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Chapter 10: Processing: UNDERWRITING AND QUALITY CONTROL. By Dr. D. Grogan M.C. “Buzz” Chambers. Preview. The file is sent from the processor to the loan underwriter. The underwriter: Reviews all items in the file to look for areas that need further information.
By Dr. D. Grogan
M.C. “Buzz” Chambers
The file is sent from the processor to the loan underwriter. The underwriter:
Reviews all items in the file to look for areas that need further information.
Reviews areas that do not meet the lending guidelines of the loan program.
Finds discrepancies, referred to as red flags.
Items that can be explained and documented are then added to the file for the lender.
When the item appears to be a problem, the matter is referred to quality control or the auditing department for a fraud or misrepresentation audit.
After the underwriting department has completed its work on the file, the loan file is forwarded to the funding department, where loan documents are prepared for the borrower to sign.
Describe the underwriting process.
Name typical stages for conditional approval.
Differentiate between acceptable and problem red flag loan criteria.
Explain the audit department functions in the loan process.
Outline the major components of quality control.
Early banking charged the banker with:
Process for qualifying borrower and for determining acceptable collateral
The banker had no insurance to cover deficiencies for loan defaults
Current underwriting includes both
Determining borrower ability to repay a loan
Estimating value for pledged property
The last stop before loan docs are drawn & the loan is funded and recorded
Minimum requirements for a new loan set by the loan committee
Lender or investor
Senior personnel of the lending institution
Secondary money market
Vice president of loan operations
Minimum standards set by the mortgage insurance company
FNMA maximum loan limits & LTV
Terms of amortization
Loan application (1003)
Credit ratios and FICO score
Appraisal that meets FIRREA standards
Note: Only one underwriter needed for loan approval, but TWO needed for a denial of a loan package.
Loan evaluation prior to commitment
Clarifies potential discrepancies
Follows investor’s guideline criteria
Meets FNMA, FHLMC or GNMA guideline standards
Approval for non-conforming, jumbo or non-residential specialty loans
Forwards fraud to quality control for audit
May approve loan up to maximum VA, FHA or FNMA based on past experience
Direct Endorsement denotes that the mortgage loan broker may fund and close the loan before submitting the loan package to a lender. Used for FHA loans.
Automatic Funding is the same as above, and use for DVA loans.
FNMA guidelines found at:
Click on “Fannie Mae Selling Guide”
Insurance company has regional underwriters.
Insurance underwriters rely on loan broker credit clearances and property evaluation.
Insurance company underwriting guidelines are separate from those of the lender, and often may be different from the lender’s.
Conditions prior to documents
Copy of most recent pay stub
Copy of recent bank statement
HUD-1 from borrower’s property being sold
Conditions prior to funding
Work requirement clearance
Copy of permits
Conditions after funding
Fire insurance and title insurance policies
Reconveyance deed on another lien
Borrower analyzed according to:
Cash, reserves, gifts
Effective income after paying housing expense
Ratios on stable income
Property analyzed according to:
Written, approved appraisal report
Risks may include cash out loans or pending litigation
To safeguard the investor’s funds
A list of questions about the borrower
Does loan application make sense
Does employment verifications fit together
Do bank deposits have a good record
Are tax returns prepared and filed
Does credit report match loan application data
A list of questions about the property
Is price about current market value?
No large adjustments on appraisal report
Unrealistic commute time for owner-occupied
Big changes in cash, job, funds – inconsistent
Delinquent taxes on other property
No match on tax returns, SS ID, W-2s
Name does not match and no prior credit
Items outside of escrow: cash, property
As rates of foreclosure increase, underwriting standards become stricter.
Lenders encouraged to implement quality control programs.
Zero Tolerance: Where the mortgage loan broker signs an agreement to buy back a defaulted loan where fraud is found and quality control was lacking.
Predominately inaccurate information
Incorrect statements about occupancy
Submission of inaccurate information with false statements on the application.
Falsification of documents (credit, employment, deposits, asset information, personal information, ownership of real property.
Lack of due diligence by anyone
File goes through Quality Control to:
Obtain names of parties who handled the file to look for a pattern by same individuals/entities.
The names of the underwriting, appraiser, loan officers, escrow agent, brokers and processors are compared to other defaults.
E & O claims are compared
Determine if fraud or misrepresentation is present
Refer file to investigator for legal action
Forward file to mortgage insurer for recovery
Review of a file is based upon
Referral from processor, underwriter or funder
Have vast experience to discover discrepancies
Investigate any file referred for audit
Some mortgage loan brokers must sign and agree to buy back any bad/defaulted loan
Documents false data & recommends prosecution for violations