Discretionary Post-Closing Reviews

Question: Our firm has recently been informed that we need to perform discretionary reviews on conventional loans. What is the criteria for review and do we include government loans in the selection?

Answer            
The purpose of a discretionary review—not to be confused with a “targeted review”—is to focus on areas that may pose an elevated risk for errors, misrepresentation and fraud. There are no volume requirements and there is no minimum or percentage of production.

It is at the lender’s discretion as to how many loans will be included in any audit period. For instance, selected loan files could be one loan or ten loans or more, depending on the need of the lender and based on the suggested criteria below.    

A targeted review is directed more in the vein of specific employees’ performance, new branch offices, new processors or underwriters, new processes and/or reviews of findings derived from pre-closing and post-closing reports.

Example of discretionary selections include:

►LTV ratios over 90%
►Investment properties
►High risk credit scores
►Cash-out refinances
►10% of new loan originators
►All high LTV loans
►Low FICO scores
►Manufactured homes 

Discretionary reviews are required for FNMA and FHLMC products, although at this time FHA only suggests discretionary audits. Depending on your own reason for the review, it would seem prudent and necessary to include the entire portfolio of loan products in the selection process.

If you would like to know more about discretionary reviews, please contact me!

Brandy George is director of underwriting operations compliance and executive director of LCG Quality Control for Lenders Compliance Group.