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Trigger leads and antitrust violations and the big three - oh my!

May 24, 2007

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].
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May 24, 2007
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