The examiner pointed out that it had at least seven improper accounting practices that were not in conformity with Generally Accepted Accounting Principles, and that it had improper practices with its loan origination and operation. The examiner also investigated the business risks that New Century faced that could easily put the company at stake without strict internal control, proper quality control and operation and management. The examiner also reveals in his report the key internal accounting controls that failed to prevent the accounting errors.
Business Risks The report identified the primary business risks that New Century Financial faced in three general areas: credit risks, market risks, and operational risks.
Its credit risks involved mortgage loan borrowers. Credit risk is a particularly significant risk for New Century and other subprime originators because of the relatively higher risk nature of subprime mortgage borrowers as the loans of subprime lenders are usually given to individuals with low credit score and those whose credit profile does not qualify for a prim mortgage. Since the borrowers are at higher risk of default, they generally pay higher interest rates than prime rates. Thus, subprime originators have higher credit risks as the loans are made to individuals who have high risk of default yet have to pay high rates on loans. New Century discloses the credit risks that it may face in its annual report: * “The mortgage loans that we hold are subject to the risks of delinquency and foreclosure loss, which could result in losses to us” * "We may incur losses on our mortgage loans even if the mortgage loans are insured by the Federal Housing Administration or guaranteed by the Veterans Administration.” * "Our inability to realize cash proceeds from mortgage loan sales and securitizations in excess of the loan acquisition cost could harm our financial position." * "We are subject to losses due to fraudulent and negligent acts on the part of mortgage loan applicants, mortgage brokers, other vendors and our employees."