Quality controlAnna DeSimoneHUD, Fannie Mae, Freddie Mac, quality control plans and steps, outsource
A core element of the broker-to-banker
transition
Government-sponsored enterprises such as the U.S. Department of Housing and Urban
Development (HUD), Fannie
Mae and Freddie Mac
publish rigid standards for quality assurance. Private investors
and warehousers are now publishing guidelines for pre- and/or
post-funding quality control, particularly for their enhanced
correspondent lending programs. Traditional table funding requires
brokers to obtain their own warehouse lines of credit, prepare
closing documents and deliver the loan to the investor, who has
provided pre-funding underwriting approval.
The enhanced option allows brokers to close in their own names
using warehouse funds provided by the investor. The loan is
assigned to the investor at the closing table. The combination of a
built-in warehouse line of credit and competitive pricing conduit
is a very attractive business solution and reduces the risk of
transitioning from broker to banker.
There are companies that provide a full end-to-end service that
encompasses call center through post-closing steps, including an
array of back-office functions such as processing, underwriting,
doc-prep, closing, post-closing and vendor management. Some
companies offer back-office services on a private label basis,
enabling originating lenders to concentrate on sales in a
controlled cost-contained arrangement.
Whether the lender's warehouse line is from an independent
warehouser funded under an enhanced correspondent arrangement or a
segmented step from a full-service provider, there is one strong
underlying requirement for those who are transitioning from broker
to banker - quality control.
Quality control plans and steps
Post-funding quality control consists of an independent review of
the credit and legal documents and re-verification steps to test
the authenticity of file documents. A mortgage lender's quality
control plan must be submitted along with their correspondent
application for Federal Housing Administration approval and for
most conventional conduits. FHA Mini Eagles must have quality
control reviews on 10 percent of their loans - even though the
sponsor is also completing quality control. Private investors
publish guidelines for pre- and/or post-funding quality control
that are consistent with the requisites of Fannie Mae, Freddie Mac
and HUD. Both prime and non-prime conduits are strengthening their
quality control requirements and are increasingly sending a very
clear message to their correspondents: skipping quality control is
not an option.
A comprehensive plan should delineate the following steps and
procedures:
-Sampling requirements (10 percent of closed loan
production)
-Re-underwriting the mortgage file to investor guidelines
-Re-verification of asset documents for purchase transactions
-Written re-verification of income document
-4506 tax return verification on self-employed borrowers
-Verbal re-verifications (on loans with verbals)
-Salary reasonableness test, employer validation and salary survey
on stated-income/stated-asset and stated-income/verified-asset
loans
-Automated underwriting data integrity
-Occupancy validations on non-owner occupied
-Credit report on all manually underwritten loans and automated
underwriting refer or caution
-Mortgage credit report (RMCR or tri-merge) for 10 percent of
sampling
-FNMA Review 2000 Appraisal for 10 percent of sampling
-RESPA, TIL, privacy, FACTA, flood and other federal
compliance
-State compliance disclosure and permissible terms
-Review of HUD-1 Settlement Statement
-Review of note, mortgage and legal documents
-Desk and field review appraisal
-Fraud investigation
-Documenting and remediation of exception items
-Trending reports by branch, originator and appraiser
-Disciplinary action
Most investors ask for quarterly quality control reports and
reviews are completed on a monthly or quarterly basis, depending on
volume and specific investor requirements. Any review completed
after 90 days is usually not acceptable to any investor. Quality
control file reviews and re-verification steps may be completed
internally by a lender, so long as the work is completed in a
separate department outside of the origination area.
Outsourcing is a cost-effective option, especially for smaller
companies. The outsourced service provider will request a copy of
the lender's closed loan report, choose the 10 percent sampling and
submit a list of files to ship. A growing number of companies have
electronic files or scanning equipment, thereby saving time and
cost of copying and shipping of paper files to outsourced service
providers. The major benefit of the outsource provider is cost
control, since all services are included in a flat fee - typically
around $150 per file. Lenders must reimburse providers for the cost
of credit reports, appraisals and other out-of-pocket expenses.
Information becomes aged. The older information is, the less
valuable it becomes. Monthly file reviews for quality control can
identify deficiencies sooner, thus enabling lenders to put process
improvement into place faster. Through a well-deployed strategy
that monitors risk, lenders can tap into a wealth of options
available for correspondent lending.
Anna DeSimone is director of Mortgage Quality Control for
Integrated Compliance Solutions. She was president and founder
of Bankers Advisory
Inc., a mortgage audit services firm acquired by ICS in 2004.
She can be reached by e-mail at
[email protected].
