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:
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Reviews all items in the file to look for areas that need further information.
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Reviews areas that do not meet the lending guidelines of the loan program.
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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
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Early banking charged the banker with:
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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
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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
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Minimum requirements for a new loan set by
the loan committee
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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
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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
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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 nonresidential 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
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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:
https://www.efanniemae.com/sf/guides/ssg/sg
pdf.jsp
Click on “Fannie Mae Selling Guide”
©2011 Cengage Learning
Commitment Certificate
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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
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2.
Conditions prior to funding
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3.
Copy of most recent pay stub
Copy of recent bank statement
HUD-1 from borrower’s property being sold
Work requirement clearance
Copy of permits
Conditions after funding
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Fire insurance and title insurance policies
Reconveyance deed on another lien
©2011 Cengage Learning
LOAN RISK EVALUATION
• Borrower analyzed according to:
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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
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Underwriting worksheet
Uniform Underwriting and Transmittal
Summary – FNMA Form 1008
Confirm or verification of:
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www.driverslicense.com
U.S. Immigration & Naturalization Service
Social Security Verification
Tax Rate Booklet
©2011 Cengage Learning
QUALITY CONTROL
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To safeguard the investor’s funds
A list of questions about the
borrower
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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
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Does the file make sense?
Who stands to gain in this transaction?
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Appraisal
Closing Instructions
Credit Report
Loan application
Payroll check stubs
©2011 Cengage Learning
Sales Contract
Tax Returns
Title Search
VOE
VOD
QUALITY CONTROL
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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
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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
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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
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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
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©2011 Cengage Learning
AUDIT AND REVIEW
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Review of a file is based upon
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Auditor must:
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Referral from processor, underwriter or funder
Random selection
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
©2011 Cengage Learning