Loan mod forensic loan audit: Part I of III
What is a forensic loan review? Although an afterthought where mortgage lending is concerned, this piece of the mortgage function should be strongly considered not only from a compliance standpoint, but also from the standpoint of future lender liability. It’s not a term that we have heard often in the past, but with the rise of loan modification cases, the term will become quite relevant in the years to come. As we wade our way out of the mortgage mess that was created over the past seven or so years, government officials as well as lenders, have become well aware of the unscrupulous lending practices that plagued us over the past several years. These practices have resulted not only in the collapse of the mortgage market, but the subsequent increase in the number of foreclosures. As lenders try to minimize overall losses that might be sustained as a result of the excessive foreclosure rate, loan modifications have become, in some instances, a method to cut future losses as well as help a borrower retain ownership of their property. Loan modification companies, as well as attorneys, have taken on the arduous duties of helping those individuals who received mortgages that were not in their best interest either do to excessive interest rates or other features, modify their current mortgages into more sustainable mortgage products, and due to declining markets nationwide, many lenders are beginning to also see this as a viable solution to foreclosure. However, there are still lenders out there that purchased and securitized these mortgages that refuse modification attempts at any level. As a result, many of the attorneys and loan modifications companies have implemented the use of the forensic loan audit in order to gain legal leverage against these loan servicers. The bottom line is this, if a forensic loan audit determines that the borrower’s rights were violated under state or federal law, the attorney may pursue legal action against the loan servicer which could not only stay a pending foreclosure but result in actual, as well as statutory, monetary damages being awarded the consumer should the court find in the borrower’s favor. Several pieces of the mortgage process are audited during a forensic loan audit to determine if there have been violations where the overall mortgage process is concerned. Cases are examined to determine compliance where the Real Estate Settlement Procedures Act (RESPA) and Regulation Z are concerned, reviewed to determine if predatory lending practices were used and examined to determine if misrepresentation or constructive fraud occurred at any time throughout the mortgage process. Evidence of violation where any of these items are concerned could result in serious legal consequences for the loan servicer and as stated above, legal leverage for the borrower where loan modification is concerned. Approximately 80 percent of the forensic loan review can be completed by simply reviewing the borrower’s mortgage documents, reviewing the results of any technology tools, underwriting practices and the borrowers closing documents. Quite frankly, something as simple as under-disclosure of the borrower’s annual percentage rate by as little as 0.125 percent could result in serious consequences, including reopening the borrowers’ rescission period which could place a stay on foreclosure proceeding until the case is heard in a court of law. Forensic loan review is a useful tool for all lenders, servicers as well as the loan modification companies. As mortgage professionals, I think we all need to be aware of the standards and practices under which they will be conducted in the future. The trend is gaining momentum from both an offensive and defensive standpoint. As the author of The 2009 FHA/VA Survival Kit, a 1,000-page how-to guide, Bonnie Wilt-Hild is a Loan Modification University instructor (www.loanmoduniversity.org), and maintains a full-time position as senior DE underwriter for a major banking institution.