©2011 Cengage Learning Chapter 10: Processing: UNDERWRITING AND QUALITY CONTROL By Dr. D. Grogan M.C. “Buzz” Chambers

©2011 Cengage Learning 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.

©2011 Cengage Learning 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.

©2011 Cengage Learning 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

©2011 Cengage Learning 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

©2011 Cengage Learning Qualifying Minimum Standards FNMA maximum loan limits & LTV Terms of amortization Loan application (1003) VOE, VOD Credit ratios and FICO score Borrower’s income Appraisal that meets FIRREA standards Note: Only one underwriter needed for loan approval, but TWO needed for a denial of a loan package.

©2011 Cengage Learning LOAN UNDERWRITER Loan evaluation prior to commitment Clarifies potential discrepancies Follows investor’s 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

©2011 Cengage Learning 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: pdf.jsp Click on “Fannie Mae Selling Guide”

©2011 Cengage Learning 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 lender’s.

©2011 Cengage Learning Underwriter worksheet Options: 1. Conditions prior to documents Copy of most recent pay stub Copy of recent bank statement HUD-1 from borrower’s property being sold 2. Conditions prior to funding Work requirement clearance Copy of permits 3. Conditions after funding Fire insurance and title insurance policies Reconveyance deed on another lien

©2011 Cengage Learning 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

©2011 Cengage Learning Underwriting guidelines Underwriting worksheet Uniform Underwriting and Transmittal Summary – FNMA Form 1008 Confirm or verification of:   U.S. Immigration & Naturalization Service  Social Security Verification  Tax Rate Booklet

©2011 Cengage Learning QUALITY CONTROL To safeguard the investor’s 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

©2011 Cengage Learning 10.2 Red Flags Does the file make sense? Who stands to gain in this transaction?  AppraisalSales Contract  Closing InstructionsTax Returns  Credit ReportTitle Search  Loan applicationVOE  Payroll check stubsVOD

©2011 Cengage Learning 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

©2011 Cengage Learning 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.

©2011 Cengage Learning 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

©2011 Cengage Learning 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

©2011 Cengage Learning Fraud audit form Borrower Self-employed Co-Borrower Credit Bureau Lender Verification Underwriter comments

©2011 Cengage Learning 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