Chapter 10: Processing: UNDERWRITING AND QUALITY CONTROL

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Chapter 10 Processing UNDERWRITING AND QUALITY
CONTROL
By Dr. D. Grogan M.C. Buzz Chambers
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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.
• 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.

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Student Learning Outcomes

1. Describe the underwriting process.
2. Name typical stages for conditional approval.
3. Differentiate between acceptable and problem red
   flag loan criteria.
4. Explain the audit department functions in the
   loan process.
5. Outline the major components of quality control.

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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

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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

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Qualifying Minimum Standards

• FNMA maximum loan limits LTV
• Terms of amortization
• Loan application (1003)
• VOE, VOD
• Credit ratios and FICO score
• Borrowers income
• Appraisal that meets FIRREA standards

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

• Loan evaluation prior to commitment
• Clarifies potential discrepancies
• Follows investors 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

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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
• https//www.efanniemae.com/sf/guides/ssg/sgpdf.js
  p
• Click on Fannie Mae Selling Guide

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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 lenders.

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Underwriter worksheet Options

• Conditions prior to documents
• Copy of most recent pay stub
• Copy of recent bank statement
• HUD-1 from borrowers 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

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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

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Underwriting guidelines

• Underwriting worksheet
• Uniform Underwriting and Transmittal Summary
  FNMA Form 1008
• Confirm or verification of
• www.driverslicense.com
• U.S. Immigration Naturalization Service
• Social Security Verification
• Tax Rate Booklet

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QUALITY CONTROL

• To safeguard the investors 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

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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

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QUALITY CONTROL

• 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

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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.

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Types of loan fraud

• Forgery
• 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

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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

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Fraud audit form

• Borrower
• Self-employed
• Co-Borrower
• Credit Bureau
• Lender Verification
• Underwriter comments

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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