination system?

Assuming no findings so far, you can sleep well at night! Hit a few low risk items (like advertising) if time remains.