In today’s lending environment, the quality control process is more important then ever before. Whether you’re a large or small mortgage lender or broker, the quality control process needs to be a key part of your daily business. As foreclosures continue to mount, loans are being kicked back for a variety of reasons even when you think your company has done its due diligence with sound underwriting. In this market, you need to ask yourself, can we absorb repurchase losses, because a single repurchase can mean the loss of thousands of dollars, the loss of a warehouse line, or worse yet, the closure of the business.
Quality Control is often viewed as insignificant to the lenders and broker’s production process. The results of the QC process, although reported to management, get lost or pushed back in the day-to-day effort to originate more loans. While some lenders and brokers consider the establishment of a quality control department to be an unneeded expense, others view the cost as an expense that has a positive impact on a company’s bottom line.
Some lenders and brokers have considered the use of an Automated Underwriting System (AUS) as their quality control department. This is not acceptable and may lead to major issues for the lender and broker. The AUS system is only as good as the data being provided to generate the approval. An AUS approval is not a guarantee that the loan will not ultimately end up as a repurchase request months or years down the line. A good in-house or outside independent third party quality control program would ensure that all the AUS requirements are satisfied in order to provide for a loan that meets the investor’s ultimate requirements for purchase.
A good quality control review is not only looking for fraud, but also at whether the loan meets a wide variety of regulatory requirements. As the regulatory environment continues to change, not only do you need to be concerned with the typical underwriting issues relating to credit, income, assets, property, rescission, APR etc. you will now need to be concerned with new disclosure requirements regarding RESPA, Regulation Z, Home Valuation Code of Conduct and the licensing requirements soon to be effective under the SAFE Act. Violations of any one of these regulations or problems with the quality of the underwriting package may cause the loan to fall into a potential repurchase scenario. Even more concerning is the fact that where there is one file with regulatory or underwriting errors, there generally is more.
In reviewing loan files, the QC review process will review the typical areas that are known to be of concern and the source of numerous repurchase demands.
The following are just a few areas of concern:
- Verifications of Income falsified or distorted
- Verifications of Deposit falsified
- Fraudulent bank statements
- Fraudulent income documents (paystubs, W-2’s and tax returns)
- Appraisals with false comparables or improper adjustments used to justify a highly inflated value.
- Inaccurate disclosures or the failure to provide disclosures timely.
- Flips - property is acquired and resold in a very short time frame, often to a related party.
- Sending verifications to P.O. Boxes or unsubstantiated addresses.
- Fraudulent gift letters
- “Straw buyers” - Using someone as a buyer to obtain a loan only to facilitate a transfer of the property either away from a builder or to someone who otherwise would not qualify for the loan.
- Improper use of social security numbers.
- Incorrect data input to automated underwriting systems.
In order to satisfy the quality control requirements of investors, warehouse lenders and state regulators, lenders and brokers can either use an internal department or outsource the process to an independent third party. Outsourcing can often relieve a large amount of the effort expended in doing the quality control work and allow the lender’s staff time for reviewing issues, training and implementation of changes that can improve loan quality. Outsourcing makes what would be an otherwise fixed cost vary based on the volume of loan production, thus allowing the monthly cost of quality control process to increase or decrease based on the lender's loan volume. Another advantage to outsourcing the quality control function is the objectivity brought to the process by an unrelated third party. In-house audits can create questions about the independence which needs be present in the review and disclosure of errors along with the potential severity of the finding. Outsourcing also avoids personality conflicts within the company that can be an issue between co-workers.
A quality control plan whether done by an in-house department or independent third party should at a minimum:
- Consist of a sampling of at least 10% of the monthly loan production or a valid statistical sample for those large lenders.
- Verify for accuracy the information obtained in the loan file.
- Review the accuracy of the data used to obtain the Automated Underwriting approval.
- Verify that the requested items for Automated Underwriting approval have been satisfied as requested.
- Identify whether any there are any problems with processing, underwriting and closing.
- Develop an action plan with management to correct any identified problems.
- Review and respond to repurchase demands.
Part II of this article will deal more directly with anticipating and responding to repurchase demands.
George H. Marentis is President/CEO of Compliance Made Simple, LLC, a company that provides licensing services and other compliance related services to the mortgage lending industry nationwide. Mr. Marentis has a Juris Doctorate and over 15 years of mortgage lending experience ranging from frontline operations, originations to regulatory and legislative compliance. Information provided in this article is not intended to be legal advice and is informational only.