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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.

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chapter 10 processing underwriting and quality control


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.

student learning outcomes
Student Learning Outcomes:

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.

underwriting standards

Early banking charged the banker with:

Underwriting responsibility

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 standards
Minimum Standards

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

qualifying minimum standards
Qualifying Minimum Standards

FNMA maximum loan limits & LTV

Terms of amortization

Loan application (1003)


Credit ratios and FICO score

Borrower’s income

Appraisal that meets FIRREA standards

Note: Only one underwriter needed for loan approval, but TWO needed for a denial of a loan package.

loan underwriter

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

loan approval
Loan approval

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”

commitment certificate
Commitment Certificate

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.

underwriter worksheet options
Underwriter worksheet Options:

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

loan risk evaluation

Borrower analyzed according to:

Cash, reserves, gifts

Debt analysis

Income analysis

Effective income after paying housing expense

Ratios on stable income

Property analyzed according to:

Written, approved appraisal report

Review appraisal

Property disclosure

Risks may include cash out loans or pending litigation

underwriting guidelines
Underwriting guidelines
  • Underwriting worksheet
  • Uniform Underwriting and Transmittal Summary – FNMA Form 1008
  • Confirm or verification of:
    • U.S. Immigration & Naturalization Service
    • Social Security Verification
    • Tax Rate Booklet
quality control

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

10 2 red flags
10.2 Red Flags
  • Does the file make sense?
  • Who stands to gain in this transaction?
    • Appraisal Sales Contract
    • Closing Instructions Tax Returns
    • Credit Report Title Search
    • Loan application VOE
    • Payroll check stubs VOD
quality control1

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

10 3 quality control and auditing
10.3 Quality Control and Auditing

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.

types of loan fraud
Types of loan fraud


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

loan default

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

fraud audit form
Fraud audit form




Credit Bureau

Lender Verification

Underwriter comments

audit and review

Review of a file is based upon

Referral from processor, underwriter or funder

Random selection

Auditor must:

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