CHAPT ER 6
Real Estate Loans Audit
OVERVIEW
The audit of real estate loans comprises a wide range of functions to be reviewed — from
examining loan documentation to ensuring compliance with applicable laws and regulations.
This chapter breaks the components of real estate lending into specific checklists to provide
focused, step-by-step guidelines for you to follow in conducting an audit. Whether the loan
is a government loan or a conventional one, there are some basic items you should address
to assure your credit union that the loan is in order, the information is complete and accurate, and the loan will be eligible for insurance, guaranty, or sale in the secondary market.
At the beginning of any real estate loan function audit, you should examine the loan documentation as it was submitted and discuss any changes with the underwriter. After you have
received a loan file, you should check it to:
Verify that the preliminary title report is less than six months old.
Compare the names of applicants on all documents.
Compare the sales agreement with the title report and escrow instructions.
Cross-check the address on all documents.
Cross-check the legal description with the appraisal, sales agreement, and title report.
Determine the progress made on any of the underwriter’s conditions.
Determine the progress made on any repairs required by the appraiser and/or the underwriter.
You can apply these basic, preliminary procedures to most of the specific checklists presented in this chapter. The audit checklists cover functions related to real estate lending,
including:
Government loans, including loans from the Federal Housing Administration (FHA), the
Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA), and the Department of Housing and Urban Development
(HUD)
Escrow accounts
Loans made at branch offices
Appraisals
Commissions for procuring loans
Conventional loans
Documentation
Fraud and abuse
Insider or affiliate transactions
Private mortgage insurance
Lending limits, security, and standards
Loan fees
Loan origination
Adjustable-rate mortgages (ARMs) and mortgage lending
Residential lending
SAMPLE LOAN REVIEW PROGRAM
In Appendix 6.1 we include a sample loan review program that your credit union can use as
a model to create a formalized quality control review of your lending functions. The objectives of the review are:
To assure that your credit union is in compliance with all applicable laws and regulations.
To assure that your credit union’s procedures are revised in a timely manner to accurately reflect changes in regulation, to keep credit union personnel informed of the
changes, and to verify that employees are held accountable for performance failures or errors.
To assure that procedures exist for expanding the scope of quality control reviews
where fraudulent activity or patterns of deficiencies are identified.
You should also verify that the loan departments are using the most current manuals, instructions, and forms from the Federal Agencies. Verify that the loan departments have procedures in place to update manuals, forms, and procedures based on communication from
the agencies.
The appendix includes the following worksheets and forms to help you conduct a review:
Board of Directors Resolution (Exhibit A)
Credit Report Checklist (Exhibit B)
Cover Letter (Exhibit C)
Credit Release (Exhibit C-1)
Verification of Employment Form (Exhibit C-2)
Verification of Deposits (Exhibit C-3)
Verification of Loans (Exhibit C-4)
Request for Verification of Mortgage Account (Exhibit C-5)
Letter to Explain to the Quality Review (Exhibit D)
Statement of Information (Exhibit D-1)
FNMA Nomination and Recommendation of Appraiser Form (Exhibit E)
Appraisal Review (Exhibit E-1)
Commercial Appraisal Review (Exhibit E-2)
Review Checklist (Exhibit F-1)
Loan File Exception Report (Exhibit F-2)
Loan File Audit Report (Exhibit F-3)
Adjustable Rate EDP Audit (Exhibit F-4)
EDP Loan Audit Workpapers (Exhibit F-5)
Settlement Statement (Exhibit G)
Payment Coupon Report (Exhibit H)
Conventional & Second Loans Foreclosure Less than One Year Old (Exhibit I)
First Payment Default Report (Exhibit J)
Name Change on Hazard Insurance Report (Exhibit K)
Request for Beneficiary Statement: Conventional, Seconds & Warehouse Loans Under
120 Days Old (Exhibit L)
Underwriting Audit Log (Exhibit M)
Funding Audit Log (Exhibit N)
Funding Audit Report (Exhibit O)
Audit Log (Exhibit P)
Denied Loans Compliance Worksheet (Exhibit Q)
Loan Review Questionnaire (Exhibit R)
SAMPLE LENDING QUALITY CONTROL AUDIT
Fannie Mae requires each lender to use prudent, sound, and responsible business practices in its marketing and origination efforts. The lender’s operating policies and procedures
must provide an effective means of ensuring responsible lending practices, and identifying
and avoiding predatory lending practices.
Fannie Mae requires lenders to update their business practices as necessary to ensure
continuing responsible lending practices that are in line with current market conditions. Fannie Mae also requires lenders to have policies and procedures, including quality control procedures, to ensure that loans delivered to Fannie Mae comply with these responsible lending requirements. In Appendix 6.2 this manual supplies a sample program and loan quality
control audit. Auditors should also refer to Fannie Mae’s Loan Quality Initiative as set form
in Lender Letter 2010-03. This letter is included as Appendix 6.3 on the CD.
FHA Property Improvement Lending (Title I) Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ensure that the credit union’s FHA Property Improvement Lending program meets necessary requirements so the credit union is protected from 90 percent of a loss.
AUDIT PROCEDURES
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If the loan is in excess of $7,500, verify that a trust deed has been recorded
against the property.
On nonowner-occupied properties, verify that the loan-to-value ratio (LTV) is
75 percent or less. [You may insert an appropriate percentage for your
credit union based on your loan policy]
Determine the eligibility of the property.
Ascertain that improvements were eligible.
Establish that funds were disbursed for eligible home improvements only.
Confirm the terms of the loan.
Verify the funding procedures:
Debt ratio (not to exceed 45 percent) [You may insert the ratio your credit
uses in your underwriting standards]
Monthly income
Borrowers’ credit
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Superior lien verification
Verify the servicing procedures of the loan:
Billing cycles
Late payments
Verify the contractor approval procedures if applicable:
Written application
License verification
Length of time licensed
References
State license board record review
FHA Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To review this federal program to ensure that all requirements are met to protect the credit
union from a loss.
AUDIT PROCEDURES
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Check to see whether the credit union uses the FHA- or Veterans Administration (VA)-approved deed of trust note or a uniform note with the proper
riders to specify the type of loan being made.
Verify the deed of trust with assignment of rents.
Determine that the mortgage insurance premium rider to the deed of trust is
attached and recorded with the deed of trust.
Ascertain that the graduated payment rider is prepared and attached to the
deed of trust on all graduated payment mortgage (GPM) loans, along with
the borrower’s acknowledgment of any negative amortization and payment increases.
Establish that the assumption rider is in the file.
Substantiate the use of a tax and insurance reserve notification on which the
borrowers acknowledge the requirements of the reserve.
Confirm that the FHA home owner’s fact sheet will be delivered and acknowledged at closing, if it was not supplied in the credit package.
Ensure the firm commitment. This form is to be signed and dated on the re-
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verse by the applicants as of the date they actually sign the note and deed
of trust.
Validate the statement from the sellers and buyers that the terms of the contract are the same as shown and that fees have been paid as shown on
the closing documents.
Verify that the hotel transient use is signed by all nonoccupant borrowers for
two- to four-unit dwellings.
Determine that the mortgage insurance premium and funding fee were transmitted immediately after loan funding. The transmittal will be on the mortgage insurance premium (MIP) transmittal. The calculation on the MIP
must be verified prior to transmittal. (This transmittal must not be delayed.
The FHA charges late fees for each day the premium is later than 15 days
and interest if the fees are not received within 60 days after loan funding.
Any error in the FHA MIP can cause numerous problems and will delay
obtaining the insurance certificate from the FHA.)
Ascertain that a close follow-up is maintained for proper receipt of the MIP
recap statement. The FHA indicates on the recap if the loan is cleared for
insurance or if there is a shortage. The FHA also charges penalties, even
on the shortages. The late fees and penalties are quoted on the transmittal form.
Verifying the File for Submission to FHA
Immediately upon receipt of the final HUD settlement statement and acknowledgment of the FHA’s receipt of the MIP, the file will be prepared for submission to the FHA for insurance. Verify the following:
Remove from the funding package all items submitted to meet the conditions
the underwriter specified at the time of loan approval, and place them in
the file in proper order.
Review the HUD settlement statement for any unauthorized charges and
compare to GFE for tolerance errors. Make sure the settlement statement
is certified by the escrow or title company, and the certification is proper
as required by the FHA. Any unauthorized charges, or those outside the
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tolerances allowed by RESPA, must be refunded by the credit union.
Make a copy of the trust deed containing the recording data and certify it to be
a true copy. Make sure the MIP and assumption riders and the GPM rider
are attached.
Review the MIP receipt to ascertain that the file is cleared to submit for insurance (i.e., proper funds were transmitted and accepted by the FHA).
Verify the underwriter’s certification.
Confirm that the request for insurance endorsement has been completed.
If the loan was closed more than 60 days ago, review to see that a payment
ledger has been received from the loan servicer to verify that the account
is current. (Some FHA offices will accept the certification that the account
is current without a ledger sheet if fewer than three payments have come
due before its submission.)
Review that the documents in the HUD case binder are in the proper order,
according to HUD instructions.
Verify that the file has been properly prepared for submission to the FHA for
final review and signature by the authorized employees. Submit the file to
the proper FHA office.
VA Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
All loans must be submitted for VA approval using the guidance in the VA lending manual
and regulations as updated from time to time.
Internal auditors will not be reviewing loans prior to submission to the VA, but the department should have procedures in place to conduct a pre and post closing review of the documentation required to ensure that the loan will be eligible for the insurance or guaranty.
Select a sample of loans submitted to the VA and determine the following:
AUDIT PROCEDURES
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Upon receipt of the loan file, the auditor will:
Verify that the preliminary title report is less than six months old.
Compare names of applicants on all documents (the veteran must take title as the name appears on the certificate of eligibility or an “also
known as” statement is required).
Compare the sales agreement with the title report and escrow instructions.
Cross-check address on all documents.
Cross-check the legal description with the appraisal, sales agreement,
and title report.
Determine the progress made on any of the underwriter’s conditions.
Determine the progress made on any repairs required by the appraiser (a
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VA employee or contract employee) or underwriter.
While the VA offers an approved deed of trust note for each state, it will also
permit the use of the uniform note with the proper riders to specify the
type of loan being made. Refer to the VA manual and regulations for a
complete list of necessary documents.
Verify the deed of trust with assignment of rents.
Verify that the graduated payment rider is also prepared and attached to deed
of trust on all gradual payment mortgage (GPM) loans along with the borrower’s acknowledgment of the negative amortization and payment increase.
Verify that the assumption rider is in the file.
Verify the use of tax and insurance reserve notification wherein the borrowers
acknowledge the requirement of the reserve.
Verify that the VA federal collection policy notice is signed at closing.
As VA loans require the automatic loan report for automatic loans and certification of loan disbursement for agency-approved loans, verify that the
loan report will be prepared with as much information as available prior to
the closing. The veteran is to sign and date the form as of the date he or
she signs the note and deed of trust (The VA interprets the date of closing
to be the date the veteran signs the closing papers, not the date of funding.)
Verify whether the VA loan was closed at a different rate than that shown on
the handwritten loan application. If so, then an acknowledgment from the
veteran and the credit union for the change must be on file.
Document that, unless the funding fee is waived, a loan guaranty funding fee
transmittal was prepared.
Verify that the funding fee, after funding, was immediately transmitted. The
transmittal will be on a VA loan guaranty funding fee transmittal. The VA
requires the fee to be paid 15 days after the loan funds.
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Verify that a close follow-up was maintained for proper receipt of the funding
fee receipt. The VA reject transmittals; however, if the funder notes the
transmittal was correct, the file may generally be submitted with a notation
to the applicable VA office.
Immediately upon receipt and acknowledgment of the funding fee, the file
should have been prepared for submission to the VA for guaranty. Verify
the following:
Review the explanation of appraisal conditions in determining the acceptability of the appraisal requirements.
Review the HUD settlement statement for any unauthorized charges and
compare to the GFE for tolerance errors. Verify that the settlement
statement is certified to be a true copy by the escrow or title company.
Any unauthorized charges or those outside certain tolerances in RESPA must be refunded to the member by the credit union.
Is the correct certificate of loan disbursement form completed?
Review the funding fee receipt to ascertain whether the file was cleared
for guaranty.
If the loan was closed for more than 60 days before submission, ensure
that the account is current and certified using an acknowledgment of
the late reporting, along with an explanation as to the reason for the
delay in submitting the file for guaranty.
Verify that the file was assembled in the stacking order as prescribed by
your local VA office.
Ascertain that the file had been properly prepared for submission to the
VA. The credit union’s authorized representative should have conducted a final review and signed the appropriate VA form, Automatic
Loan Report.
Verify that one employee has been given the responsibility to maintain proper
follow-up to the files as to meeting of conditions, funding, transmitting
funding fee, and obtaining the proper receipt, receipt of all documents
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from the title or escrow company, follow-up with the VA for any submission made more than 30 days previously, and in meeting any additional
requirements imposed by the VA to obtain the proper loan guaranty certificate.
In the event the loan guaranty certificate was received from the VA with an
error, ensure that it was returned immediately to the VA for correction.
Note: If the error is the result of some erroneous information given to the
VA, clarification documents should be sent to the VA with the request for
correction. Follow up this request.
FNMA Quality Control Verification Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To comply with the FNMA Secondary Mortgage Program by ensuring that the credit union’s
quality control plan meets the expectations of the agency. FNMA guidelines require that the
QC program be conducted monthly. You must notify Fannie Mae if your QC cycle is in arrears by more than one 30-day cycle. Quality control audits may be conducted by credit union staff, the internal audit department, or an external company. The conductor of the audit
should be guided by Subpart D of the Single Family Seller Guide, which can be accessed at
efannie.com.
QUALITY CONTROL PLAN AUDIT PROCEDURES
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Determine that the credit union has a written Quality Control Plan for all types
of government insured loans.
Establish that the plan includes the following:
A general overview of the credit union’s QC philosophy, plan objectives,
and identification of the specific risks the lender intends to measure,
monitor, and manage.
Detailed operating and reporting procedures for all employees involved in
or affected by the QC process, and QC staff training concerning standard operating procedures.
A process for performing QC during prefunding and post-closing
Determine that the plan specifically provides the process for the following:
Identifying a representative sample of loans using the random and discre-
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tionary selection processes that includes loans:
Originated through each applicable production channel, e.g., retail, correspondent, third-party originations;
Originated under all mortgage products, e.g., fixed-rate mortgage,
ARM, special or niche programs;
Originated using all underwriting methods, e.g., manual and each automated underwriting system; and
Loans for which all employees (e.g., loan originators, processors, underwriters, closers, etc.), vendors, appraisers, and contractors were
involved in during the origination process.
Reviewing the QC work performed by the lender’s contractors.
Evaluating compliance with Fannie Mae’s requirements, such as closing
documentation, underwriting, data integrity, and property valuation.
Written procedures for reporting, including:
The method of monthly reporting of review findings;
Distributing loan-level findings to the business unit(s), specifically to
parties within the business unitresponsible for resolution;
Identifying all defects, including the defect rate, and providing the results to senior management;
Documenting all corrective actions taken; and
Maintaining accurate and detailed records of the results of the lender’s
QC reviews.
Maintaining records for three years of QC findings and reports, loan files
reviewed, and all related documentation.
An audit process for the lender’s QC processes and procedures.
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Timing and loan selection process for the prefunding QC review such as
verification of data and documents, and reporting procedures.
How third-party originators are selected and specifics about the review cycle of loans originated by them. The cycle should be no less than annually.
Criteria used to select third-party originator loans to review such as:
Property location,
LTV ratios,
Mortgage product types,
Borrowers’ credit scores, and
Third-party originator’s past performance.
Information on the QC Reporting Structure of the managers and staff that
will be responsible for the QC process. Note: Fannie Mae recommends
that the QC operations report to the lender’s senior management.
Proper training of employees and detailed standard operating procedures
for all employees who will be involved with, or affected by, the QC process.
PRE-FUNDING AUDIT PROCEDURES
Prefunding/Post-Closing Review Quality Review
By interview or by reviewing prefunding/post-closing audit reports, verify that
the credit union staff select an adequate sample of loans with characteristics related to errors or defects identified in prior prefunding and postclosing review results (for example, unsupported property values or incorrectly calculated income). It is recommended that the credit union regularly
reevaluate its loan selection process to ensure its effectiveness.
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Ensure that the credit union is at least following Fannie Mae’s recommendation that discretionary sampling methodology include the following loans
with higher risk characteristics, such as:
LTV ratios > 90%
Credit scores considered in the high-risk range
Loans secured by investment properties
Cash-out refinances
In addition, sampling methodology may include the following mortgages:
Originated by third parties
Representing all property types including condominiums, cooperatives,
leasehold estates, and manufactured housing; originated or processed
by newly hired loan officers, processors, appraisers, or other personnel
or third parties involved in the loan origination process; and underwritten by all underwriters
Establish that the credit union verifies the following for each loan selected for
prefunding or post-closing review:
Data entered into an automated underwriting system,
Borrower Social Security number used to verify borrower identity,
Income calculations and supporting documentation,
Employment — verbal verification of employment,
Assets needed to close or meet reserve requirements,
Appraisal or other property valuation data, and
Documentation of adequate mortgage insurance coverage.
Note: Data verification may be obtained either directly from the information
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source (e.g., the Social Security Administration, IRS, employer, financial
institution), or reliable third parties. Fannie Mae recommends that the
credit union validate that the loan file has been documented with the CPM
decision and verify that they have identified the loan with the correct project review type code.
Determine whether the credit union has procedures to ensure that defects
identified in the prefunding review are reported properly. Reporting procedures may include:
Notifying senior management about the defects,
Informing the parties responsible for resolving the defects,
Documenting the resolution of the defects, and
Reporting results of the resolution efforts to senior management and other
appropriate parties within the credit union.
QUALITY CONTROL AUDIT PROCEDURES FOR LOANS SOLD TO
FANNIE MAE
Fannie Mae requires that you conduct an audit of the QC process. You should
verify your credit union’s QC process by reading policies and procedures, interviewing QC staff, reading QC reports and — if necessary — selecting files
that have been reviewed to ensure all of the steps required by Fannie Mae’s
Selling Guide have been completed.
Establish that the post-closing mortgage review process evaluates the following:
The underwriting documents, including re-verification of underwriting documents and a data integrity review for mortgage loans underwritten
with DU or other automated underwriting systems;
Compliance with the terms of the Selling Guide, other program requirements, and is in all respects eligible for delivery to Fannie Mae;
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The appraisal or property inspection report;
The underwriting decision;
The closing documents; and
Compliance with all federal, state, and local laws.
Determine that mortgage loans are selected for QC reviews on at least a
monthly basis, if not more frequently.
If not, establish that the credit union requested permission from its head
Fannie Mae regional office to conduct review less often.
Establish that loan selections are made within 30 days of closing.
Reviews are completed within 60 days of the selection.
If the credit union’s QC cycle is in arrears more than one 30-day cycle, determine that it has notified Fannie Mae.
Verify that the credit union’s QC process reviews a minimum of 10% of the
residential mortgage loans that it originates or acquires from a third party.
Review the selected mortgages for the following criteria:
Represent the lender’s overall book of business;
Include the different types of mortgage loans that the lender offers;
Represent mortgage loans originated by each branch office and by thirdparty originators; and were originated using an automated underwriting
system, including DU and electronic commerce (i.e., various Internet
channels or other web-based applications).
If the credit union uses a statistical sampling for its selection process instead
of the standard 10% random selection process, determine that it has procedures to provide, upon request, a detailed written justification of the
methodology, including the following information:
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Method for making a statistical selection;
Variables used in the selection model and how they are defined (population size, precision rate, percentage of defect rate, and confidence level); and
Periodic evaluation of the process and variables and establishment of time
periods for the evaluations.
For discretionary selections, ensure that the QC plan uses some or all of the
following criteria in selecting loans that:
Are delinquent 60 days or more within the first 12 months of origination;
Present a higher risk, including mortgage loans with multiple risk layers,
e.g., high LTV and DTI ratios;
Were created using unusual or unique underwriting, processing, or appraisal techniques;
Were approved with nontraditional credit;
Were processed by a particular branch office, staff person, contractor,
third-party originator, or appraiser;
May be subject to concerns about delinquency rates or patterns identified
in other reviews;
Are secured by properties located in areas with high delinquency rates or
areas experiencing rapid increases or decreases in property values; or
Represent all property types including condominiums, cooperatives,
leasehold estates, and manufactured housing.
Underwriting QC Review
Determine that the QC process re-verifies the accuracy and integrity of the
information used to support the lending decision for any mortgage loans
selected for a QC review.
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Note: For loans underwritten with DU, the re-verification of information also includes a data integrity review to determine that the data entered into
DU was complete and accurate, and that it matched information found on
the documents in the underwriting file.
Verify that the loan includes the credit union’s execution of Form 4506-T with
the IRS and reconciliation of the transcript information with the income
documents in the loan file.
Note: Form 4506-T grants the credit union permission to request copies of
federal income tax returns directly from the IRS. Lenders that obtain the
appropriate IRS transcripts during the pre-closing process may use the
same documents in their post closing QC process without ordering new
transcripts.
Establish that the QC process reviews the following pieces of information in
the re-verification:
Social security number in selected loan files either directly with the Social
Security Administration or through a third party.
Borrower income, employment, and asset information in writing or orally if
there are notes on the conversation.
Borrower’s traditional credit history by obtaining a new in-file credit report
Re-verification of nontraditional credit by contacting each of the credit references on that report. If the credit union obtained written references
from creditors, the QC review process must include re-verification of
each of the credit references.
That the borrower is occupying the residence if the property is a primary
residence or second home, and document the loan file accordingly.
Data Integrity Verification
Verify that the QC process compares the following DU data elements to the
information that appears in the actual underwriting file documents:
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Borrower’s name;
Borrower’s social security number;
Borrower’s employment and employment type (e.g., self-employed);
Borrower’s income and assets;
Property address, including unit number (if applicable);
Property type;
Mortgage loan term, type, and purpose;
LTV ratio; and
Source of documentation used to determine the borrower’s ability to repay
the mortgage loan.
Determines that the QC process verifies:
That documentation exists to support all data used to underwrite the mortgage loan and that the documentation appears reliable.
The accuracy of “matches” on DU’s liability and real estate owned reconciliation worksheets (including any amounts omitted from the underwriting analysis).
When there are material inconsistencies between the data submitted to DU
and in the source documents, the QC process verifies that the credit union
took the following steps:
Determined whether discrepancies are within the tolerances permitted by
Fannie Mae
If discrepancies are outside the DU allowed tolerances, the mortgage loan
was resubmitted to DU using correct data.
Determined if the loan was eligible for delivery to Fannie Mae.
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Notified the lead Fannie Mae office if the mortgage loan was not eligible
for delivery to Fannie Mae.
The QC processing includes a review of any red flag messages appearing in
the DU or any other sources such as credit reports, social security verification systems to ensure that all messages have been addressed and documented, and that the mortgage loan is eligible for delivery to Fannie Mae.
QC Review of Appraisers and Appraisals
Establish that the QC process includes procedures to re-verify the appraisal
or property inspection for 10% of the mortgage loans selected for QC review by ordering a review appraisal, additional appraisal reports, property
inspection report, or other appropriate documentation to check the work of
the original appraiser.
The QC process ensures that the correct appraisal report forms were used for
the selected loan.
If a desk review is used to re-verify the appraisal or property inspection for the
remaining 90% of mortgage loans selected for QC review, determine
whether the staff person competent to complete the review.
Note: The lender’s staff person who performs the desk review does not
have to be an appraiser, but must be competent in the application of basic
appraisal theory for:
Assessing market risk;
Determining if a property meets eligibility requirements, including the LTV
ratio; and
Prescribing corrective actions in the underwriting process when defects
are identified.
Ensure that the QC process includes verification that all selected loans comply with the provisions of the Appraiser Independence Requirements. The
credit union’s policies and procedures must include the provisions of the
Appraiser Independence Requirements and describe the controls in place
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to ensure compliance.
Review of DU Underwriting
The QC review process covers the following for approved/eligible selected
files:
Validates the data integrity of the mortgage loan file.
Re-verifies qualifying income and recalculate income.
Re-verifies the borrower’s assets.
Confirms that the requirements of DU verification messages or approval
conditions were satisfied, and that the actions taken to satisfy them
were adequately supported by appropriate documentation.
Establish that the QC review process covers the following for approve/ineligible selected files:
Validates the data integrity of the mortgage loan file;
Confirms whether a variance permits the ineligibility characteristics in
question, and whether the file includes sufficient written documentation
to support the underwriter’s decision to approve the ineligible mortgage, and compensating factors used to justify that decision; and
Confirms that the DU verification messages or approval conditions were
satisfied, and were adequately supported by appropriate documentation.
Verify that the QC review process covers the following for refer/eligible selected files:
Validates the data integrity of the mortgage loan file;
Validates the reasons for referral and the steps the underwriter took to resolve, or compensate for, the conditions resulting in the referral;
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Confirms whether the mortgage loan file includes sufficient written documentation to support the underwriter’s decision to approve the referred
mortgage, and compensating factors used to justify the decision; and
Confirms that the DU verification messages or approval conditions were
satisfied, and were adequately supported by appropriate documentation.
Determine that the QC review process covers the following for refer/ineligible
selected files:
Validates the data integrity of the mortgage loan file;
Validates the reasons for referral to the lender’s underwriter and the steps
taken to resolve or compensate for conditions resulting in the referral;
Validates specific eligibility criteria that the mortgage loan failed to meet;
and
Confirms whether a variance permits delivery of a mortgage loan with the
ineligibility characteristics in question, and whether the file includes
sufficient written documentation to support the underwriter’s decision to
approve the referred ineligible mortgage, and compensating factors
used to justify that decision.
Review of Closing Documents
Review the QC process to ensure that it includes a review of closing documents. Exhibit 6.1 has a list with the most coming closing documents and
critical data elements that must be included in the post-closing document
review. The list is not all inclusive and your closed loan files may include
other documents.
Verify that the credit union reports the results of QC review on a regular basis
to the credit union’s senior management within 30 days after the review is
completed.
Verify that the credit union notifies Fannie Mae within 30 days of confirming
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any misrepresentation or breach of a selling warranty, including fraud.
Establish that the credit union notifies Fannie Mae if it discovers any act that
resulted in an actual breach of its selling warranties.
Determine whether the credit union notifies Fannie Mae immediately to report
any fraudulent or dishonest activities by lenders, contractors, or brokers.
Note: A Suspicious Activity Report may also be required.
Ensure that the credit union retains all written and electronic records that are
created as part of a QC review process for a minimum of three years.
Review the records and ensure that they include documentation of QC review
findings, as well as documentation related to any corrective actions.
Determine whether the credit union has procedures in place to provide Fannie
Mae with a copy of their records upon request.
Freddie Mac Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if the quality control procedures in place at the credit union comply with the
best practices recommended by Freddie Mac.
The credit union must maintain complete records for each mortgage selected for quality
control review and document discrepancies or inconsistencies that affect the eligibility of the
mortgage based on your requirements as well as those of the mortgage insurer and Freddie
Mac.
AUDIT PROCEDURES
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Determine that the credit union reports the results of the QC review in writing to
senior management within 90 days of the selection of loans for the audit.
Establish that the credit union has procedures in place to notify Freddie Mac in
writing within 30 days of any determination that a finding from the QC audit
affects the eligibility of a mortgage sold to Freddie Mac.
Origination and Closing Documents Checklists
Verify that the audit includes a review of the following documents for comparison with the re-verifications received.
Form 65, Uniform Residential Loan Application
Credit documentation
Employment and income documentation
Date
Completed
Sources of funds documentation
Appraisal and inspection documentation
Sales contract
Form 1077, Uniform Underwriting and Transmittal Summary
Verify that the audit includes a review of the following closing documents to
ensure that the information is accurate, complete and consistent with other
documents in the mortgage file.
Notes and riders
Security instruments and assignments
Mortgage insurance certificate, or policy or mortgage guaranty certificate
Modification or assumption agreement
Title binder or final title insurance policy (both if available) or other evidence
of title
Plat or survey
Settlement statements (HUD-1 or other form)
Leasehold estate documents
Hazard insurance policy or certificate
Flood insurance policy or certificate, or flood zone determination documents
Underwriter’s approval and any conditions of closing
Closing instructions
Date
Completed
Sample Document Review for Red Flags
Ensure that the QC audit contains the Freddie Mac recommended review of
documents such as the mortgage application, credit report, income tax returns, and appraisals to determine if red flags exist that may suggest fraud
or at a minimum a need for additional review and documentation.
Establish that the credit union maintains adequate records and reports to document the QC program.
Note: Examples of some of those reports/records may be:
Mortgage sample selection documentation
Individual mortgage file reports
Summary report of individual findings
Reporting of quality control findings to affected areas
Regular report of quality control findings to senior management
Management’s response to the quality control findings
Special problems report
Corrective actions status report
Report to investors, mortgage insurers, or government agencies including
Freddie Mac
Tracking and trending reports
Other special reports such as branch office reports, reports of targeted reviews, or mortgage service provider
Reports and fair lending reports
Escrow (Impound) Accounts Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine that all escrow accounts have adequate funding from the borrower to cover
taxes, hazard insurance, and flood insurance (if applicable) payments.
AUDIT PROCEDURES
Date
Completed
Obtain trial balances of individual escrow accounts, and reconcile or review
the reconciliation of the total to the credit union’s control account and the
related bank or corporate credit union escrow account(s).
For selected mortgages, obtain the most recent escrow analysis (if it was prepared not more than one year ago) and determine that the monthly deposits appear adequate to provide for payments of taxes, insurance, etc. Also
note that the most recently due real estate bills for the account were paid
on a timely basis.
For accounts selected for review, randomly inspect supporting documents for
disbursements from escrow accounts, such as received invoices, tax bills,
or canceled checks.
Verify for each loan, if the borrower has flood insurance, that policy payments
are escrowed/impounded, if the loan has impounded taxes and insurance
payments.
Ascertain that the credit union is using the payment shock disclosure whenever there is to be a substantial increase in payments (see Exhibit 6.2).
Loans Made at Branch Offices Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
Every year, all branch offices will be audited by the internal audit department to ensure that
origination of loans complies with credit union policies and procedures. If major discrepancies are found, the auditor will make another visit to the branch within 90 days from the initial audit, and ensure that all deficiencies have been corrected. All reports and findings of
the auditor will be given to the supervisory committee, with copies to interested officers.
AUDIT PROCEDURES
Date
Completed
Select 20 percent of loans in process for the audit.
Follow underwriting and documentation review guidelines.
Promissory Notes
Determine that the appropriate note is prepared for each type of loan.
Determine that the note is properly completed and signed by all borrowers.
Compare signature(s) to those on other documents in the file.
Agree loan amount, interest rate, loan number, date, and terms to on-line data. Ascertain that the appropriate rate and late charges are specified.
Deed of Trust/Mortgage
Determine that the deed document is properly completed and signed by all
persons signing the note. The date on the deed of trust/mortgage and the
note should be the same. A description of the property must be shown on
Date
Completed
the deed; this property description should match exactly the description
shown in the title policy. Also, this document must be recorded with the
county in which the property is located. Compare the legal description to
that in the title policy.
Verify that correct riders are attached and recorded with the deed of trust
(e.g., condo, planned unit development (PUD), 1-4 rider, ARM rider).
Mortgage Insurance
Determine that an insurance policy is in force on all loans with an LTV of 80
percent or higher.
Appraisal
Check that the appraisal report was typed and that no alterations were permitted.
Check that the report is not more than six months old (from date of note, or
recertify) at the time of loan approval.
Check that comparables are similar in size; sales should be reasonably current (less than six months) and in the same general area. If not, the appraiser must comment. Determine that the subject values for cost per unit
and square foot do not exceed the maximum range of comparable values
without explanation.
On new developments, whether the property is a single-family residence,
condo, or PUD, verify that at least two comparables were obtained outside
a given development.
Check that dollar adjustments do not exceed 15 percent of the absolute value
of the adjustments and individual line adjustments do not exceed 15 percent. (Comment if over 15 percent.) Determine reasonableness for size,
age, and financing differences. Determine that adjustments (plus or minus) signs are correct.
Verify that the appraiser has justified or explained significant differences between the appraisal value and sales price as well as between actual and
Date
Completed
effective age.
Verify that the appraisal identifies whether the subject property is in a HUD
flood hazard area. For properties located in flood areas, ascertain the existence of flood insurance.
Check the property address and legal description to the preliminary title report. Check the plat map for correct lot.
Check that specified approval requirements such as termite inspections or soil
tests are satisfied or waived in writing by the approving authority.
Check that appraisals are signed and dated by a class II or above appraiser,
depending on the type of property. The appraiser must be on the credit
union’s approved list.
Check that appraisals with land values greater than one-third of the total value
are explained.
On refinanced and equity loans, when the credit union also has a first deed of
trust, investigate significant differences in the old and new appraisals.
Confirm that the appraisal determines that the square footage cost for the replacement cost approach to value is reasonable.
Determine that financing terms are indicated and adjustments are included for
favorable financing terms.
Determine that the lot size is included.
Federal Income Tax Returns
Two recent tax returns are required on all self-employed applicants. They
should be signed and dated close to the application date. A signed yearto-date profit and loss statement may be accepted in lieu of one year’s tax
return. If tax returns are not filed, a copy of the signed extension from the
Internal Revenue Service (IRS) is needed. Check tax returns for accuracy.
Date
Completed
Conversation Sheet
Comments on this sheet should be dated and initialed. Read it carefully for
any comments that may have an impact on the examination.
Document Control Checklist
This checklist should be properly completed and indicate the dates documents are ordered or prepared and received. All applicable items should
be checked. If this checklist indicates a document was received but not locatable, a request for a copy of the original document should be made.
The request should be signed by a supervisor. For owner-occupied real
estate loans, determine that a good faith estimate of closing costs, a HUD
booklet, and, if applicable, ARM disclosures were mailed within three
business days from the date the application was received.
Title Policy
This must be an American Land Title Association (ALTA) or a state land title
association policy. It must insure the credit union for the amount of the
loan.
Schedule A
Should show the credit union is insured for the loan amount.
The credit union borrower should be the vested party.
At the bottom of this schedule, it should show:
The amount
The date
Borrower as trustor
Trustee
Credit union as beneficiary
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Completed
The recording date
Schedule B
This should not reflect any liens except those authorized by the credit
union. Determine and note the recording of any unauthorized liens
before or after recording of the credit union deed of trust.
Schedule C
This gives a complete description of the property, which should match
the legal description shown on the deed of trust and the appraisal.
Title Insurance Policy Endorsements
A 100 endorsement (insures against covenants, conditions, and restrictions)
and a 116 endorsement (indicates type of dwelling and address) are required on all loans, and should comply with the lender’s loan requirements. Verify the proper address and description on the 116 endorsement.
Other endorsements should also be included to insure against possible
prior liens and easements of right of reentry (where applicable); PUD or
condo loans require additional endorsements (116.2 instead of 116). Unauthorized building additions require demolition endorsements.
New Loan Funding
Review debits and credits for accuracy and agree entries to approved loan
terms. Verify accuracy of prepaid interest charged the borrowers. The
form should be signed by the processor preparing the document and approved by a supervisor. If applicable, determine that the processor funding
the loan, if different from the preparer, has also signed as evidence of
proper disbursement. Determine that the check numbers are included. If
applicable, determine that the tax service contract fee was properly credited. Determine whether the borrower was charged for a credit report.
The HUD or closing statement must be certified by the escrow officer. Review
for compliance with the lender’s loan requirements and escrow instruc-
Date
Completed
tions. Verify that the approved down payment is reflected as “deposit of
earnest money” on the settlement statement. Note any unapproved concurrent liens or escrows. Note any funds paid outside of escrow. Determine that any unapproved settlement terms were identified and corrected
internally. Verify that the closing date is the same as the date on the deed
of trust recording. Verify that the name and property address are the
same, and that the lender’s charges agree.
Disclosures
Verify that all early disclosures required by the Real Estate Settlement Procedures Act (RESPA) and Regulation Z were delivered in a timely fashion.
Refer to 12 CFR 1024.7 and 12 CFR 1026.19 for details on the timing and
disclosure requirements.
Itemization of Amount Financed
Regulation Z requires that lenders either provide borrowers with an itemization of the amount financed or disclose that an itemization is available upon request. Verify that every disbursement of loan funds, including the net
funds to the title/escrow company, is itemized on this form. The form
should be signed by all borrowers.
Federal Truth-in-Lending Disclosure Statement
This is required by Regulation Z (except for business purpose real-estate
loans). Review the disclosure statement for the following:
The disclosure is signed and dated by the borrower.
The disclosure is properly completed, especially the areas of amount financed, annual percentage rate (APR), finance charges, other charges, and collateral.
The disclosure indicates the late charge formula, and prepayment and assumption provisions.
The disclosure indicates the type of loan (variable vs. fixed rate).
Date
Completed
The payment schedule is disclosed in a table format as required by Regulation Z for loans secured by a dwelling. (12 CFR 1026.18(s))
Loan Program Description Disclosure Notice
Ascertain that the appropriate loan disclosure notice is signed by the borrower(s).
Notice of Right to Cancel
This is required on all owner-occupied refinanced and equity loans. The loan
cannot fund until three business days after the date this notice is received,
all material disclosures are provided, or the promissory note is signed,
whichever occurs last.
(12 CFR 1026.23)
Commitment Letter
The commitment letter should be signed and dated by the approving authority.
Transmittal or Cover Sheet Summary
Review for completeness and accuracy as follows:
Verify approved terms, such as loan and down payment amount, loan-tovalue, interest rate, and fees. Variance of terms and policies should be
documented as approved. Alterations of critical data (e.g., interest
rate, loan fees) should be initialed by the approver.
The summary should be dated and signed as approved by a person with
signing authority.
Verify that loan approval is within assigned lending limit.
Escrow (Impound) Limitations
Obtain a certified copy of buyers’ and sellers’ escrow instructions from the escrow/title company. Review for compliance to terms disclosed on the loan
Date
Completed
application and loan quotation approval.
Sales Agreement (if Conflict of Interest)
Real estate agents and brokers must disclose that they are agents or brokers
on agreements if they are the buyer or seller. Review for conflicts with the
credit union-approved loan terms.
Employment and Deposit Verification
These should be signed by the borrowers and confirming parties. Make sure
the verifications are independent (e.g., verification of company president
should not be signed by his or her secretary). Verification should be dated
before approval. Verifications should be mailed to the confirming parties
rather than the borrowers. Determine if the source of down payment was
verified and whether the borrower can provide funds to close the loan as
stated.
Credit Reports
All loan files should contain a credit report printout. Factual credit reports are
required on all loans. A business credit report may be required on selfemployed applicants. Review the credit report for the following:
It should be initiated by the approving authority.
The date of the credit report should be reasonably close to the approval
date, but not after it.
Material adverse items (e.g., delinquencies, judgments, bankruptcies)
should be explained by the borrower. Determine the reasonableness
of the explanation vs. the borrower’s other more positive credit payment history. Note exceptions for any outstanding and unpaid judgments or charge-offs.
Loan Application
The loan application should be completed, dated, and signed by all borrowers. Compare the loan rate and term at the time of application to the ap-
Date
Completed
proved and disclosed rates and terms. Review for the following:
Reasonableness of assets, liabilities, and income claimed by the borrower(s).
Monthly payments on debts beyond 10 months were included on the loan
risk evaluation in calculating the debt-to-income ratio.
The date that the application was received by the loan office is indicated.
The original application should be dated and stamped.
Affidavit of Purchaser and Vendor
This is required for owner-occupied loans with an LTV higher than 80 percent.
It should be signed by all borrowers and the sellers.
Certificate of Insurance
The policy should show the borrower as the insured and the credit union as
the loss payee. The coverage should be equal to the loan amount.
Credit Committee or Loan Officer Approval
Verify that proper persons signed the commitment.
Loans for Second Trust Deeds
When granting a second trust deed to a member and when the credit union is
not the holder of the first trust deed, verify that the first trust deed holder
was informed of the new encumbrance.
Check for unauthorized transfer of title subsequent to the credit union’s loan.
Check for unauthorized subordinate financing recorded concurrently or immediately following the recording of the credit union’s trust deed.
Adjustable-Rate Mortgage Disclosure
Determine that the special ARM notice disclosure is in the file and properly
completed for all adjustable-rate loans. (12 CFR 1026.19(b))
Date
Completed
Inspection of Title Records
For all new loans selected for testing, perform or arrange for an inspection of
title records. Complete a title search worksheet and mail it to the title
company. Review records concerning the property from just prior to the
recording of the credit union’s loan to the date of inspection. Look for the
following:
Verify that borrowers have title to the property at the date of the recording
of the credit union’s deed of trust.
Check for unauthorized subordinate financing recorded concurrently or
immediately following the recording of the credit union’s deed of trust.
Check for unauthorized transfer of title subsequent to the credit union’s
loan.
Appraisal Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain that all appraisers utilized by the credit union meet professional licensing and
standards, have been approved by the board, and are reviewed on an annual basis.
To verify that the appraisals contain pertinent information.
To determine the adequacy of the credit union’s appraisal policy.
AUDIT PROCEDURES
Date
Completed
Appraiser Review
Verify that specific guidelines and procedures for hiring appraisers exist, including:
Professional education
License
Type of experience
Membership in a professional appraisal organization
Approval by the board of directors
Review each appraiser who has previously been approved by the board and
completed work for the credit union during the year at year’s end. The review must include:
The degree of compliance with the credit union’s appraisal policies
Date
Completed
Regulatory compliance
The quality of the reported values
Determine that each appraiser review is placed in a folder that contains the
appraiser’s resume and work samples. These folders should be maintained by appraiser name, not by appraisal firm name.
Verify that the appraiser is competent to provide an accurate appraisal by reviewing the following:
Inquire about the appraiser’s professional certification, license, or other
verification that would ensure competence within the industry.
Inquire as to the appraiser’s familiarity with the items being appraised.
Determine if the board preauthorized use of the appraiser.
Ascertain that the appraiser has no relationship with the credit union or appraised item that would affect objectivity. This determination includes:
Financial interests in the credit union’s assets
Contingent fee terms based on results of the appraisal
Other significant services performed for the credit union
Document that the assumptions used by the appraiser are accurate by reviewing the appraisal and noting if the methods selected to do the appraisal are the most relevant under the circumstances.
Appraisal Policy
Ascertain that written appraisal policies include the following elements:
Required market value definition
Narrative clearly disclosing market value and the reasoning followed in arriving at this value
Date
Completed
Prior sales history (one year for one- to four-family properties and three
years for all other properties)
Establish that the credit union’s appraisal policy statement requires all appraisals to:
Be performed by a qualified appraiser.
Result in a statement of market value.
Follow a reasonable valuation method.
Support the current valuation of real estate.
Take into consideration and make provision for all appropriate deductions
and discounts for development-type property.
Indicate sales history.
Address a proposed project’s marketability and feasibility prospects.
Confirm that appraisal content contain the following:
Documentation and support. The appraisal should contain reasonable
supporting documentation, with no pertinent information withheld and
no information that would be misleading if read by a third party.
Property identification. The property should be identified by legal description or otherwise.
Other appraisal standards. The appraisal should identify the property
rights being appraised, describe all salient features of the property,
state the purpose of the appraisal, set forth the date of the value conclusion, and name the appraisal procedures followed.
Comparable sales. Data presented contain descriptive information, in sufficient detail, to show that the transactions are conducted under the
terms and conditions of the definition of value being estimated, that the
highest and best use equivalent has been used, that the selected
properties are physically and economically comparable, and that any
Date
Completed
adjustments used are explained.
Operating income/expenses. The appraisal should contain a summary of
annual operating statements for existing income-producing property.
Assumptions and limiting conditions. The appraisal should state all material assumptions and limiting conditions that affect its analysis, opinions, and conclusions.
Certification. The appraisal should include the appraiser’s certification.
Appraisal Test Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To review the appraisal process to establish the competency of the appraisers and the validity of their reports.
AUDIT PROCEDURES
Date
Completed
Verify that the appraiser is competent to provide an accurate appraisal by reviewing the following:
Inquire about the appraiser’s professional certification, license, or other
verification that would ensure competence in the industry.
Inquire as to the appraiser’s familiarity with the items being appraised.
Determine if the board preauthorized the use of the specific appraiser (or
firm).
Verify that the appraiser has no relationship with the credit union and has not
appraised an item that would affect objectivity:
Financial interest in credit union assets
Contingent fee terms based on results of a specific appraisal
Other significant services performed for the credit union
Verify that the assumptions used by the appraiser are accurate, by reviewing
the appraisal and noting:
Methods selected to do the appraisal are the most relevant under the circumstances.
Adequate consideration and provisions are made for appropriate deductions and discounts for any development properties (i.e., interest and
holding costs have been considered for a reasonable development
pay-out period).
If the market/economic feasibility prospects for the property are in sufficient detail to support a forecast of probable success.
Verify that only properties actually serving as collateral are involved in the appraisal (do not include “comparables”). See Exhibit 6.3 for guidance.
Real Estate Appraisal Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine the effectiveness of the appraisal function, including:
The adequacy of policies, procedures, and internal controls
The quality of appraisal reports and the reasonableness of value estimates
The competence and independence of appraisers used by the credit union
To identify deficiencies and initiate corrective action as necessary
AUDIT PROCEDURES
Date
Completed
Review examination scoping materials related to appraisals. Obtain a written
or verbal summary of the reviewof items concerning this program. Scoping
materials might include:
The prior examination report
Prior exception sheets and work papers
Review of internal and external audit reports
Supervisory analysis
Correspondence
Review of review of market area economic conditions
Review of the business plan
Date
Completed
Minutes from the board of directors meetings
Review the preceding report of audit and all real estate appraisal-related exceptions noted and determine if management has taken appropriate corrective action.
Evaluate the credit union’s policies and procedures for appraisals by reviewing policy statements, procedures manuals, board and committee
minutes, etc.
Evaluate the credit union’s written guidelines for hiring appraisers as they pertain to education and experience.
Review management’s annual evaluation of appraiser performance. The
evaluation should address an appraiser’s compliance with the credit union’s appraisal policy and the reasonableness of value estimates.
Complete appraisal line sheets, either as a separate review procedure or in
conjunction with the completion of the real estate mortgage lending program.
From discussions with management determine the need to review:
Delinquent loans or loans placed on non-accrual status granted to boardapproved appraisers
Major loans granted to board-approved appraisers
Ensure that the objectives have been met. State your findings and conclusions, as well as appropriate recommendations for any necessary corrective measures, on the appropriate work papers and report pages.
Determine the need for the services of the regional appraiser. This may include instances where:
An appraisal report’s estimate of value is unreasonable;
The credit union did not receive an appraisal report for a security property
or for real estate owned;
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Completed
An improper basis was used in calculating value; or
An appraisal is outdated or market conditions have changed.
After discussion with management, or designee, determine the need for independent appraisals.
Conventional Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To review funded loans in order to establish that all compliance requirements are met.
To confirm that these loans comply with the policies and procedures of the credit union.
AUDIT PROCEDURES
Date
Completed
Test of Controls
Examine selected monthly bank or corporate credit union account reconciliations. Follow up on all reconciling items.
Test selected tellers’ daily balancing reconciliations. Follow up on all reconciling items.
Examine selected reconciliations of detailed loan subsidiary records to the
general ledger. Follow up on all reconciling items.
Follow up on results of delinquency notices sent to members. Determine that
discrepancies have been resolved or reconciled.
Test of Account Balances
Obtain a reconciliation of the mortgage loans detail listing to the general ledger as of the audit date selected.
Select a sample of conventional mortgage loans since the last audit and perform a loan file examination as follows:
Date
Completed
Verify that the mortgage was properly completed and recorded.
Ascertain that the Regulation Z disclosure statement was properly completed.
Determine that the proper prepaid finance charges have been disclosed on the form.
Recalculate the APR.
Verify RESPA compliance:
Confirm that a RESPA booklet and a good faith settlement of closing
costs are given to the member within three business days of the
receipt of the application.
Ascertain that HUD final closing cost disclosure statements are made
available to the member at least one day before closing.
Ensure that the title insurance policy, or certificate of title search and legal
opinion, contains the correct legal description.
Check for a complete and signed application.
Verify hazard insurance:
Confirm that address is that of mortgaged property.
Check for adequate insurance coverage.
Ensure that the credit union is named in a loss payable clause.
Review the outside appraisal; compare appraisal and loan value; review
methods used for compliance with the credit union’s policy.
Review the certificate of survey.
Determine that taxes are paid on time and are current.
Calculate the loan-to-value ratio to ascertain if it is within board policy lim-
Date
Completed
its.
Documents Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ensure that all documentation necessary to fund a loan exists and meets compliance
requirements, as well as credit union policy and procedures.
AUDIT PROCEDURES
Date
Completed
Review deeds of trust or mortgage document for the following:
Must be an original with original signature of the existing borrower
Must show correct existing legal description, loan amount, and county
Must be signed, notarized, and recorded
Review the assignments of the deed of trust or mortgage document for the
following:
Must be dated, notarized, and recorded
Shows date of the original deed of trust or mortgage document
Shows this credit union (if purchased by the credit union)
Must be signed by authorized personnel of the selling mortgage (if purchased by the credit union)
Shows legal description exactly the same as on the deed of trust or mortgage document
Date
Completed
Review the note for the following:
Correct loan amount
Date the same as on deed of trust or mortgage document
Is an original with original borrower signature
Has approval assignment to credit union on back by authorized personnel
of the selling mortgage (if purchased by the credit union)
Shows the interest rate
Shows correct principal and interest payment amount
Review the title policy for the following:
Vesting is exactly as on the note and deed of trust.
Amount of insurance is at least the loan amount.
Date of the policy is the date of recording of the deed of trust or mortgage
document.
Name of the insured is the credit union.
Policy bears original or facsimile signature of the title officer.
Is an ALTA policy with endorsements 100, 116, or 104.1.
116 — Must show type of residence and correct property address.
104.1 — Shows transfer of the policy to this credit union. The date on
the endorsement must be the recording date of the assignment. (If
purchased by the credit union.)
Plat map is attached.
If applicable, review the tax contract (if the service is released) for the following:
Date
Completed
Assignment to this credit union
Service type
Loan amount
Correct loan number
Legal description
Review the insurance policy for the following:
Coverage should be sufficient to protect the credit union’s investment (at
least the outstanding loan balance or the insurable replacement value
of the improvements on the property, whichever is less).
Must list this credit union as the first mortgagee.
Must include a lender’s loss payable endorsement or an endorsement
transferring the policy to this credit union.
Name of the insured and the property address must be the same as the
borrower of record.
Policy should be dated and initialed.
Review the appraisal report for the following:
Must show estimated market value
Must include photographs of the subject property — one of subject property and one of street scene
Review the loan application for the following:
Must be on credit union forms or a FNMA/FHLMC application
Must be typewritten or filled in and signed in ink
Must be completed, including property address
Date
Completed
Verify the existence of and review the following miscellaneous documents, as
appropriate:
Credit report
Verification of employment/deposit
Flood maps
Escrow instructions or sales agreement
Private mortgage insurance certificate (if required)
Truth-in-lending statement/Regulation Z
Disclosure settlement statement
Financial statement(s) of borrower(s) (if applicable)
Condominium agreement (if applicable)
Subordination agreement (if applicable)
Waiver of lien affidavit (if applicable)
Participation certificate (if applicable)
Guaranty agreement (if applicable)
Security agreement
Financing statement (if applicable)
Verify the existence of the following master documents:
Commitment letter (signed)
Board resolution (if applicable)
Participation agreement (if applicable)
Date
Completed
Servicing agreement contract (if applicable)
Credit committee approval (if applicable)
Legal opinion
Review for False Representation by Borrowers
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain that statements made by the borrower are true and no misstatements are
made on the documentation.
AUDIT PROCEDURES
Date
Completed
During review, be alert for false statements submitted by the member. Some
areas where false representations are likely to occur are:
Application forms
Comments regarding adverse credit
Statements or representations regarding income
IRS 1040 forms
Private Mortgage Insurance Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To verify that all loans with a greater than 80 percent loan-to-value ratio (LTV) have private
mortgage insurance (PMI) or that a valid waiver is in the loan file.
AUDIT PROCEDURES
Date
Completed
Request from the information systems a report of real estate loans with original loan-to-value ratios greater than 80 percent.
Review for the proper miscellaneous code [insert code].
Cross-check with the insurance delinquency report to verify private mortgage
insurance.
For those found not coded [insert code], review for a waiver by the credit
committee, an other real estate owned (OREO) loan, an assumption loan,
or a project participation loan.
Submit a letter to PMI vendors requesting a list of policies in force.
Compare with credit union records.
Audit any discrepancies.
For those loans not exempt, resubmit them to the credit committee for a decision on the private mortgage insurance problem.
Verify that the credit union has adequate procedures in place to respond to
member’s request to remove PMI when LTV reaches 80%.
Date
Completed
If loans have reached a 78 percent loan-to-value ratio and the member did not
request for PMI to be revolved, determine that the credit union automatically removes the PMI.
Lending Security Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine that procedures are in place to protect the credit union from fraudulent documents being submitted in the lending area.
AUDIT PROCEDURES
Date
Completed
Determine that there are procedures to prevent or detect the omission of
loans and significant commitments from the records.
Check the credit union’s procedures for:
Preventing significant commitments from being made without commitment
documents being prepared and recorded.
Ensuring that all collateral is appropriately secured and recorded.
Determine that there are procedures to prevent the inclusion of fictitious loans
in the records.
Check the credit union’s procedures for preventing:
Loan documents from being prepared for nonexistent borrowers.
Loan disbursements from being made without receipt of complete, authentic, and legally binding notes, security agreements, disclosure
forms, and credit data.
Determine that there are procedures to prevent incorrect amounts from being
assigned to loan disbursements.
Date
Completed
Check the credit union’s procedures for:
Ensuring the correct calculation of monthly loan payments and unearned
discounts.
Ensuring that interest rate adjustments on adjustable-rate mortgages are
calculated.
Ensuring that the correct (contractual) interest rate is recorded in the subsidiary ledgers.
Preventing loan disbursements from being made for amounts different
from those approved.
Determine that there are procedures to prevent loans and commitments from
being recorded in the wrong accounting period.
Check the credit union’s procedures for:
Ensuring that all significant commitments are recorded in a timely manner.
Ensuring that the accounting department is notified promptly when loans
are disbursed.
Ensuring that loan disbursements are recorded in the period in which they
are made.
Preventing back-dated transactions.
Determine that there are procedures throughout processing to ensure that
loan disbursements and initial fees are charged and credited to the correct
general and subsidiary ledger accounts.
Check the credit union’s procedures for:
Ensuring that the borrower’s name and number, loan amount, payment
terms, initial fees, and maturities are properly coded for entry into the
books of original entry and the subsidiary ledger.
Ensuring that the determination of the loan type is consistent with internal
Date
Completed
policy, statutory reporting requirements, and generally accepted accounting principles.
Determine that there are procedures to ensure that loan disbursements and
commitments are correctly accumulated.
Check the credit union’s procedures for:
Ensuring that all loan disbursements and significant commitments are correctly included in management reports.
Preventing errors in checking the loan registers and other books of original entry.
Determine that there are procedures to ensure that loan disbursements and
commitments are entered correctly in the general and subsidiary ledgers
and related transaction journals.
Check the credit union’s procedures for:
Preventing errors in posting transactions in books of original entry to the
general ledger.
Preventing errors in posting the totals from the books of original entry to
the general ledger.
Preventing duplicate postings to the books of original entry, or the general
or subsidiary ledger.
Ensuring that payments for incorrect or unidentifiable amounts are controlled, researched, and identified.
Loan Fees Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if loan and commitment fee income is properly recorded in the general ledger/accounting records.
AUDIT PROCEDURES
Date
Completed
Verify the amount charged against the amount stated in the original application or loan ledger.
Determine subsequent receipt of fees by examination of check copy or by
reference to loan closing statement/settlement sheet.
Trace loan fees recorded to the loan ledger of new loans. (This procedure
could be performed in conjunction with new loan document examinations
and disbursement testing.)
During cutoff testing, verify that loan fees were recorded in the proper period.
Obtain a copy of commitment letters issued for forward commitment and review to determine whether commitments were exercised in accordance
with the time period stated in the commitment letters.
Determine that all fees charged are in accordance with the credit union’s policy.
Recompute the credit union’s cost to originate a loan or the standard cost estimate for each type of loan.
Ascertain that loan origination costs include only the direct costs of complete
Date
Completed
loans.
Verify that origination fees charged in excess of direct origination costs are
deferred.
Confirm that indirect origination costs or direct costs of unsuccessful loans
are expensed as incurred.
Review schedules of deferred income; recalculate amounts amortized to income on the current period.
Review the recording of income to determine whether income is properly recorded. Review and trace entries for both income earned and income and
costs deferred to the general ledger.
Deferred Loan Fees Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain if deferred loan fees are properly recorded in the general ledger/accounting
records.
AUDIT PROCEDURES
Date
Completed
Prepare a schedule detailing elements of [insert number] account balances.
Determine which loans have paid off by making an inquiry. Use general ledger transaction reports for general ledger account [insert account number]
for loan number determination. Test all credits of $100 or more.
Summarize paid-off loans on the schedule and detail deferred amounts (original credits), subsequent charges, adjusted deferred balances, monthly
amortization figures, elapsed period (in months), amounts amortized to
date, and remaining deferred balances to be taken into income.
Loan File Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To perform a detailed loan file examination as a test of the loan underwriting procedures
and supporting documentation, which are critical to the audit of this credit union.
AUDIT PROCEDURES
Date
Completed
Detailed Loan File Examination
Select a sample of [insert number] new loan accounts from the daily loan
transaction register and determine if the following documents are complete:
Loan application (signed).
Financial statement of contractor (if applicable).
Credit committee or loan officer approval and date of approval.
Credit report of borrower.
Title policy in the amount of the loan and with the credit union as beneficiary.
Trust deed note or mortgage (note date of preparation and agree signatures to the application).
Trust deed with credit union named as beneficiary (note date of preparation and recording date).
Date
Completed
Compliance documents.
Fire insurance policy in force and adequate to cover the amount of the
loan (net less the land value) with the credit union as beneficiary. (Ascertain that if the policy is not issued in the amount of the loan, it covers replacement cost.)
Appraisal report of reasonable value.
Loan escrow instructions.
If applicable, tax service contract.
If the loan is pledged to the Federal Home Loan Bank (FHLB), determine if
the note and trust deed are filed separately from the loan file.
Send a positive confirmation request on all loans for which the trust deed or
mortgage document is out for recording. If any of the documents are in
the hands of an escrow company, secure confirmation indicating that
these documents are in the possession of an escrow company.
Regular Loan File Examination
Select a sample of [insert number] loans made before the last audit date and
[insert number] loans made after the last audit date (excluding those included above). Perform a three-document test, as follows:
Examine the note to determine if it has been properly signed and dated.
Compare the original loan amount to the original balance per loan trial
balance.
Examine the deed of trust or mortgage document. Compare the original
loan balance and signature of the borrower per trust deed or mortgage
document to the note. Review the trust deed or mortgage document
for evidence of its having been recorded.
Examine the title policy to determine that the original loan balance was
adequately covered and that no significant liens or encumbrances with
respect to the property were noted.
Loan Origination Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To review internal controls to ensure loan applications/originations have the necessary and
properly completed loan documents.
AUDIT PROCEDURES
Date
Completed
Audit controls to ensure that loan originations are recorded.
Review monthly bank or corporate credit union account reconciliations.
Review detailed loans records to the general ledger.
Review loan file input data information and on-line data files.
Review internal documents.
Mail follow-up confirmations on missing documentation.
Audit controls to ensure that each recorded loan origination and funding is
real.
The proper loan documentation is obtained before a loan is approved and
funded.
The loan is approved by the credit committee or loan officer.
Loans are not funded without evidence of a first and best lien on the property.
Date
Completed
Audit controls to ensure that each recorded transaction is properly valued.
Reconciliations between actual funding and the loan closing statements
are independently prepared.
Exception reports are reviewed for all changes in on-line information.
Audit controls to ensure that each recorded loan origination is recorded on
time.
Review monthly bank or corporate credit union account reconciliations.
Audit controls to ensure that each recorded loan origination is correctly classified and posted.
Compare the master record data to the input sheets after processing.
Reconcile the loan funding journal to the general ledger.
Loans to Officials Review
REGULATORY COMPLIANCE
Each federal credit union must establish a procedure for processing all loan applications
involving officials. Officials include members of the board of directors, credit committee, and
supervisory committee. Part of the procedure must be the appointment of one or more individuals to be responsible for making sure that loan applications from officials are complete
as to income and debt obligations. Also, the individual responsible for this process would
have to document on the loan application a computation that would indicate whether the
board of directors’ or executive committee’s approval is necessary. The credit committee or
loan officer must act on all loan applications from officials. In addition, the general rule is
that, if an official is liable to the credit union for more than $20,000, over and above pledged
shares, board of directors or executive committee approval of the loan is required.
To determine whether the $20,000 rule applies, the computation adds the amount of the
current loan application, the amount of all outstanding loan balances, and the amount of all
unused portions of approved lines of credit. These figures include direct loans or loans that
the official has endorsed, cosigned, or guaranteed. From that total the computation subtracts the amount of shares already pledged and the amount of shares to be pledged in
connection with the current loan application. If the resulting figure exceeds $20,000, either
board of directors or executive committee approval is required. Of course, executive committee approval would be appropriate only if the credit union board of directors has given
power to the executive committee. In either event, a quorum of the board of directors or executive committee would have to be present and all of those present must agree in order for
the loan application to be approved. In no event should an official be present at a meeting
while his or her loan application or a loan application he or she will be endorsing is being
considered. The rate, terms, and conditions of the approved loan or line of credit must not
be more favorable than the rate, terms, and conditions for comparable loans or lines of
credit to other credit union members.
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine that procedures are in place governing loans to management, employees, di-
rectors, and volunteers to ensure compliance with applicable regulations.
AUDIT PROCEDURES
Date
Completed
Ascertain that there are guidelines governing the loans to credit union employees and officials.
Verify that these loans have evidence of proper approvals.
Determine if there are any delinquencies and review for advanced due dates.
Ascertain that payments are being made as outlined in the signed note.
Verify that all the underwriting criteria have been met and documented, including:
Income verification
Debt ratios
Credit report review
Sufficiency of collateral
Determine if limits have been placed on such loan amounts in the credit union’s policy.
Determine if all loans to officers for more than $20,000 plus pledged shares
have been approved by the board.
Loans to Officials — Computation
Official’s Loans:
Current Application
___________________
Sum of Outstanding Loan Balances
___________________
Used Portion of Approved Line of Credit
___________________
Unused Portion of Approved Line of Credit
___________________
Endorsed Loans (if applicable):
Current Application
___________________
Sum of Outstanding Loan Balances
___________________
Used Portion of Approved Line of Credit
___________________
Unused Portion of Approved Line of Credit
___________________
Less:
Shares Pledged on Official’s Loans
$_____________
Shares Pledged on Endorsements
______________
Shares to be Pledged
(_________________)
______________
Total
$
__________________
===================
The board of directors will consider an application if the computation produces a total in ex-
cess of $20,000.
Adjustable-Rate (Variable) Mortgage Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain whether the initial loan disclosures contain all of the required elements, as applicable, and are being provided to members within the time frame set forth in the regulation
regarding adjustable-rate mortgages.
To determine whether adjustment notices are complete and are being issued within the required time frame.
To verify whether the credit union is providing all subsequent disclosures required by Regulation Z within the specified time frame.
To establish whether the credit union has included in its loan contracts the maximum interest rate that may be imposed during the term of the obligation.
AUDIT PROCEDURES
Date
Completed
Determine if the credit union uses the booklet titled Consumer Handbook on
Adjustable-Rate Mortgages published by the federal government.
Review the credit union’s disclosure policies, procedures, and practices to
determine if the booklet referenced in step 1 and all appropriate loan programs are disclosed when an application is provided, or before the payment of a nonrefundable fee, whichever is earlier.
Confirm through a review if the credit union’s loan program disclosures that
all the following required disclosures are included, if applicable:
Notice that the interest rate, payment, or term may change
Date
Completed
The index or formula used in making adjustments, and a source of information about the index or formula
An explanation of how the interest rate and payment will be determined,
including how the index is adjusted
A statement indicating that the member should inquire about the current
margin value and interest rate
Notice that the interest rate will be discounted and a statement that the
member should inquire as to the amount of the discount
The frequency of interest rate and payment changes
Rules relating to changes in the index, interest rate, and payment amount,
and the outstanding loan balance
A 15-year historical example, based on a sample $10,000 loan amount
OR the maximum interest rate and payment for a $10,000 loan at the
initial interest rate in effect as of an identified month and year for the
loan program assuming the maximum periodic increases in rates and
payments under the program
An explanation of how the member may calculate the payments for the
loan amount to be borrowed based on either the most recent payment
shown on the historical example, or the initial rate used to calculate
the maximum interest rate and payment
Notice that the loan contains a demand feature
The type of information that will be provided in notices of adjustments and
the timing of such notices
A statement that disclosure forms are available for the credit union’s other
variable-rate loan programs
Determine if the credit union is providing all the following disclosures for both
adjustable- and fixed-rate loans, in plain language and in documents other
than the loan documents, within three business days of receiving a written
Date
Completed
application or, alternatively, with the initial loan program disclosures:
What rights the lender has under a due-on-sale clause if one is contained
in the loan contract
The amount of late charges or prepayment penalties, or the method by
which they will be determined, if such charges or penalties are provided for in the loan contract
If the loan contract provides for escrow payments, a statement explaining
the purpose for requiring the escrow payments, how the amount is established, how the borrower will be notified of any deficiencies in the
escrow account, how such deficiencies will be corrected, whether the
borrower will have the option of correcting the deficiency with either
prorated monthly payments or a lump-sum payment, how any surplus
will be returned to the borrower, and the rights of the lender if the borrower fails to make the escrow payments (if applicable)
In the case of non- or partially amortized loans, a statement of what information will be contained in the notice of maturity, how far in advance the notice will be provided, whether the credit union has unconditionally obligated itself to refinance the loan, and whether there will
be a large payment due at maturity or upon call of the loan
Determine through a review of the credit union’s policies, procedures, and
practices if adjustment notices are provided (delivered or placed in the
mail):
At least once each year when an interest rate adjustment is implemented
without an accompanying payment change
At least 25, but not more than 120, calendar days before the due date of a
payment at a new level
Review a sample of the credit union’s adjustment notices to determine if they
contain the following required provisions, as applicable:
The current and prior interest rates
Date
Completed
The index values on which the current and prior interest rates are based
The extent to which the credit union has foregone any increase in the interest rate
The contractual effects of the adjustment, including the payment due after
the adjustment is made, and a statement of the loan balance
The amount of the payment required to fully amortize the loan at the new
interest rate over the remainder of the loan term if that amount is different from the payment resulting from the adjustment
Determine if the credit union has included maximum interest rate provisions
in all its adjustable-rate loan contracts, including both open-end and
closed-end contracts.
Real Estate Lending Standards Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine that the credit union has written policies establishing appropriate limits and
standards for extensions of credit secured by liens on or interests in real estate, or that are
made for the purpose of financing permanent improvements to real estate.
AUDIT PROCEDURES
Date
Completed
Ascertain that real estate lending policies adopted pursuant to this section
are:
Consistent with safe and sound financial practices
Appropriate to the size of the credit union and the nature and scope of its
operations
Reviewed and approved by the board
Verify that the lending policies establish:
Loan portfolio diversification standards
Prudent underwriting standards, including loan-to-value limits, that are
clear and measurable
Loan administration procedures for the credit union’s real estate portfolio
Documentation, approval, and reporting requirements to monitor compliance with the credit union’s real estate lending policy
Date
Completed
Establish that the credit union has the ability to monitor conditions in the real
estate market in its lending area to ensure that its real estate lending policies continue to be appropriate for current market conditions.
Confirm that the real estate lending policies adopted do reflect consideration
of NCUA’s Letter to Credit Unions No. 124.
Real Estate Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if policies, practices, procedures, and internal controls regarding real estate
loans are adequate to identify and manage the risks the credit union is exposed to.
To ascertain if the credit union has implemented risk management programs that identify,
measure, monitor, and control the inherent risks involved in real estate lending.
To determine if credit union officers and staff are operating in conformance with the credit
union’s established guidelines.
To evaluate the portfolio for collateral sufficiency, performance, credit quality, and collectibility.
To determine compliance with applicable laws and regulations.
To initiate corrective action when policies, practices, procedures, objectives, or internal controls are deficient or when violations of laws or regulations have been noted.
AUDIT PROCEDURES
Date
Completed
Determine the scope of the audit based on the evaluation of internal controls.
Review the board of directors minutes to ensure that real estate loan policies
are reviewed and approved at least annually.
Test real estate loans for compliance with policies, practices, and procedures
by performing the remaining audit procedures in this section. Obtain a listing of any deficiencies noted in the latest external audit report and determine if appropriate corrections have been made. Additionally, obtain a list
of personnel changes and determine if these changes are significant
Date
Completed
enough to influence the scope of the audit.
Obtain a trial balance and delinquency listing for all real estate loans and:
Reconcile the real estate department’s trial balance totals to the credit union’s general ledger accounts.
Review reconciling items for reasonableness.
Obtain information (e.g., paid-to dates, last date paid, and date of nonaccrual status) on past-due loans and loans on nonaccrual status.
Evaluate the credit union with respect to:
The adequacy of written policies and procedures relating to real estate
loans.
The operating compliance with established credit union policy.
Favorable or adverse trends in the overall real estate lending activity.
The accuracy and completeness of the credit union’s records.
The adequacy of internal controls.
Adherence to lending policies, procedures, and authority by all appropriate personnel.
Compliance with laws and regulations on real estate lending activity, including lending limits and restrictions; loans to officers, directors, and
shareholders; appraisal and evaluation of real estate collateral; and
lending practices, including:
Whether the credit union adequately documented exceptions to supervisory loan-to-value (LTV) limits.
Whether the volume of nonconforming loans exceeds the capital limitations.
Whether risk management programs have been established and main-
Date
Completed
tained to identify, measure, monitor, and control the inherent risks
associated with high LTV lending.
Other matters of significance, including mortgage servicing, warehousing
operations, and the loan origination/resale process.
Select loans for examination using an appropriate sampling technique drawn
from judgmental (cut-off amount approach) or statistical sampling. Analyze the performance of the loans selected for review by transcribing the
appropriate information from the following list onto the real estate loan line
cards, when applicable:
Collateral records and credit files.
Loan agreements relative to any purchases, transfers, participations, or
sales that have been entered into since the last audit.
Loan commitments and other contingency liabilities.
Loan modification agreements or restructuring terms to identify a reduction in interest rate or principal payments, deferral of interest or principal payments, or other restructurings of terms.
Past-due/nonaccrual-related information.
Loan-specific internal problem credit analyses information.
Escrow analysis reports, including the status of property tax payments
and escrow advances by the credit union to cover delinquent property
taxes.
The status of mortgage insurance claims either for government insurance
or guarantee programs or for private mortgage insurance, including
procedures for ensuring coverage and reporting procedures for filing
claims and contested claims, if any.
Loans to insiders and their interests.
In analyzing the selected real estate loans, consider the following procedures,
Date
Completed
taking appropriate action if necessary:
Determine the primary source of repayment and evaluate its adequacy.
Assess the quality of any secondary collateral afforded by the loan guarantors or partners.
Compare collateral values with outstanding debt and determine whether
the loan’s LTV ratio is in excess of the supervisory LTV limits. If so,
ascertain whether the loan has been properly reported as a nonconforming loan.
Assess the adequacy of the appraisal or evaluation.
Ascertain whether the loan complies with established credit union policy.
Identify any deficiencies in the loan’s documentation both in the credit files
and in the collateral records.
Identify whether the loan is to an officer or director of the credit union and
whether an officer or director of the credit union is a guarantor on the
loan.
Review the borrower’s compliance with provisions of the loan agreement
and the borrower’s payment performance, indicating whether the loan
is past due.
Determine if any problems may jeopardize the repayment of the real estate loan.
Determine whether the loan was classified during the preceding audit and,
if the loan has been paid off, whether all or part of the funds for repayment came from another loan at the credit union, from a participation or sale with another institution, or from the repossession of the
property.
For loan participations, either in whole or in part, to or with another lending
institution, review, if applicable:
Date
Completed
Participation certificates and agreements, on a test basis, to determine if
the contractual terms are being adhered to.
Loan documentation to see if it meets the credit union’s underwriting procedures as if the loan had been originated by the credit union.
The transfer of loans immediately before the date of the audit to determine if the loan was either nonperforming or classified and if the transfer was made to avoid possible criticism during the current audit.
Losses to determine if such losses are shared on a pro rata basis.
For participations between an institution with a different primary regulator and
the shared credit program loans:
Check any criticized participation loans that were not covered by the
shared credit program and in which the participant has a different primary regulator.
In connection with the audit of other lending activity in the credit union:
Check the central liability file on the borrowerand determine whether the
total indebtedness of the borrower exceeds the lending limit to a single
borrower.
Obtain information and related performance status on common borrowers
and their interests from auditors assigned to other audit areas (such
as nonreal estate loans, leasing, overdrafts, and cash items) and determine the total indebtedness of the borrower to the credit union.
Consult with the auditor responsible for the asset/liability management analysis portion of the examination to determine the appropriate maturity
breakdown of real estate loans needed for the analysis and prepare the
necessary schedules.
Summarize the findings of the real estate loan portfolio review and address
the following:
The scope of the examination.
Date
Completed
The quality of the policies, procedures, and controls.
The general level of adherence to policies and procedures.
The competency of management and loan officers, including identification
of individuals with an excessively high level of problem loans or documentation exceptions.
The quality of the loan portfolio.
Loans not supported by current and complete financial information.
Loans with incomplete documentation, addressing deficiencies related to
items such as appraisals or evaluations, title policy, proof of insurance,
deeds of trust, and mortgage notes.
Loans to officers or directors or their interests.
Causes of existing problems.
Delinquent loans and the aggregate amount of statutory bad debts.
Concentrations of credits.
Classified loans.
Violations of laws and regulations.
Action taken by management to correct previously noted deficiencies and
corrective actions recommended to management at this audit, with the
credit union’s response to them.
Real Estate Loans Receivable Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain that the income from real estate loans can be verified and that the income is
consistent with the portfolio dollar amount.
AUDIT PROCEDURES
Date
Completed
Obtain control of the backup loan file, which includes transactions as of the
close of business of the previous day. Perform the following procedures:
Obtain a loan trial balance as of the control date and reconcile it to the
general ledger. This should be done before confirmations are prepared.
Select [insert number] loan accounts for positive confirmation.
For the loan accounts selected above, trace name, address, and account
number to the documents in the loan file to verify the accuracy of the
information.
Prepare the confirmations for mailing to borrowers.
Control the confirmations until they are delivered to the post office.
After 10 days, if no response, mail second confirmation requests.
Perform alternative procedures on all positive requests for which no response
(or inadequate address information, returns without a signature, etc.) was
made.
Date
Completed
Perform the three-document loan file examination for each loan (note or
mortgage, deed of trust, and title policy).
Review the status of the loan (delinquency, litigation, etc.) for possible
reasons why a reply was not received.
Review for subsequent payments received. Examine supporting documentation.
Process all confirmation replies. List all differences that borrowers indicate do
not match with the confirmations and have the credit union determine the
cause of the differences.
Prepare a summary of these loan confirmations. Evaluate the results of the
confirmation work based on the summary.
Reconcile the loan trial balance and related loan information reports at the
control date to the general ledger.
Test amortization of the unearned discount on loans purchased. For new
loans purchased in the control date month, agree a sample of loan numbers to the new loan register.
Obtain detail and basis of allowance for estimated losses.
Agree paid-to-date delinquency loan listing. Review delinquency loan and
foreclosure listing to be sure all loans that have an indication of potential loss are properly considered.
Reconcile the total to the operations account for estimated losses on real
estate loans.
As considered necessary, obtain and review in-house appraisals of these
properties in order to discuss the adequacy of estimated loss reserves. Before this discussion, consider visiting the selected properties and/or obtaining outside appraisals.
Obtain a schedule comparing the principal balance of participation loans for
the current and prior years for each control account.
Date
Completed
For loans originated during the year, obtain a settlement statement relating to the period nearest the control date and confirm the principal
balance, interest collections, and participant share of the total paid.
For loans in existence at the beginning of the year, review the amortization during the year. If the amortization does not appear to be reasonable, confirm the balance in accordance with the paragraph directly
above.
For items related to the above, consider performing the following:
Examine canceled checks or check for amount paid.
On a test basis, test interest collections by applying the interest rate to the
principal balance before the settlement period.
For a selection of controls, trace principal collections after the control date
on a sample basis to the loan transaction register.
Reconcile the above described schedule to the collections payable (both
interest and principal) at the control date. Consideration must also be
given to mid-month advances and service fees in this calculation.
Trace the service fees for the settlement period to the general ledger.
Reconcile the participation loan balance per the above described summary schedule to the general ledger as of the control date.
Real Estate Mortgage Lending Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if policies, practices, procedures, and internal controls regarding real estate
loans are adequate.
To assess management’s conformance with established guidelines.
To evaluate the real estate loan portfolio for credit quality, collectibility, and sufficiency of
loan collateral.
To ensure compliance with applicable laws and regulations.
To identify the strengths of the real estate lending function.
To initiate corrective action when policies, practices, procedures, objectives, or internal controls are deficient or when violations of law or regulations have been noted.
AUDIT PROCEDURES
Date
Completed
Review the real estate lending policies and procedures for adequacy, given
the volume and type of lending activity for the credit union. Specifically,
the review should focus on whether the policies and procedures address
and are adequate with regard to:
Geographic limits
Acceptable types of property
Lending authority for committee and individual offers
Minimum standards for documentation, amount, and frequency of financial information on borrowers for different types of mortgage loans,
Date
Completed
especially “low doc” loans
Minimum standards for qualifications of borrowers for various loan products, such as ARMs and teaser-rate loans
Maximum loan-to-value ratios or loan-to-purchase price ratios
Maximum maturities
Amortization requirements
Procedures for reviewing real estate loan applications
Internal controls regarding the mortgage documents and the preparation,
posting, and reconciliation of loan records
Collection and charge-off procedures
Mortgage blanket hazard insurance
Policy review and approval by the board of directors at least annually
Compatibility with the business plan and current market conditions
Obtain a list of any deficiencies or exceptions contained in the latest CPA review and determine if appropriate corrections have been made.
Obtain and review the following information as it pertains to real estate lending:
Lending, appraisal, and collection policies and procedures
Past-due loans
Loans in a nonaccrual status
Loans for which interest is not being collected in accordance with the
terms of the loans
Loans whose terms have been modified by a reduction of interest rate or
Date
Completed
principal payment, by a deferral of interest or principal, or by other restructuring of repayment terms
Loan participations purchased and sold
Loans sold in full since the previous audit
Loans considered problem loans by management (classified)
Loan commitments and contingent liabilities
Extensions of credit to employees, officers, directors, volunteers, and their
interests
Extensions of credit to officers, directors, and volunteers of other credit
unions
Current interest rate structure and loan pricing
Officer’s current lending authority
Pertinent reports furnished to the board of directors and the loan committee
Underwriting and collection experience of “low doc” loans
Using the appropriate sampling technique, select loans for review. Types of
loans to be considered should include:
Loans granted and participations purchased since the previous audit
Loans sold in full since the last audit
Multiple loans to the same borrower or related group of borrowers, particularly those that represent a concentration of credit
Loan commitments and other contingent liabilities
Loans to affiliate persons
Date
Completed
“Low doc” loans
Obtain the credit union’s credit or loan files on the loans selected for review.
While analyzing the loan, test for compliance with the credit union’s established policies, procedures, and internal controls. The following considerations may be beneficial during the loan review process:
The credit quality of the loan. Consider the adequacy of primary and secondary sources of repayment, including the value, quality, and liquidity
of the security property and other collateral support. Financial statements from the current and previous periods, as well as the loan officer’s memoranda and correspondence, should also be considered to
identify unfavorable or adverse trends.
The adequacy of any secondary support afforded by guarantors and endowers.
Compliance with established policy and procedures.
Compliance with applicable laws and regulations.
The lack of current and complete financial information or that the information obtained was not reviewed, analyzed, and evaluated.
Deficient collateral documentation.
Compliance with provisions of any loan agreement.
Adherence of the original amount of the loan to the lending officer’s authority.
Adherence of the interest rate charged and terms to the established parameter of the interest rate schedule.
The appearance of preferential treatment or actual or potential conflicts of
interest on loans to affiliated persons.
Excessive debt ratios (i.e., high monthly mortgage payments relative to
borrower income).
Date
Completed
A loan advertising program indicating that the credit union only or predominantly relies on collateral rather than the borrower’s ability to repay.
Reconcile the real estate loan trial balance to the general ledger and review
reconciling items for reasonableness.
For participation loans purchased and sold and loans sold in full since the
preceding audit:
Determine whether the credit union is aware of both the lender’s and the
purchasing institution’s responsibilities relating to loan participations
sold or purchased.
Test participation certificates and records and determine that the parties
share in the risks and contractual payments on a pro rata basis.
Document whether the books and records properly reflect the credit union’s liability.
Ascertain whether the credit union exercises controls and procedures
over loans sold and loans serviced for others similar to those it exercises for loans in its own portfolio.
Investigate any loans or participations sold immediately prior to the audit
to determine whether any were sold to avoid criticism during the audit.
For FHA-insured loans and VA-guaranteed loans:
Verify that the valid certificate of insurance or guaranty is on file by reviewing management’s procedures to obtain such insurance or guaranty or by checking a representative sample of such loans.
Establish that required delinquency reports are being submitted.
For discounted or “teaser” ARMs:
Confirm if the credit union’s current pricing structure or policy is sufficient
to recover the credit union’s operating expenses, funding cost, and
risk premium. If not, determine the soundness of management’s strat-
Date
Completed
egy, such that:
Deeply discounted ARMs, even in periods of stable or falling interest
rates, not reach profitability until at least two or three repricings occur.
Any interest rate movement above the yearly interest rate cap must be
absorbed by the credit union.
Refinancing existing ARMs at lower rates offered on new ARMs reduces the opportunity to recoup initial losses in subsequent repricings.
Determine if the credit union’s lending policies and procedures and underwriting guidelines adequately address the increased default risk by
qualifying borrowers at or near fully indexed rates.
Secondary Market Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine the adequacy of the credit union’s policies and procedures.
To ascertain that secondary market activities are in compliance with regulatory requirements.
To verify compliance with policies and procedures established by senior management and
the board.
To confirm that the credit union is in compliance with its asset/liability policy.
To establish whether sales or acquisitions of servicing rights are consistent with established
plans.
AUDIT PROCEDURES
Date
Completed
Review the material related to secondary market activities.
Review the credit union’s policies and procedures related to secondary market activities.
Determine if required investor reports are being accurately prepared and
submitted on a timely basis.
Confirm that an effective quality control program has been established and
implemented.
Review the trading portfolio to identify those mortgages destined for resale.
Determine the current risks based on the latest trends in interest rate move-
Date
Completed
ments for loans in the warehouse or pipeline.
Determine if the risk associated with warehouse financing is controlled. Determine if there are clear guidelines as to the limits of acceptable risk from
uncovered loans in inventory.
Review the credit union’s risk management strategies, including buying and
using commitment coverage and disposing of inventory.
Review the strategy for open commitment positions and determine what
commitments are approaching expiration and the volume and type of
products deliverable.
Determine that all inventory held for sale is carried on the books at the lower
of cost or market value at regular intervals.
Compare budget projections to actual results with respect to secondary market activity.
Obtain the secondary market activity reports submitted to the board and review for completeness and accuracy.
Determine that commitment agreements define all terms up front to avoid later problems.
Examine selected monthly bank or corporate credit union account reconciliations. Follow up on all significant or recurring reconciling items.
Review the forward commitment register.
Obtain the reconciliation of inventory trial balance to the control account at the
credit date. Follow up on large or unusual reconciling items.
Determine the extent of standby commitments and if they are written or oral.
Document the extent of mandatory commitments and whether they are made
in conformity to written guidelines and policies.
For sale agreements, determine that losses on past-due accounts are provid-
Date
Completed
ed for if appropriate.
Member Business Lending Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain if the credit union officers and employees conform with the established guidelines.
To verify if officers and employees are able to perform their duties and responsibilities in a
manner that ensures safety and soundness, and compliance with laws and regulations.
To evaluate if the management reports provide accurate and necessary information to assist management and the board in fulfilling their responsibilities.
To initiate corrective action when deficiencies exist that could affect safety and soundness,
or when noncompliance to law and regulations is identified.
AUDIT PROCEDURES
Date
Completed
Document that the board has adopted specific, written member business loan
policies and procedures?
Establish that the board reviews the policy at least annually.
Determine that the policies address, at a minimum, the following:
Types of business loans that will be made? 723.6(a)
The credit union’s trade area for business loans? 723.6(b)
Maximum amount of credit union assets, in relation to net worth, that will
be invested in business loans? 723.6c
Maximum amount of credit union assets, in relation to net worth, that will
Date
Completed
be loaned to any one member or group of associated members?
723.6(e) and 723.8
Maximum amount of credit union assets, in relation to net worth, that will
be invested in a given type of business loan? 723.6(d)
Minimum qualifications and experience of personnel involved in making
and administering business loans? 723.6(f)
Analysis of the ability of the borrower to repay the loan based on the
source of repayment? 723.6(g)
Collateral requirements, including loan to value ratios, appraisals, title
search and insurance requirements, steps to be taken to secure various types of collateral, and how often the value and marketability of
collateral is reevaluated? 723.6
Appropriate interest rates and maturities of business loans? 723.6(i)
Loan monitoring, servicing, and follow up procedures, including collection
practices? 723.6(j)
Identification, by position, of those senior management employees prohibited from receiving business loans? 723.6(k) & 723.2
Ensure that the following considerations are addressed, unless the board
finds they are not appropriate for a particular type of business loan and
states the reason for those findings in the written policies:
Balance sheet analysis 723.6(g)
Ratio analysis of cash flow, income, expense, and tax data 723.6(g)
Leveraging 723.6(g)
Comparison with industry averages 723.6(g)
Receipts and periodic updating of financial statements and other documentation, including tax returns 723.6(g)
Date
Completed
General Issues
Determine whether the aggregate amount of outstanding member business
loans to any one member or group of associated members exceeds the
greater of 15% of the credit union’s net worth, or $100,000. 723.8
If yes, verify whether the credit union has obtained NCUA approval. 723.8
Determine whether the aggregate amount of outstanding member business
loans exceeds the lesser of 1.75 times the credit union’s net worth, or
12.25% of the credit union’s total assets. 723.16
If yes, verify whether the credit union has obtained NCUA approval. 723.18
Determine whether the aggregate amount of outstanding construction and development loans exceeds 15% of the credit union’s net worth. 723.3(a)
If yes, verify whether the credit union has obtained NCUA approval. 723.10
Establish whether any of the credit union’s member business loans have a
loan to value ratio in excess of 80%. 723.7
If yes, verify whether the value in excess of 80% is covered through private
mortgage or equivalent insurance. 723.7(a)
If the LTV ratio exceeds 80% and the excess amount is not covered through
private mortgage or equivalent insurance, verify whether the credit union
obtain NCUA approval. 723.10
Member Business Lending Portfolio Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if policies, practices, procedures, and internal controls regarding member
business loans are adequate.
To determine if lending personnel are operating in conformance with the established guidelines.
To evaluate the member business loan portfolio for credit quality, collectibility, and sufficiency of collateral.
To determine compliance with applicable laws and regulations.
To initiate corrective action when policies, practices, procedures, or internal controls are deficient or when violations of law or regulations have been noted.
AUDIT PROCEDURES
Date
Completed
Loan Portfolio
Review the member business lending policies and procedures for adequacy
given the volume and type of lending activity.
Review adequacy of management reports to the board to assure that policies
and procedures are consistently followed.
Review the preceding audit report and ensure that all member business lending exceptions have had appropriate corrections.
Summarize findings, obtain management responses, and update programs.
Date
Completed
If additional verification is needed, use an appropriate sampling technique,
select loans for review, and require in-depth review.
Obtain the credit union’s credit or loan files for all borrowers for whom line
sheets were prepared and analyze for credit quality, adequacy of loan and
collateral documentation, and compliance with established policies, procedures, and controls. In analyzing the loans, determine and/or consider
the following:
The adequacy of any secondary support afforded by guarantors and endorsers
Compliance with established policy and procedures
Compliance with applicable laws and regulations
Loans not supported by current and complete credit information
Loans in which collateral documentation is deficient
Compliance with provisions of any loan agreements
If the original amount of the loan was within the lending officer’s authority
The interest rate charged and terms are within the established parameters
of the interest rate schedule and whether loans to affiliated persons of
this or other credit unions represent preferential treatment and/or actual or potential conflicts of interest
For participation loans purchased and sold and loans sold in full since the
preceding examination:
Test participation certificates and records and determine that the parties
share in risks and contractual payments on a pro rata basis
Determine that the books and records properly reflect the credit union’s liability
Determine that the credit union exercises similar controls and procedures
over loans sold and loans serviced for others as for loans in its own
Date
Completed
portfolio
Investigate any loans or participations sold immediately prior to the audit
to determine whether any were sold to avoid criticism during the audit
For loans in the sample, check the central liability file on borrowers indebted
above the cutoff or borrowers displaying credit weaknesses or suspected
of having additional liability in other loan areas.
Perform the following steps for past-due loans:
Compare the following and determine any material inconsistencies:
The past-due loans provided to the auditor
Delinquency reports submitted to the board
List of loans considered problem loans by management
Delinquency levels provided on reports to NCUA
Determine the projected loan growth.
Determine general distributional characteristics of the member business loan
portfolio by:
Determining percentage of total loans in specific classes
Comparing loan category distributions to policy guidelines
Compare management’s list of problem loans to classified loans to determine
management’s knowledge of its future potential problems.
Determine the causes of existing problems or weaknesses within the system
which present potential for future problems.
Determine the compliance with laws, rulings, and regulations pertaining to
member business lending.
Review loans to affiliates with respect to adherence to regulatory require-
Date
Completed
ments, credit union procedures and policies.
Review the reconcilement of the member business loan trial balance to the
general ledger and check reconciling items for reasonableness.
Perform the following using the loan commitment and contingent liability
schedule.
Reconcile appropriate contingencies totals to memorandum ledger controls.
Review reconciling items for reasonableness.
Individual Standard Loans
Verify a report is being generated to indicate the business loans.
Ascertain that these business loans are being reported on Form 5300.
Examine selected reconciliations of detailed loan subsidiary records to the
general ledger. Follow up on all items of reconciliation.
Follow up on results of delinquency notices sent to members. Determine that
discrepancies have been resolved or reconciled.
Obtain a trial balance of loans outstanding as of the audit date. Foot and tie
to the general ledger.
Select a sample of loans and perform or review the following:
The following items are properly executed and recorded:
Note
Security agreement
Contracts
Liens
Date
Completed
The borrower's legal form of organization is documented.
The principals in the business are identified.
Complete financial statements are in file with supporting schedules and
tax returns.
Collateral conditions and value determined by independent qualified appraisers.
Periodic review of the financial condition is documented.
Loan officers make regular on-site inspections of the business sites and
collateral.
Verify that loans are not in excess of authorized lending limits.
Review summary of loan activity during the period audited. Examine activity
with respect to very large loans or loans made with unusual interest rates,
repayment periods, or fees.
Review listings of loans for activity with related parties, such as officers, directors, volunteers, or business, in which directors have ownership or control.
Confirm loans receivable. (The extent to which loans are confirmed and the
type of confirmation used, positive or negative, is dependent on the internal auditor’s assessment of risk and effectiveness of internal accounting
controls.)
Verify cutoff of major lending transactions by selecting loans five days before
and after the audit date. Perform or review the following:
Trace loan disbursements to the general ledger
Trace the disbursement of loan proceeds to a properly endorsed loan
check or credit to deposit account
Obtain the date of the note from the loan file
Verify that the date of the note and the loan disbursements are in the
Date
Completed
same accounting period
Verify the accuracy of electronically processed data in the loan system by selecting a sample of loan transactions during the audit period and perform
the following:
For each payment, verify the correct posting of principal, interest, escrow,
if applicable, and late charges to the general ledger
Verify that payments are accurately split between principal, interest, and
other charges
Select a sample of loans at the end of the audit period. Verify that accrued
interest recorded is properly calculated in accordance with the credit union’s policy and the loan agreement.
Test the validity of this credit union’s past-due loan report by performing the
following:
Select and test a sample of loans not on the past-due loan report for possible inclusion
Select and test a sample of loans listed on the past-due loan report for
proper classification as to agency, or past-due interest
Review loans 60 days or more past due and:
Discuss collectibility with the appropriate loan officer
Determine that collection efforts are in accordance with the credit union’s
policy
Determine that proper reserves are maintained for doubtful loans and related interest
Select a sample of loan payoffs during the audit period and:
Verify the correct application of proceeds to principal, interest, and prepayment penalties
Date
Completed
Verify that all pertinent legal documents were returned to the member
Obtain a listing of loan commitments and undisbursed loans and:
Investigate any old commitments
Verify that loan commitments are properly approved
Perform the following procedures on loan charge-offs:
Determine that loans charged-off during the period were approved
Verify that subsequent collection efforts are in accordance with the credit
union’s policy
Determine that subsequent payments on charged-off loans are controlled
by designated employees
Review reports to governmental agencies for accuracy and completeness.
Select a sample of loans and test the accrued interest receivable balance for
accuracy.
Loans in Process (Construction) Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ensure that loans in process follow credit union policies and procedures and that they
comply with applicable regulations.
AUDIT PROCEDURES
Date
Completed
Review credit union’s policies with respect to construction loans for the following items:
Volume of construction loans in respect to total loans
Conformance to lending limitations
Adequacy of security during construction
Percentage of loans with a particular contractor
Relationship between contractor and officer or director of the credit union,
if applicable
Financial status of contractors
Value of units financed
Other (specify):
_______________________________________________
Obtain a copy of the loans-in-process detail run for [insert number] months
Date
Completed
and agree it to the general ledger.
Make a selection of [insert percentage] construction loans from the detail trial
balance listing and perform the following steps:
Perform a detail loan file examination noting the following:
Loan application signed
Credit report received and reviewed for both borrower and contractor
Contractor’s specification of material
Prime construction contract agreement
Contractor statement with referrals (note follow-up on referrals)
Copy of building permit
Fire insurance policy in force adequate to cover the amount of the
loan, net of the land value, with the credit union named as beneficiary
Title insurance policy in the amount of the loan, with the credit union
as beneficiary
Loan escrow instructions
Appraisal and amount of loan as a percentage of the property value
(note class level of appraiser)
Approval of the contractor’s cost breakdown
Compare appraisal date to:
Date of specification of materials report
Date of contractor’s cost breakdown sheet
Compare loan setup data to:
Date
Completed
Date of title insurance policy
Date trust deed recorded
Date approved by loan committee
Date of coverage by fire insurance company
Loans-in-process disbursement test. Obtain the loans-in-process folders for
the loans reviewed above and perform the following:
Review the cost breakdown sheet to determine that there have been no
over disbursements made in any of the cost breakdown categories.
If any overdisbursements have been made, determine that they had
been approved by an authorized individual, and obtain an explanation. (This may indicate a problem that will require more detailed
evaluation.)
Select [insert number] individual postings for any [insert number] on the
cost breakdown categories and trace them to the loans-in-process
card. One posting selected for each loan should be the final posting for
a cost breakdown category. Obtain support for these postings as follows:
Note that the amount posted to the loans-in-process card does not exceed the voucher prepared by the borrower and signed (released
and waiver agreement of the back) by the contractor or supplier,
or, if the voucher is made out to the contractor for reimbursed
costs, determine that it does not exceed the support in the form of
invoice or releases from the contractor or supplier.
Note that the allocation to the cost category is supported by the description on the invoice or releases from the independent contractor or supplier.
Review canceled checks noting amount, date, payee, and endorsements.
Date
Completed
Foot or test the loans-in-process card to control date and agree to trial
balance.
For the [insert number] posting selected above, determine that the degree
of completion per the inspector’s report as of their dates support the
percentage of disbursements for those cost categories.
For completed or nearly completed projects, determine whether there is,
or may be, a significant excess in the loans-in-process account. If so,
determine if management has ordered a reappraisal of the completed
project.
Follow up disbursement of any excess funds and determine that any excess has been either offset against the loan or disbursed to the borrower as provided for in the construction loan agreement.
Determine that there are no loans in process that are dormant due to bankruptcies, etc.
For construction and development loans, determine that the borrower has a
minimum of 25% equity interest in the project being financed. 723.3
If no, has the credit union obtained NCUA approval?
For construction and development loans, establish whether the credit union
releases funds according to a pre-approved draw schedule and only after
on-site written inspections by qualified personnel. 723.3c
Construction Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if policies, practices, procedures, and internal controls regarding real estate
construction loans are adequate.
To verify that management is operating in conformance with the established guidelines.
To evaluate the construction loan portfolio for credit quality, collectibility, and collateral sufficiency.
To ensure compliance with applicable laws and regulations.
To initiate corrective action when policies, practices, procedures, objectives, or internal controls are deficient or when violations of laws or regulations have been noted.
AUDIT PROCEDURES
Date
Completed
Verify that the board has adopted written construction lending policies that:
Establish procedures for reviewing construction loan applications
Require agreements by borrowers for completion of improvements in accordance with approved construction specifications, cost, and time limits
Define qualified collateral and minimum margin requirements
Identify acceptable appraisal or valuation techniques
Specify inspection procedures
Date
Completed
Define methods of dispersing loan proceeds
Delineate standards of take-out commitments
State completion bond requirements
Established minimum standards for documentation
Outline aggregate for construction loans
Specify extensions of credit in particular types of construction projects
Ensure that construction lending policies and objectives are reviewed at least
annually to determine if they are compatible with changing market conditions.
Establish that the credit union requires:
A history of the contractor's prior construction experience and a schedule
of other projects the contractor currently has under construction.
Trade reputation credit checks, current and historical financial statements.
Verify whether project costs estimates include:
Land and construction
Related off-site expenses
Legal services and insurance expenses
Loan interest
Determine whether estimated cost breakdowns are available for each stage of
construction.
Establish that cost estimates of more complicated projects are reviewed by
qualified personnel, i.e., an architect, construction engineer, or independent estimator.
Date
Completed
Determine whether construction borrowers contribute equity to a proposed
project in the form of money or real estate and is it included in the budget.
Verify whether commitment fees are required on construction loans.
Verify that the credit union requires:
Personal guarantees by the borrower(s)
Personal completion guarantees by the contractor(s)
Construction and Loan Agreements
Verify that construction and loan agreements signed prior to actual loan disbursements.
Determine that construction and loan agreements reviewed by experts:
To determine that building specifications conform to appropriate codes,
ordinances, and restrictions (i.e., local water and sewage codes)
To ensure a perfected lien position
To ensure any needed easements or building restrictions have been met
Ensure that change orders are approved in writing.
Verify that construction and loan agreements set a specific date for project
completion and sell out.
Review the construction and loan agreements to verify that they require:
The contractor to not begin work until authorized to do so by the credit union.
Permission for on-site inspections.
Disbursement of funds to be based upon progress of project.
The credit union can withhold disbursements if work is not performed in
Date
Completed
accordance with approved specifications.
A portion of the loan proceeds can be retained pending satisfactory completion of construction.
The credit union is allowed to assume prompt and complete control of the
project in the event of default.
The contractor has builder's risk and hazard insurance.
For projects that are developed in phases, ensure that the credit union authorizes individual starts and requires sales reports.
Collateral
Determine whether the credit union utilizes first liens on real estate in order to
secure collateral.
Determine whether it appropriate under state law.
Establish whether construction loans have take-out commitments that are
predicated upon achievement of a specified minimum rent or lease occupancy.
Determine whether construction loans which are subject to the credit union’s
own take-out commitment are limited to a percent of the appraised value
of the completed project.
In connection with construction loan review, establish whether unsecured
lines of credit to contractors are periodically monitored by management.
Appraisals
Verify whether feasibility studies are obtained and whether they support the
viability of new development projects.
Determine whether appraisals are approved in writing by the permanent lender where construction loans are subject to a take-out commitment.
Date
Completed
Establish that the institution has an internal review procedure conducted by
qualified personnel to determine whether construction appraisal procedures are consistently being followed and that appraisal documentation
supports the conclusions reached.
Inspections
Verify that inspections are conducted on a timely basis in order to allow monitoring of the project during all stages of construction.
Determine whether sites are inspected for environmental risks and liability.
Establish whether inspection reports are sufficiently detailed and documented
to support disbursements.
Verify whether inspection and disbursement functions are segregated.
Verify whether spot checks are made of the inspector’s work.
Establish whether inspectors have sufficient expertise to determine compliance with plans and specifications.
Disbursements
Determine whether a review of the undisbursed loans in process account indicates that there are sufficient funds to complete the project.
Verify that disbursements are:
Advanced on a percent of completion method.
Made only after reviewing complete written inspection reports.
Subject to written preauthorization by the contractor, inspector, and authorized officer.
Compared to original cost estimates.
Establish whether the credit union obtains waivers of subcontractor and
Date
Completed
mechanic's liens when work is completed and disbursements made.
Verify that the credit union obtains sworn and notarized releases of
mechanic's liens from the general contractor at the time construction is
complete and before final disbursement.
Take Out Commitments
Determine whether take-out commitments are reviewed by counsel for enforceability.
Establish whether financial statements of permanent lenders are obtained and
reviewed to determine their viability.
Verify whether the institution requires take-out agreements to include an Actof-God clause which provides for automatic extension of completion date
in the event construction is delayed.
Completion Bonding Requirement
Establish whether the credit union require a completion bond for all construction loans.
Verify whether the institution has established standards for borrowers who are
not required to obtain completion bonding.
Establish whether legal counsel reviews completion bonds for acceptability.
Documentation
Verify whether the institution requires that documentation files include:
Loan application
Financial statement for the borrower, builder, and guarantor
Credit and trade checks on the borrower and builder
Date
Completed
A copy of plans, specifications, and building permits
A property survey
Construction and loan agreements
Appraisal and feasibility study
Up-to-date preliminary title search
Assigned tenant lease or letter of intent to lease
Copy of take-out commitment
Copy of borrower's application to the take-out lender
Inspection reports
Disbursement authorizations
Undisbursed loan proceeds and contingency or escrow account reconcilements
Insurance policies
Determine whether standardized checklists are utilized to control documentation for individual files.
Establish whether documentation files note all borrower's other loan and deposit account relationships.
Verify whether the credit union keeps tickler files that will give at least 30 days
advance notice before expiration of:
Take-out commitments
Hazard insurance
Credit and trade checks on the borrower and builder
Date
Completed
Construction Loan Accounting Records
Determine whether the preparation, addition, and posting of subsidiary real
estate construction loan records performed and/or adequately reviewed by
persons who do not also issue official checks or drafts or handle cash.
Establish whether the subsidiary real estate construction loan records are
reconciled, at least monthly, to the respective G/L account and reconciling
items investigated by persons who do not also handle cash.
Verify whether documents supporting recorded credit adjustments are
checked or tested subsequently by persons who do not also handle cash.
Construction Loans (Participation) Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if policies, practices, procedures, and internal controls regarding real estate
construction loans are adequate.
To verify that management is operating in conformance with the established guidelines.
To evaluate the construction loan portfolio for credit quality, collectibility, and collateral sufficiency.
To ensure compliance with applicable laws and regulations.
To identify the strengths and weaknesses of the construction lending function.
To initiate corrective action when policies, practices, procedures, objectives, or internal controls are deficient or when violations of laws or regulations have been noted.
AUDIT PROCEDURES
Date
Completed
For participation loans purchased or sold and loans sold in full since the preceding audit:
Test participation certificates and records to determine that the parties
share in the risks and contractual payments on a pro rata basis.
Determine that the books and records properly reflect the credit union’s liability.
Determine that the credit union exercises similar controls and procedures
over loans sold and loans serviced for others as for loans in its own
portfolio.
Date
Completed
Investigate any loans or participations sold immediately prior to the audit
to determine whether any were sold to avoid criticism during the current audit.
Reconcile the construction loan trial balance to the general ledger and review
reconciling items for reasonableness.
Real Estate Held for Investment Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To evaluate the policies, procedures, and degree of expertise concerning the acquisition,
development, management, and disposition of these assets. To assess management’s proficiency in managing this type of asset.
To determine if the credit union has correctly calculated its level of real estate held for investment and if it is within the level prescribed by the applicable laws and regulations as
well as the credit union’s business plan.
To determine if management has properly accounted for the acquisition, start-up, maintenance, sale, and, if appropriate, the write-down of these assets.
To evaluate the quality of these assets and their impact on the financial condition and performance of the credit union; to check for compliance with the objectives laid out in the
business plan.
To ascertain whether cash flow is adequate to finance the acquisition and development of
these assets.
AUDIT PROCEDURES
Date
Completed
Review materials applicable to this program.
Evaluate the adequacy of the credit union’s policies and procedures on real
estate held for investment by thoroughly reviewing policy statements, the
internal asset review program, procedure manuals, business plan, and
board minutes.
Determine whether the credit union’s procedures, controls, and objectives in
this area are safe and sound and in compliance with applicable laws and
Date
Completed
regulations. Determine if the current level of real estate held for investment
is consistent with the credit union’s business plan.
Conduct interviews with management. Ascertain compliance with policies and
procedures and determine whether policies and procedures are reviewed
periodically and changes are communicated to the appropriate credit union
personnel.
Review the results of the procedures performed, and determine if the examination objectives are reviewed periodically and changes are communicated to the personnel involved.
If additional verification is needed, determine if the real estate held for investment balances is correctly reported on the call reports.
In the review of a selected sample of asset files, the following should be considered:
Determine if any insider has any interest in real property purchased for investment or will personally benefit directly or indirectly from the development and/or resale of the property.
Determine if a feasibility study has been made for each major project, and
whether it indeed supports the project and the credit union’s projections.
Review contracts and records with respect to development costs, etc. Determine if joint venturers or contractors have the technical capacity and
financial ability to complete the project.
Review documentation supporting disbursement for construction, and determine whether disbursements have been authorized and supported
by the appropriate manager and reviewer.
Discuss with management and obtain its response on plans for the development and marketing of these assets.
Review the sales of real estate held for investment since the previous audit.
The following areas should be addressed:
Date
Completed
Ascertain whether sales volume is reasonable in relation to market conditions.
Determine whether sales prices are reasonable in relation to appraised
values.
Determine the reasonableness of sales expenses.
Determine whether credit union financing in connection with sales is
soundly underwritten.
Ensure that gains/losses on property sold are properly recognized in accordance with regulations. If sales are financed by loans with belowmarket financing, determine misstatement or profit or loss.
Review credit union’s projections and determine if cash flow will be sufficient
to fund all developments, including those of its subsidiaries.
Determine if fair value calculations have been performed on classified assets
and review the calculations for reasonableness of assumptions.
Verify the proposed asset classification write-ups.
Obtain a complete listing of real estate held for investment and reconcile to
the general ledger balance.
Inspect properties as necessary to determine their marketability, time listed for
sale, whether appraised values and asking prices are reasonable, if independent appraisals should be ordered to ascertain unrecorded losses, if
the properties are adequately managed and maintained, and if completed
work supports the payouts to date.
Determine if any agreements exist to sell any properties back to the previous
owner or any of his or her interests.
Troubled Debt Restructuring Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine whether management policies and procedures are adequately addressing
safety and soundness with compliance with laws and regulations.
To verify whether credit union officers are operating in conformance with established guidelines, objectives, policies, and procedures.
To ascertain whether management personnel periodically reevaluate procedures and practices and implement appropriate modifications, either directly or through recommendations
to the board.
AUDIT PROCEDURES
Note: A troubled debt restructuring (TDR) is defined as a restructuring in which a credit union, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.
Date
Completed
Determine if the credit union has restructured troubled debt. The restructuring
may include the following:
The transfer from the borrower to the credit union of real estate, receivables from third parties, other assets, or an equity interest in full or partial satisfaction of the loan or other debt instrument.
A modification of the loan terms.
Reduction in stated interest rate to below the current rate.
Extension of maturity at a favorable interest rate.
Date
Completed
Reduction in the face amount of the debt.
Reduction in accrued interest.
A combination of the above.
A loan extended or renewed at a stated interest rate equal to the current
market interest rate for new debt with similar risk is not to be reported
as a restructured loan.
Determine if any troubled debts were restructured after December 15, 1994.
Loans restructured are considered impaired per SFAS 114 and as
amended by SFAS 118. A loan is considered impaired when the creditor
determines, based on current information, that it is probable the creditor
will be unable to collect all principal and interest as scheduled, according
to the original contractual terms of the loan agreement.
A loan impairment is measured in the following three ways:
Present value of expected future cash flow discounted at the loan’s effective interest rate at inception as defined in SFAS 114 and
amended by SFAS 118.
Loan’s observable market price.
Fair value of collateral if the loan is collateral dependent.
A loan is not impaired during a delay in payments if the creditor expects to
collect all amounts due.
Impairment does not apply to smaller balance homogeneous loans collectively evaluated for impairment (credit card loans, residential mortgage
loans, consumer installment loans). Those loans are accounted for at
fair value or the lower of cost of market.
Determine if policies and procedures include the following items:
Guidelines on TDR accounting. (Basic criteria are set forth in SFAS 15,
114, 118, and Call Report Instructions.)
Date
Completed
Guidelines for approval of restructuring concessions and agreements.
Determine whether management has developed appropriate monitoring procedures for TDRs:
Determine the process for approving restructured loans.
Identify responsibility for monitoring TDRs.
Evaluate the system used to track TDRs.
Determine whether management has correctly identified TDRs.
Determine if impaired loans comply with SFAS 114 and SFAS 118.
Determine if the loan review function has identified any additional loans that
should be categorized as TDRs.
Determine whether the loan review function encompasses TDRs.
Ensure that the TDRs are considered in calculating the adequacy of the
ALLL.
Determine if appropriate documentation is retained to support TDR assumptions and conclusions.
Review external audit recommendations and assess the adequacy of remedial actions taken by management to correct TDR deficiencies.
Ascertain the volume of TDR in the credit union’s portfolio utilizing prior audit
reports.
Large Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine that a report is generated that identifies large loans and embraces requirements set by NCUA.
AUDIT PROCEDURES
Date
Completed
Ascertain that a report is being generated indicating loans in excess of
$200,000 as required by NCUA.
Verify that the report is current and available for NCUA review during its annual examination of the credit union.
Risk-Based Lending Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain that the lending department is following the policies and procedures approved
by the board.
To determine that parameters have been set so that capital is at minimal risk.
To verify that a tracking mechanism is in place to test the program’s effectiveness.
To establish that the written policies are uniformly applied.
AUDIT PROCEDURES
Date
Completed
Is there a risk-based policy approved by the board of directors?
Is the policy neutral in its concept and developed because of a business necessity?
Is the information developed practical and is it sound statistically?
Is the credit scoring system evaluated and updated periodically?
Has there been a lending authority policy established?
Does this policy set minimums and maximums of credit approval?
If an applicant exceeds the credit approval level, are procedures in place for a
subsequent review?
Are the loan files properly documented as to who approved the loan on review?
Date
Completed
Is there a “credit score” by loan officer? Is the report available?
If yes, and the loan must be reviewed by a higher level employee, does
the report reflect who the “higher authority” is?
Is there a “credit score” code attached to each such loan for easy tracking?
If yes, does this code appear on any charge-off report to the board?
Are these charged-off loans reviewed by a loan officer so that any pattern
can be established?
If yes, are loan officers counseled as necessary, and any such reports
made part of their personnel file?
Are reports on credit scoring/loan authority reviewed if made part of an NCUA
examination or outside accountant’s findings?
If yes, are the recommendations accepted?
Is the “human” factor considered when a member’s score is in a “gray” area
or when the member does not fit the “mold”?
If yes, are these human factors ultimately considered by the credit union
when approving or denying a loan?
If yes, are these loans sufficiently documented to answer any subsequent
inquiries?
Are provisions in place to adequately handle legal issues (e.g., EEOC,
FCRA)?
If yes, is there a log maintained for tracking purposes?
Mortgage Loans Prequalification Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain that a policy is in place and followed by the loan staff.
To verify that the prescreening process is neutral as to credit criteria.
AUDIT PROCEDURES
Date
Completed
Is there a policy in the credit union which covers prescreening?
If yes, does the policy contain neutral credit criteria for all members?
Are the prescreened loan offerings sufficiently separated (in time) by marketing in order to avoid confusion with the members or the loan department?
Can prescreened offerings be tracked in order to ascertain that loans were
offered to those who requested them?
If yes, are they reviewed for any compliance violations?
Do the offerings and subsequent inquiries or actual loans comply with Regulation B (e.g., regarding applications, adverse action)?
If a prescreening list is prepared by a credit bureau based on a comparison of
the credit union’s credit criteria and the members’ files at the credit bureau, are all members from the prescreened list made a firm offer of credit
as required under the Fair Credit Reporting Act?
If the credit union plans to qualify these firm offers of credit, are the qualifications or conditions disclosed on the credit solicitation?
Interest Income — Real Estate Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To verify that interest income is correct as received.
AUDIT PROCEDURES
Date
Completed
Select 10 loans at random for reasonableness test.
Find the principal loan balance from the loan trial balance of the audit date.
Find the principal loan balance at the start of the audit period from the loan
history.
Find the interest paid for the audit period from the loan trial.
Using code ____ on the terminal, find the interest rate of the tested loans.
Calculate the interest:
Add the two balances together.
Divide by two.
Multiply result figure by the interest rate, divide by the number of days in
the audit, divide by 360.
To test the interest income for the credit union.
From the credit union monthly trial balance, get the interest of the total
loans.
Date
Completed
From the report ____, get the monthly weighted interest average and multiply.
Divide by the total months of the audit periods.
Subtract the interest per the trial balance and interest participation and
compare with the test figure.
Exhibit 6.4 contains a model loan interest audit report that can be used for this review.
You may need to customize the model form for your credit union’s needs.
Mortgage Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To review the entire process of real estate lending to ascertain that the department is operating in compliance with laws and regulations and with the credit union’s policy and procedures.
AUDIT PROCEDURES
Date
Completed
Prepare all supporting documents of mortgage loan accounts.
Prepare the trial balance total to the general ledger (G/L); trace any reconciling item to final disposition.
Check the unposted journal, on the first day of the audit, for the following
day, and subsequent days and follow clearance of the unposted items.
Settle escrow balances (if applicable) to G/L.
Prepare the following, using the audit statistical sampling routine as outlined
in Chapter 2 of this manual.
Statistical sampling input parameters for the selections to be made; post
all applicable statistical data evaluated in the determination of your
confidence level.
Send letters of confirmation to borrowers, using those loans selected by the
statistical sampling.
To make the sample valid, a response must be on file for each confirmation. This may be accomplished by having the signed confirmation on
Date
Completed
file, by telephone follow up with the borrower, or by alternate procedures.
Inspect mortgage documents as listed below:
Note, deed of trust, assignment of rents, title insurance, insurance, loan
approval, appraisal, FHA, VA agreement (if applicable), file maintenance forms, and all forms required by regulation.
Review delinquent loans and prepare a listing of loans delinquent in excess of
90 days; ascertain the reasons for the delinquencies and that proper collection procedures are being followed.
Review the clearing account and check credits to member’s account, reconcile all uncleared accounts.
Check loan transactions; reconcile all entries for applicable accounts, inspect
supporting journals for proper approval.
Debits. Trace disposition of proceeds to credit union check.
Credits. Check credits to daily journals; review for large payoffs on loans;
reconcile credits to G/L account on loan closings.
Review loans serviced for insurance providers; obtain the most recent servicer’s statement of account; schedule the amount of remittance and examine the paid check for proper endorsement and amount.
Determine the service fee by referencing the servicing agreement. Recalculate and trace the amount of the G/L income account.
Determine the servicing statements are submitted according to the terms
of the servicing agreement.
Review and analyze Other Real Estate Owned (foreclosures).
Review maintenance changes; determine unusual and unauthorized changes
to accounts; follow up with management on any suspect changes.
Prepare a negative escrow trial balance; determine the cause of the negative
Date
Completed
balances; ascertain that appropriate action is taken to increase contributions where necessary or to collect NSF payments; follow up to ascertain
the correction or collection of the negative amounts.
Perform a regulatory compliance review for approved loans and follow up on
any exceptions.
Prepare a regulatory compliance review on declined loans and follow up on
any exceptions.
Review closed loans for clearance of applicable mortgage documents, closing
entries, excess escrow balance, and that documents have been filed with
the appropriate agency.
Loans — Confirmation (Alternate Procedures) Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
The outside auditors will select a percentage of the credit union’s outstanding real estate
loans to verify balances and interest rates. When a member does not respond, it is IAD’s
responsibility to verify the accuracy of the loan balance and interest rates. This is also a
procedure that IAD can perform whenever real estate loans are audited.
AUDIT PROCEDURES
Date
Completed
Review the reconciliation of the loans receivable trial balance and impounds
account trial balance to the general ledger at (insert date).
Investigate large or unusual reconciling items.
Follow up on any exceptions noted by members on returned confirms.
Perform work on “no-reply” or “unable-to-reply” confirms as follows:
Determine that the loan is not more than 30 days past due as of the commencement of the no-reply work.
Compare the signatures on the note and deed of trust. If a note has been
assumed, an assumption agreement is not necessary, and it should be
dated after the confirmation request date.
Determine that the amounts of the note and deed of trust agree and are
greater than or equal to the balance per the confirmation trial balance.
Determine that the trust deed has been stamped as recorded and indicates the credit union’s lien.
Date
Completed
Determine that the title insurance policy insures the credit union for at
least the amount of the original loan. If there are any large advances
for the loan, see that they are covered.
Determine from the title policy that the credit union’s lien is not subordinated to other liens. Where information is readily available, determine
that other subordinate liens are not excessive relative to the first lien
and appraised value. Both the recording date and note date shown on
the title policy should agree with the original documents.
Summarize the results of the of loan balance review.
Servicing Loans for Others Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain that the proper records are being maintained; that the remittances are proper
and include all serviced loans.
AUDIT PROCEDURES
Date
Completed
Examine selected monthly bank account reconciliations. Follow up on all reconciling items.
Examine selected teller’s daily balancing reconciliations. Follow up on all reconciling items.
Examine selected reconciliations of detailed loan subsidiary records to the
general ledger. Follow up on all reconciling items.
Examine selected reconciliations of servicing activity to disbursements made
to note holders. Determine that discrepancies have been resolved or reconciled.
Follow up on results of delinquency notices sent to members. Determine that
discrepancies have been resolved or reconciled.
Review all loan servicing agreements. Ascertain that the credit union has
complied with the terms of the agreements relating to:
Remittance of principal and interest
Calculation of service fee and late charges
Date
Completed
Loan servicing reporting
Delinquency notices and collection efforts
For the audit date selected, obtain a reconciliation of loans serviced to ledger
or reporting statement balance. Determine that loans serviced for others
are properly identified and controlled.
Confirm loans being serviced for others. Confirm directly with borrower the
loan balance, escrow balance, and date of last payment.
Obtain monthly loan servicing reports for the audit period. Compare actual to
expected results for:
Principal and interest remitted
Principal repayments
Loan servicing fees
Verify the accuracy of electronically processed data in the loan servicing system.
Select a sample of loans serviced for others from the loan servicing agreement. Compare to monthly servicing report to determine that all loans are
being serviced.
Obtain monthly reports of loans serviced by others. Determine that remittances are being made for all loans identified in the servicing agreement.
Tie-In Provisions Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine whether there is an extension of credit to a member within the guidelines of
the credit union.
AUDIT PROCEDURES
Date
Completed
Tie-in provisions.
While reviewing credit and collateral files (especially loan agreements),
determine whether any extension of credit is based on:
The member’s obtaining or providing some additional credit, property,
or service to or from the credit union, other than a loan, discount,
deposit, or trust service
The member’s not obtaining some other credit, property, or service
from a competitor of the credit union other than a reasonable condition to assure the soundness of the credit
Lending Limits Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVE
To verify that loans funded do not exceed the limits set by the credit union.
AUDIT PROCEDURES
Date
Completed
Lending limits
Obtain a loan trial balance for the date of the examination.
List any loan balances that exceed the regulatory limits set for the credit
union’s capital and surplus as of the audit date.
Discuss any loans listed above with the responsible lending officer and
obtain explanations for any excessive balances.
Prepare a report for outside auditors (if applicable) and NCUA examiners explaining any excessive loan amount.
Interest Review (Interest Earned, Not Collected; Interest Collected,
Not Earned Regarding Mortgage Loans)
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To ascertain that the credit union has not collected interest to which it is not entitled, at the
time of the audit, and has collected interest that has been earned.
AUDIT PROCEDURES
Date
Completed
Control the mortgage loan master files and obtain the following items for the
audit period:
Loan trial balances showing loan payments received
Loan payment daily receipts and posting information
Reconcile interest accrued detail to the general ledger.
Recompute and reconcile the monthly accruals transferred to income.
Report on any differences.
Recompute the unapplied funds (unearned discount) and reconcile to the
general ledger.
Report on any differences.
Test collection of interest by obtaining payment coupons for the audit period.
Trace daily totals to the daily loan trial balance.
Date
Completed
By reference to individual amortization schedules, determine amounts, per
payment, for principal, interest, and escrow, if any.
Trace to the general ledger and report any differences.
Trace posting of interest to income accounts.
Trace posting of interest from escrow, if applicable.
Review adjustments to income and daily entries to income for the audit period
for transactions requiring adjustment to the income accounts.
Review general ledger control accounts for adjustments during selected
dates (and dates outside the audit period, if noticed) and review adjustments of unusual amounts or period containing an unusual number
of adjustments. Report the cause of the unusual amounts.
Credit Risk Management Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if policies, practices, procedures, and internal controls regarding credit risk
management are adequate.
To ascertain if the credit union officers are operating in conformance with the established
guidelines.
To verify the scope and adequacy of the loan review functions.
To document the overall quality of the loan portfolio and how that quality relates to the risk
management function of the credit union.
To prepare information regarding the credit union’s lending function in a concise reportable
format.
To establish compliance with applicable laws and regulations.
To recommend corrective action when policies, practices, procedures, or internal controls
are deficient or when exceptions of applicable law or regulations have been noted.
AUDIT PROCEDURES
Date
Completed
Determine if management has adequately addressed deficiencies noted at
previous audits.
Reconcile the member central liability ledger or subsidiary loan ledgers to the
general ledger.
Review the credit union’s lending policies to determine:
If the policies are adequate for the size, nature, and business of the credit
Date
Completed
union
If the credit union is in compliance with its policies
If the policies are reviewed and updated periodically to ensure that they
are relevant to changing market conditions and new business lines of
the credit union
If policies have been approved by the board of directors
If applicable, review minutes of the credit union’s loan committee meetings to
determine:
Current members and their attendance record
Scope of their work performed
Any information deemed useful in the audit of specific loan categories or
other areas of the credit union
Determine if the loan review program ensures independence from the lending
function, including whether:
Policies specifically address the separation of loan review from the lending
and credit approval functions.
The loan review function reports directly to management not involved in
the lending function (specifically). If not, determine if the credit union
has adequate controls to ensure independence from the lending function.
Note: This review is at times called a quality control review.
Document if the frequency of loan review is adequate, and if the program includes:
A minimum frequency of reviews
A frequency which is sufficient to provide timely information concerning
emerging trends in the portfolio and general economic conditions
Date
Completed
Increased frequency for identified problems loans
Evaluate the adequacy of the scope of the loan review, including:
Method of loan selection
Manner in which loans are reviewed, including:
An analysis of the current financial condition of the borrower which addresses repayment ability
Tests for documentation exceptions, policy exceptions, noncompliance
with internal procedures, and exceptions of laws and regulations
Assess the qualification of the personnel involved in the loan review function.
Verify the loan review reporting system, including credit file memoranda,
management reports, and an annual schedule or loan review plan, to ensure it is thorough, accurate, timely, and will provide sufficient information
to allow management to identify and control risk. Determine if the reports
include:
Identification of the problem loans
Current information regarding portfolio risk
Information concerning emerging trends in the portfolio and the credit union’s lending area
Assess the adequacy of the loan grading system and verify if it:
Includes an objective grading system for loans
Contains explicit definitions of the credit union’s internal grading system,
and that it is easily understood by all lenders and loan review staff
Designates who has ultimate authority in assessing and changing loan
grades
Evaluate the accuracy of the credit union’s credit grading system. Determine
Date
Completed
the extent of management’s knowledge of its own loan problems.
Assess the effectiveness of the credit union’s loan administration and portfolio
management by evaluating:
Management’s general lending philosophy in such a manner as to elicit
management responses
The impact of loans not supported by current and complete financial information and analysis of repayment ability
The impact of loans for which credit and collateral documentation is deficient
The volume of loans improperly structured (e.g., repayment schedule
does not match loan purpose)
The volume and nature of concentrations of loans, including concentrations of classified and criticized loans
The adequacy and completeness of reports submitted to management
Competency of senior management, loan officers, and credit administration personnel
Document, through information previously generated, the causes of existing
problems or weaknesses within the system, which present potential for future problems.
Ascertain if the credit union has adequate policies and procedures for problem and workout loans, including:
A periodic review of individual problem loans
Guidelines for collecting or strengthening the loan, including requirements
for updating collateral values and lien positions, and documentation
reviews
Volume and trend of past-due or nonaccrual loans
Date
Completed
Qualified officers handling problem loans
Guidelines on proper accounting for problem loans (e.g., nonaccrual policy, specific reserve policy)
Assess the credit union’s compliance with laws and regulations by determining whether:
An officer or employee received anything of value for procuring or endeavoring to procure any extension or credit (commission or gift for
procuring a loan).
The credit union has a stated purpose for each loan over $10,000, except
those secured by real estate (Bank Secrecy Act).
The credit union is in compliance with state and federal lending limits.
The credit union is in compliance with Regulation O regarding loans to insiders.
Report any exceptions.
Ensure that any specific reserves reported by the credit union are appropriate
(i.e., based on a specific loss amount that has been identified for an individual loan).
Evaluate if the credit union accounts for specific reserves appropriately when
the underlying asset has been transferred, sold, or paid off.
Review the management reports to determine that reports are sufficiently detailed to evaluate risk factors.
Summarize your findings, including consideration of the following:
Check for noncompliance with internal policies, practices, procedures, and
controls. Determine if instances of noncompliance are system-wide or
limited to a specific area.
Organize exceptions in order of relative importance.
Date
Completed
Compile a listing of all loans not supported by current and complete loan
information and collateral documentation.
Compile a listing of low-quality loans transferred to or from another credit
union through purchases/sales, participations, or swaps.
Discuss results of the audit of the lending function with senior management,
structuring inquiries in such a manner as to:
Elicit management responses for correction of deficiencies.
Mortgage Lending Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if the credit union’s policies, practices, procedures, and internal controls for its
mortgage lending activities are adequate.
To document if mortgage lending activities are in compliance with applicable laws, rulings,
and regulations.
To verify if credit union officers are operating in conformance with the established guidelines
and following appropriate management practices.
To ascertain management’s financial performance expectations for the mortgage lending
operation and determine if its practices are consistent with those expectations.
To establish if adequate measures are being taken to protect against interest rate, price,
and other risks.
To establish if the credit union’s mortgage production and acquisition activities result in
mortgage loan inventory and servicing that is of high quality and marketability.
To evaluate if servicing functions are being performed properly and if mortgage servicing
assets are managed and accounted for correctly.
To initiate corrective action when policies, practices, procedures, or internal controls are deficient or when violations of law, rulings, or regulations have been noted.
AUDIT PROCEDURES
Date
Completed
Review the following documents:
Previous audit reports and related work papers on mortgage lending.
Date
Completed
External CPA reports.
Internal memorandum and management reports on the mortgage lending
program since the previous audit.
Briefly review information about the department’s financial performance to
gain a basic understanding of assets and liabilities.
Review the types of products offered:
Assess whether there is an overreliance on one product type or a concentration in one or two geographic areas.
Determine if there are any material changes in types of products, underwriting criteria, production and servicing volume, and market focus.
Review credit union policies and procedures regarding mortgage lending activities. Listed here are broad policy requirements:
Defined permissible mortgage lending activities
Individual officer and employee responsibilities
Lending limits
Segregation of duties
Determine if credit union policies, procedures, and strategies of other functional areas (e.g., liquidity, funds management) consider mortgage lending
activities.
Document if management adheres to policy guidelines.
Review the process for granting exceptions to policy guidelines.
Assess the quality of board reporting by reviewing a sample of board reports.
Board reports should include or convey the following information in sufficient detail, given the size and complexity of the department:
Date
Completed
Operating results (financial performance, efficiency, and cost information)
Asset quality trends (delinquencies, charge-offs, foreclosures, collection accounts)
Production volume
Inventory agings
Liquidity and capital needs
Industry and peer group performance statistics
Policy and operating procedure exception reports
Processing backlog
Market values of servicing rights
External CPA audits assessing the effectiveness of control procedures
Verify if a separate board committee for mortgage lending activities exists,
and review committee minutes, if applicable, for significant information.
Ascertain if the experience, technical knowledge, and administrative capabilities of management are sufficient for mortgage lending operations. The
assessment can be accomplished through the following activities:
Reviewing compliance with governing policies
Reviewing performance indicators (backlogs, delinquencies, costs, profitability)
Review the mortgage lending strategic plan and planning process:
Determine if goals are reasonable, attainable, and complement the credit
union’s overall business plan.
Document if management considers external influences when establishing
Date
Completed
objectives and methods to achieve those objectives.
Verify if the credit union has the infrastructure, such as sufficient personnel, data processing, expertise, and financial capacity, to meet stated
objectives.
Ascertain if management depth and succession plans are adequate to ensure
continued profitability and viability of mortgage activities.
Review management information systems (MIS) as they relate to mortgage
lending operations:
Assess whether the system has the capacity to handle existing volume
and activities, as well as projected strategies and objectives.
In conjunction with reviewing board reports, determine if the MIS is capable of producing all necessary reports. The reports should accomplish
the following goals:
Identify closed loans as either held to maturity or held for sale.
Segregate loans by product type, identifying the dollar amount and
percentage of total loans for each type.
Monitor the volume of loan applications throughout the originating process.
Monitor the status of delivery commitments to investors.
Reflect the department’s daily position.
Review the most recent engagement letter to determine if mortgage lending
activities are included in the CPA examination scope.
Review the most recent external examination report, management letter findings, and management’s response to its contents.
Determine if management establishes and implements an effective quality
control program and ascertain if the quality control program meets investor guidelines. (Certain investors like Freddie Mac and Fannie Mae require
Date
Completed
10 percent of closed loans to be reviewed.)
Verify if the quality control program findings are clearly documented and presented to the board and senior management.
Establish if the quality control function is independent from the production
process.
Evaluate if procedures exist to detect and investigate suspected fraudulent
activity and to issue related management reports.
Review the guidelines for the loan production area. The guidelines should
address the following areas:
Types of loans that will be originated or purchased
Sources from which the loans will be acquired
Underwriting standards
Review organization charts to determine the structure of the production function.
Determine the level of and reasons for nonconforming or unsalable loans.
The following should exist:
These loans do not present undue risk.
Management is monitoring the quality and delinquency trends of these
loans.
Document the methods used to compensate loan officers and whether loan
officers can alter established pricing parameters.
Review the qualifications and experience levels of underwriters.
Determine if loan officers notify management of withdrawn mortgage applications and the reasons for withdrawal.
Evaluate how management plans for peak volume periods.
Date
Completed
Determine how management monitors loan officers’ adherence to underwriting guidelines.
If underwriting is done in-house, document if management establishes approval limits, develops exception procedures for loans that are rejected or
suspended, and receives reports tracking loan quality for each underwriter.
Evaluate procedures for closing loans. Determine if management requires
that necessary documents are obtained before funds are released.
Evaluate management’s controls over the loan funding process.
Review the marketing programs used to sell mortgages to investors. Review
and assess the volume of sales under these programs.
Review a sample of larger investor master sales commitments and determine
the amount, maturity, and terms of the commitments.
Determine if the credit union has been able to meet mandatory sales commitments.
Review a sample of sales contracts to determine if the credit union has any
continuing recourse to the purchaser beyond normal representations and
warranties. If the credit union is selling loans with recourse, determine if
the credit union has adequate management information systems to track
all recourse obligations.
Review the written policies and procedures for mortgage loan servicing. Determine if they adequately cover all facets of the servicing operations.
Review a sample of investor account reconcilements. Determine if the following controls are in place:
Each investor account is reconciled at least monthly.
Outstanding items are resolved in a timely manner, and management
regularly charges off stale, unreconciled items.
Date
Completed
A supervisor reviews and approves the reconcilements.
Review the most recent management reports in which the operating results
for the servicing unit are described.
Review the most recent analysis of servicing revenues and cost for different
product types:
Determine if cost estimates are done on any average or incremental basis.
Assess the servicing unit’s current and projected profitability. Determine if
management has analyzed profitability on a product-by-product basis
and how this analysis is factored into strategic decisions.
Determine if the cost analysis includes all direct and indirect servicing expenses.
Review the list of outside vendors and subservicers employed by the credit
union. Determine how management assesses the quality of work performed by outsiders.
Determine if complaints are appropriately resolved. Review significant complaints to ascertain if there are possible internal control deficiencies.
Document the number and dollar volume of delinquent loans the credit union
has purchased from the servicing portfolio, if any.
Evaluate the asset quality of the servicing portfolio (review delinquency reports).
Verify the extent to which mortgage servicing rights (MSRs) are reviewed by
the external CPA firm and if examinations are adequate and all pertinent
issues are addressed.
Review management’s procedures for initially recording, amortizing, and periodically revaluing MSRs. The procedures should address the following
areas:
Date
Completed
Methods for assigning a relative fair value to each MSR asset, specifically,
assumptions used to derive fair value
Methods for amortizing the book value of each MSR over its estimated life
Systems for documentation and recordkeeping
Requirements for ongoing supervision of MSRs
Procedures to ensure compliance with accounting and regulatory requirements, investor criteria, and internal policies
Procedures to ensure that the market price or valuation assumptions used
for the impairment analysis are current and reflect expected levels of
mortgage prepayments and market discount rates
Process to determine if adjustments should be made to the valuation allowance account as a result of impairment analysis
Review policies and procedures for collecting delinquent loans to:
Determine if collection efforts follow investor guidelines.
Determine if the credit union documents all attempts to collect past-due
obligations.
Verify if the credit union charges off uncollectible balances in a timely
manner.
Review the mortgage department’s balance sheet and income statement.
Research items that are large relative to the department’s operations or
that pose undue financial risk for other reasons.
Review any senior officer compensation arrangements that are tied to the department’s profitability.
Assess earnings performance of the mortgage banking activities in terms of
the level, composition, and trend of net income. Consider growth plans, interest rates, and the economic environment when evaluating earnings
Date
Completed
trends.
Incorporate ratio and industry comparisons into the earnings analysis where
appropriate.
Review management’s determination of the mortgage department’s liquidity
needs, considering loans in the pipeline.
Determine whether liquidity sources are adequate for current conditions and
project funding needs.
Determine whether the credit union’s capital levels are adequate to meet minimum requirements set by investors whose loans are serviced. Also, determine if capital is adequate to absorb operating losses and support unexpected growth.
Reconcile OREO held in the mortgage banking operations area. Implement
standard OREO review procedures if volume is significant.
Mortgage Banking Program Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To review the general management of the credit union’s mortgage banking operation to determine if it is operating in a safe and sound manner.
To determine if the credit union is making any of the common mistakes or is operating in
any of the common problem areas highlighted in this audit.
AUDIT PROCEDURES
Date
Completed
Review the organizational chart for mortgage banking activities. Determine
whether decision making is centralized or delegated, and to what extent.
Determine who is responsible for major decisions and where final authorities rest. Obtain and review the board of directors and committee minutes
for significant information.
Determine whether the board of directors and senior management have written policies and procedures defining permissible activities, individual responsibilities, and risk limits. Determine the policy-making process and to
what degree policies are followed. Determine if these policies and procedures ensure compliance with generally accepted business standards,
laws, and regulations.
Review the strategic plans for both the credit union and for the mortgage
banking activities to determine if they are compatible, reasonable, and
achievable.
Assess management quality and depth, and review succession plans and
their practicability.
Date
Completed
Review the mortgage banking unit’s financial performance. Determine whether there is a separate profitability analysis for the mortgage banking operation or whether it is commingled with the credit union’s performance.
Determine if there is a comprehensive risk management system in place. Determine to what extent simulation modeling is employed.
Obtain a copy of the latest external audit to determine whether:
The controls related to mortgage banking operations are rated “effective”
or better.
Management has addressed in a timely manner the weaknesses noted in
external audit reports.
These audit reports disclose any significant risks that require immediate
enforcement action.
Locate investor sales and servicing manuals. Determine if those manuals are
up-to-date, if they are easily accessible to the origination and servicing
staffs, and if they are, in fact, being used.
Assess current business volume in relation to personnel, physical facilities,
and management information system (MIS) equipment and software. Determine the adequacy and feasibility of these areas in conjunction with future plans.
Determine if mortgage banking is integrated into the credit union’s overall asset/liability management activities.
Review management’s process for planning new products. Determine to what
degree member needs and wants are considered, if financial projections
and risk analyses are made, and if legal opinions are obtained.
Review MIS to determine their usefulness in evaluating and monitoring mortgage banking activities:
Determine the adequacy of MIS and operating systems to supervise current operations.
Date
Completed
Evaluate MIS reports for sufficient detail, accuracy, and timeliness.
Evaluate management’s and the board’s knowledge and understanding of
the systems.
Determine the use of the MIS data in the decision-making process.
Ascertain whether the mortgage lenders have recently been put on probation,
suspended, or had their approval revoked as a seller or servicer for FHA,
VA, FNMA, FHLMC, GNMA, private investors, or any PMI companies. Determine if they have since been reinstated.
State your findings and conclusions, as well as appropriate recommendations
for any necessary corrective measures, on the appropriate work papers
and report pages.
Mortgage Banking Profitability Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To measure the profitability of the mortgage banking operations in order to determine if they
are sufficient to justify the relatively high risks of the operation.
To determine if the salaries paid to the mortgage banking personnel are excessive or inadequate.
To determine the effect of the subsidiary and affiliate mortgage operations on the profitability and safety of the credit union.
AUDIT PROCEDURES
Date
Completed
Determine what type of mortgage banking operation the credit union is operating: creating an off-balance sheet servicing portfolio and recording servicing fees as received.
Review the previous report audit and all mortgage banking operation-related
exceptions noted and determine if management has taken appropriate corrective action.
Gather all profitability tracking reports prepared by the credit union that distinguish mortgage banking revenues and expenses.
Separate origination costs into fixed and variable in order to determine the ability of the credit union to reduce overhead expenses (salary and premises) if
originations decline sharply.
Review the salaries and other compensation of the mortgage banking personnel to the average costs. Then determine whether:
Date
Completed
The mortgage banking personnel have greater compensation than others
in the mortgage banking industry.
The compensation of mortgage banking personnel is tied to performance,
avoidance of risk, and long-term profitability as well as volume.
The number and cost of mortgage banking personnel can be varied according to cyclical needs.
Annual bonuses and total compensation of executive management are tied
to long-term profitability.
Total mortgage banking compensation is reviewed by the credit union
board or an outside group to make sure that it is comparable to the
mortgage banking industry.
Determine the relationships of any mortgage banking affiliates (CUSOs) with
the credit union. Assess whether those operations are permitted under
regulations. Assess whether:
Their operations are practically and visibly separate as well as legally separate.
All transactions are covered by written agreements and are at market comparable prices and terms.
The credit union is not providing any guarantees or other forms of credit
support.
The mortgage banking operation is not dumping mortgages into the portfolio that it cannot sell into the secondary market without losses.
Calculate the overall benefit/expense of the affiliate to the credit union using
market prices:
Determine the yield for the funds invested.
Determine if that yield is adequate for the risks taken by the credit union
from its initial investment and from continuing operations.
Date
Completed
Measure the reports from the mortgage banking operation of the credit union
against the appropriate mortgage banking reports with particular attention
to the expense coverage ratio and the off-balance sheet value of servicing
report. Then determine:
The rough percentage of the credit union’s operations that are related to
mortgage banking.
The percentage of the mortgage banking operation to the overall profitability/losses.
The other core income of the credit union.
The yield on mortgage banking activity for the funds invested.
If mortgages are originated for sale to a correspondent, the profitability and
dangers to the credit union.
The other significant risks of the credit union’s mortgage banking operation.
Whether the total profits vs. total risks are appropriate for the core earnings
and the capital level of the credit union.
Mortgage Banking Production Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To assess the quality control, internal controls, and risks of the credit union mortgage banking production area.
To review the correspondent mortgage banking relationships for areas of risk.
AUDIT PROCEDURES
Date
Completed
Review organization charts to determine the structure of the production function and its status within the credit union. Verify that the underwriting and
quality control units are independent functions.
Review the previous report of examination and all mortgage banking production-related exceptions noted and determine if management has taken
appropriate corrective action.
Determine the types of mortgage products offered and the credit union’s target markets. Evaluate portfolio trends for overreliance on one product type
and undue concentrations in one geographic area.
Review policies and procedures for retail origination and the extent to which
they are being followed. Review the mortgage pricing policies for reasonableness and responsiveness to changes in the secondary mortgage
market.
Determine if the credit union:
Has become excessively reliant on production income.
Date
Completed
Has excessive amounts invested in fixed assets for production.
Is originating a level of unsalable or nonconforming mortgages that is excessive.
Has interest-rate lock-in periods that are excessively long.
Determine whether commercial or multifamily mortgages are originated without specific written commitments. Determine if large commercial or multifamily mortgages are closed before the investor purchase.
Review policies and procedures for wholesale purchases. Determine purchase pricing policies and compare them to market prices. Determine
whether purchase agreements are utilized and if they are adequate. Determine if the credit union has become excessively exposed to anyone or
to correspondents.
Review the method for approving mortgage brokers and specific programs
under which mortgages are purchased. Determine whether there is an
approved list of brokers; how it is updated; and how exceptions are made
to the list, by whom, and under what authority.
Review the list of wholesale sources of mortgages. For each source, determine if the following were reviewed prior to purchases:
References
Credit report
Financial and operating statements
HUD/FNMA/FHLMC/GNMA/PMI status
Delinquency, default, and foreclosure rates and trend
Documentation deficiencies
Nondelivery and history of other problems
Determine if individual wholesale purchases are re-underwritten at delivery. If
Date
Completed
so, determine whether funding is delayed until re-underwriting is complete.
Determine if wholesale purchases are tracked by seller and if any seller has
excessive delinquency, default, or documentation errors. Determine if
those mortgages are repurchased or corrected by the sellers.
Determine how MIS tracks mortgages through all the phases of mortgage
production and if these systems are adequate. Determine if the mortgage
type and production channel are tracked. Determine if exception reports
are generated and monitored by management.
Evaluate procedures, checklists, and systems for closing mortgages. Determine if:
Checklists are carefully observed.
All required documents are obtained from the borrower before funds are
disbursed.
Suspense reports are prepared and monitored.
Determine if Fannie Mae and Freddie Mac approved documents are used.
Determine if the escrow accounts and closing documents conform to
RESPA requirements and limitations.
Review the post-closing procedures and determine if missing checklist items,
final recorded mortgages, and final mortgage title policies (without serious
exceptions) have been obtained.
Review the quality control function and determine if it meets investor guidelines for scope, timeliness, content, and independence and if it covers
both retail and wholesale production.
Review a sample of reports issued by the quality control unit to determine if
conclusions are adequately documented and communicated to management of the credit union in a timely manner.
Determine if follow-up is performed by the quality control unit to ensure
prompt and satisfactory correction of noted deficiencies and weaknesses
Date
Completed
in the retail origination process.
Determine if the quality control group samples wholesale purchases and if
that sampling is adequate to protect the credit union. Determine the exceptions noted and whether they have been corrected.
Determine if the fraud unit promptly investigates and effectively resolves fraud
referral cases and that criminal referrals are promptly submitted. Review
the effectiveness of the fraud unit’s training program.
Evaluate the credit union’s early warning system for detecting potential fraud
and if management information systems (MIS) are adequate in this area.
Ensure that the objectives have been met. State your findings and conclusions, as well as appropriate recommendations for any necessary corrective measures, on the appropriate work papers and report pages.
Mortgage Banking Secondary Marketing Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if secondary marketing policies, procedures, and practices are adequate to
effectively hedge the pipeline and warehouse at reasonable risk levels.
To determine the amount of mortgage sales involving recourse or partial recourse.
To determine the adequacy of tracking systems to monitor pipeline and warehouse mortgages and their changing effect on the overall interest rate risk (IRR) of the credit union.
AUDIT PROCEDURES
Date
Completed
Determine if the board has adopted written polices and procedures governing:
Separation of mortgages awaiting sale from those going to the credit union portfolio.
Tracking and obtaining missing mortgage documents.
Responsibilities for sale and delivery of mortgages.
Generation and review of reports for warehouse reconciliation; inventory
aging and turnover; and fallout.
Employees authorized to engage in trading activities.
Review the previous report of audit and all secondary market-related exceptions noted and determine if management has taken appropriate corrective action.
Obtain lists of all mortgage sale transactions for the previous 12 months and
Date
Completed
determine:
If mortgages are sold with full or partial recourse provisions or other special features, such as guaranteed yields.
The amount of credit risk caused by these sales and the amount of the actual losses.
If these recourse sales are properly reported, identified, and accounted for
on internal documents.
Determine the types of mortgages originated that are sold to the credit union
and those that are sold to investors.
Determine if sales to the credit union match investment needs and historical purchase types and amounts. Examine procedures for transferring
mortgages from the held-for-sale portfolio to the held-for-investment
portfolio to ensure that the credit union is not originating and keeping
unsalable mortgages (i.e., below the standards of the secondary marketing organizations).
Review the most recent audits from Fannie Mae, Freddie Mae, Ginnie Mae,
HUD, and any private conduits to determine if those organizations have
concerns or if remedial action has been taken by them to correct origination, marketing, shipping, or other errors or problems.
Determine management’s strategy for funding its mortgage pipeline and
warehouse:
For external credit agreements or lines of credit, review the rates and
terms, documentation requirements, and funding mechanics.
If credit arrangements are with an affiliate, ensure that all credit agreements are well documented.
Determine the methods used to price mortgages originated for sale. Review
the profitability objectives of the secondary marketing division and determine if its mortgage pricing is consistent with such goals.
Date
Completed
Compare the most recent filing to the credit union internal mortgage pipeline
reports for the same day:
Verify notional amounts, origination/discount fees, and rates for optional
commitments to originate mortgages.
For firm commitments to purchase, sell, or originate mortgages verify notional amounts, rates, and prices.
Option commitments to purchase or sell mortgages or mortgage-based
securities (MBSs) (including exchange-traded or over-the-counter calls
and puts on MBSs).
Verify notional amounts, days until expiration, coupon or pass-through
rates, and prices.
Determine if the exposure (or coverage) rate limits approved by the board
have been followed in practice. Determine if the exposure rate and any
changes are coordinated with the credit union’s overall risk management.
Determine if there is a policy limiting the total amount receivable from anyone
investor. Does the credit union diversify its risk by dealing with various investors?
Evaluate the overall policies, procedures, and controls for secondary marketing activities to determine if:
Commitments to deliver mortgages are periodically compared to volume
authorizations for each investor.
Profit and loss records for individual transactions are periodically reconciled to general ledger accounts.
Post-closing documentation tracking systems are in place.
Procedures are in place to ensure that mortgage pools are certified in a
timely manner.
Determine if risk limits for individuals and the entire operation are reasonable
Date
Completed
and supported by written analyses. Determine if the amount of risk approved by the board for the secondary marketing area is safe and sound
for the size and capital level of the credit union.
Review the daily mark-to-market procedures and assess the adequacy of the
methods used to determine the gains or losses on pipeline activities.
Make a determination of whether the secondary marketing policies, procedures, and practices are adequate to protect the mortgage banking operation and the credit union. If not, determine corrective measures needed.
Ensure that the objectives have been met. State your findings and conclusions, as well as appropriate recommendations for any necessary corrective measures, on the appropriate work papers and report pages.
Mortgage Banking Servicing Review
(Core Analysis)
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To assess the adequacy of the servicing systems and internal controls.
To determine the profitability and risks of the mortgage servicing operation.
To assess the accuracy of the assets reported as regulatory capital.
AUDIT PROCEDURES
Date
Completed
Determine the characteristics of the servicing portfolio paying specific attention to the investors (Ginnie Mae, Fannie Mae, Freddie Mac, private), the
types of mortgages, the delinquency rates including 30-day delinquencies,
the amount of mortgages in foreclosure, and the amount of REO.
Review the previous report of audit and all servicing-related exceptions noted
and determine if management has taken appropriate corrective action.
Obtain the organization chart and determine the experience and qualifications
of key servicing personnel. Evaluate whether they can adequately handle
the amounts and types of servicing.
Review the most recent set of management reports outlining operating results
for the servicing unit. Determine if the detail is sufficient for management.
Review the most recent analysis of servicing costs per mortgage for each
mortgage type and determine if the analysis includes all marginal, fixed,
overhead, management, and indirect servicing costs. Determine if marginal costs are calculated for servicing and if it excludes overhead and
Date
Completed
fixed expenses. Estimate the servicing operation’s current and future profitability.
Determine if the credit union assesses the financial capacity of all servicing
sellers, private guarantors, and major subservicers annually.
Review sales and purchases of servicing since the last audit to:
Determine whether the board of directors approved these transactions in
advance.
Assess the adequacy of due diligence activities performed prior to funding
bulk purchases or sales.
Determine whether servicing sales and purchases have been with or without recourse and whether there have been any implied, partial, or verbal recourse agreements.
Verify that comprehensive sales and servicing agreements are maintained
for each purchase and sale.
Verify that a disaster recovery plan is in place that covers all major servicing
and subservicing functions.
Review available audit reports from private investors, Fannie Mae, Freddie
Mac, Ginnie Mae, FHA, VA, and state agencies to determine if violations
of their servicing policies have been found and then determine if those violations have been corrected. Determine if the credit union meets or is in
danger of failing these agencies’ requirements for custodial accounts.
Evaluate the safeguards for holding mortgage documents. Determine if the
documents are kept in a secure area. Determine whether an adequate
documentation tracking system exists.
Review the procedures for receiving payments, accounts, disbursing payments to investors, escrows and payoffs, depositing those funds into separate custodial accounts, and disbursing those payments to investors to:
Evaluate if cashiering systems for the receipt of payments are adequately
Date
Completed
safeguarded from fraud, accidental errors, and misuse of funds.
Assess if the duties and access to custodial accounts are properly segregated.
Determine if systems are in place to ensure timely payments to investors.
Determine if custodial accounts are reconciled on a timely basis.
Ensure that funds are in financial institutions acceptable to the investors.
Determine whether adequate controls exist over disbursements from custodial accounts.
Determine if a monthly report is sent to each investor that details principal,
interest, and escrow collections from each mortgagor, delinquency
rates, foreclosure actions, principal balances, and escrow disbursements and balances.
Review the escrow policies and practices and the method for determining the
required escrow amount. Determine whether escrows comply with RESPA
(12 USC 2609) limits on escrow accounts and that the servicer is using
the aggregate method for escrow calculations. Determine whether an adequate annual statement showing the method of escrow correction is sent
to the mortgagor.
Review the system for ensuring the timely payment of taxes and insurance
and evaluate its effectiveness. Determine the volume of mortgages without escrows and determine how each mortgage’s tax and insurance are
kept current. Determine if there is adequate coverage under a blanket or
errors and omissions insurance policy to cover against uninsured property
losses and tax penalties.
Review policies and procedures for collecting late payments to:
Determine when collection efforts start (other than late notices).
Verify that the credit union documents all collection events.
Date
Completed
Determine if collection practices agree with the servicing agreement and
comply with applicable laws and regulations.
Determine if late charge collections are in compliance with the servicing
agreement, the mortgage, and state law.
Review a sample of delinquency reports for loans 121 days delinquent to:
Determine if foreclosure proceedings are started in a timely manner.
Determine if PMI companies are promptly notified of foreclosure actions.
Verify that forbearance agreements and payment plans are documented.
Determine that property inspections are performed promptly.
Verify that foreclosure practices comply with investor guidelines.
Review investor, late charge, and escrow advances/receivables to:
Evaluate their collectability.
Determine if reimbursement claims are sent to investors promptly.
Determine the average foreclosure costs for each mortgage type.
Determine if foreclosure and late charge loss reserve accounts are adequate and charged on a timely basis.
Verify that uncollectable advances, other charge-offs, recoveries, and expenses are charged directly to the reserve in a timely manner.
Determine the number and dollar volume of delinquencies repurchased prior
to investor requirements, evaluate the control and reporting systems in
place to limit this practice and evaluate its net effect on profitability.
Determine if the investigation of prospective, new, unknown, or unregulated
servicers and subservicers is adequate to protect the credit union. Determine if sale and servicing agreements are adequate.
Date
Completed
Determine the number and dollar volume of REO by geographic location,
evaluate regional concentrations, compare the volume of REO with historical levels and industry averages, and evaluate the impact of REO on profitability.
Review the polices, procedures, and actual practices for REO and investor
owned real estate property supervision, accounting, and marketing to ensure that they are consistent with investor requirements.
Determine if the credit union has implemented a quality control program for
the servicing unit and evaluate its effectiveness.
Determine if the servicer’s monthly bank statements and remittance reports
are checked and reconciled. Determine if other audit steps are taken
monthly.
Determine if the credit union annually:
Checks to verify that the servicer’s continued approval with the agencies
and PMI companies is maintained.
Analyzes the servicer’s financial statements.
Verifies that insurance and bond coverage remains in effect.
Verifies mortgages and balances by direct mail to borrowers.
Checks the servicer’s reported levels of delinquency and prepayment for
the credit union’s portfolio.
Verify that an independent appraisal is obtained annually for the credit union
with an excess of 25 percent of core capital that meets the independence
and fair market value requirements. Review the valuation to determine if:
It is being performed by qualified appraisers.
Economic value was reported instead of fair market value.
The prepayment speeds used in the analysis are adequately supported.
Date
Completed
Prepayments are measured by PSA, CPR, or the FHA tables.
The discount rates were comparable to the market on the appraisal date.
Servicing cost estimates were comparable to market costs.
The mortgages are segregated into types and interest rate segments.
The escrow inflation rate is realistic.
Transfer and due diligence costs are deducted.
Obtain copies of the most recent quarterly internal calculations of market value. Reconcile these amounts to the values reported on the general ledger:
Select a sample of calculations for review. The sample should represent a
cross section by mortgage type and interest rate, and should include
FHA/VA mortgages, fixed-rate conventional mortgages, ARMs, and mortgage pools with interest rates near market rates as well as above market
rates.
To ensure that the assumptions used in the internal valuation process are
valid, employ the steps in number 24 above. Review the delinquency
rates to determine if they are comparable to the averages reported.
Any other atypical characteristics should be properly reflected in the
valuations.
As a test-check, compare the assumptions in the most recent independent
appraisal and the internal valuations. Any material deviations should
be adequately supported.
If no material deficiencies are noted with respect to the model assumptions, select a small sample for calculation. A sample of one government and one conventional mortgage package should be chosen for
the initial review. If the model produces results similar to those reported by the credit union, no further review is necessary. If material deviations exist, however, the sample should be expanded to determine the
extent of any overstatement.
Date
Completed
In the event that a material overstatement is discovered, the credit union
should be required to recalculate the value with more appropriate assumptions, obtain an independent valuation, or write down the value
for regulatory capital purposes.
Interest on Loans Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To evaluate the quality of the credit union’s compliance management system for interest on
loans.
To document the reliance that can be placed on the credit union’s compliance management
system, including internal controls and procedures performed by the employeeresponsible
for monitoring the credit union’s compliance review function for interest on loans.
To verify the credit union’s compliance with interest on loans.
To initiate corrective action when policies or internal controls are deficient or violations of
laws or regulations are identified.
AUDIT PROCEDURES
Date
Completed
Through discussions with management and review of the following documents, ascertain whether the credit union’s internal controls are adequate
to ensure compliance in the area under review. Identify procedures used
daily to detect errors and violations promptly. Also review the procedures
used to ensure compliance when changes occur (e.g., changes in interest
rates, computation methods, software programs).
Organizational charts
Process flow charts
Policies and procedures
Loan documentation and disclosures
Date
Completed
Computer programs
Analyze compliance review work papers and determine whether steps are
taken to follow up on previously identified deficiencies:
The procedures used include samples that cover all product types.
The work performed is accurate (confirm by reviewing a sample of transactions).
Significant deficiencies and their root causes are included in reports to
management and the board.
Corrective actions are timely and appropriate.
Work papers are reviewed at appropriate intervals.
Determine if the credit union has extended mobile home loans. If applicable,
review the contracts and disclosures for those mobile home loans to determine whether:
The rebate is calculated on the actuarial method or one at least as favorable as that method.
No prepayment penalty is imposed.
Late charges are disclosed and assessed accurately.
Deferral fees are disclosed and assessed accurately.
The notice before repossession, foreclosure, or acceleration is delivered
to the borrower 30 days before action is taken.
The form contains a repossession notice.
If the violation noted represents a pattern or practice, substantiate the root
cause by identifying weaknesses in internal controls, compliance review,
training, management oversight, or other factors.
Identify action needed to correct violations and weaknesses in the credit un-
Date
Completed
ion’s compliance system, as appropriate.
Establish whether any items identified during the examination could materialize into a regulatory concern before the next on-site examination (consideration should be given to any planned increase in activity in this area,
personnel changes, policy changes, changes to outside auditors, and
changes in business strategy).
Mortgage Banking Servicing Review (Extended Analysis)
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To provide more detailed review of mortgage banking servicing.
AUDIT PROCEDURES
Date
Completed
Determine the number and dollar volume of REO by geographic location,
evaluate regional concentrations, compare the volume of REO with historical levels and industry averages, and evaluate the impact of REO on profitability.
Review the polices, procedures, and actual practices for REO and investorowned real estate property supervision, accounting, and marketing to ensure that they are consistent with regulators instructions and investor requirements.
Determine if the credit union has implemented a quality control program for
the servicing unit and evaluate its effectiveness.
Determine if the servicer’s monthly bank statements and remittance reports
are checked and reconciled. Determine if other audit steps are taken
monthly.
Determine if the credit union annually:
Checks to verify that the servicer’s continued approval with the agencies
and PMI companies is maintained
Analyzes the servicer’s financial statements
Date
Completed
Verifies that insurance and bond coverage remains in effect
Verifies mortgages and balances by direct mail to borrowers
Checks the servicer’s reported levels of delinquency and prepayments for
the credit union’s portfolio against reported national averages
Verify that an independent appraisal is obtained annually for credit unions
within excess of 25% of core capital that meets the independence and fair
market value requirements. Review the valuations of to determine if:
They are being performed by qualified appraisers
Economic value was reported instead of fair market value
The prepayment speeds used in the analysis are adequately supported
The discount rates were comparable to the market on the appraisal date
Servicing cost estimates were comparable to market
The mortgages are segregated into types and interest rate segments
The escrow inflation rate is realistic
The reinvestment interest rates conform to the Treasury yield curve
Transfer and due diligence costs are deducted
The value of hedges are not included
The valuation conforms to guidelines
Obtain copies of the most recent quarterly internal calculations of market value. Reconcile these amounts to the values reported on the general ledger.
Select a sample of calculations for review. The sample should represent a
cross section by mortgage type and interest rate, and should include
FHA/VA mortgages, fixed-rate conventional mortgages, ARMs, and
mortgage pools with interest rates near market rates as well as above
Date
Completed
market rates.
To ensure that the assumptions used in the internal valuation process are
valid, employ the steps in No. 6 above. Review the delinquency rates
to determine if they are comparable to the averages reported in the
MBA Delinquency Survey. Any other atypical characteristics should be
properly reflected in the valuations.
As a test-check, compare the assumptions in the most recent independent
appraisal and the internal valuations. Any material deviations should
be adequately supported.
If no material deficiencies are noted with respect to the model assumptions, select a small sample for calculation. A sample of one government and one conventional mortgage package should be chosen for
the initial review. If the model produces results similar to those reported by the credit union, no further review is necessary. If material deviations exist, however, the sample should be expanded to determine the
extent of any overstatement.
In the event that a material overstatement is discovered, the credit union
should be required to recalculate the value with more appropriate assumptions, obtain an independent valuation, or write down the value
for regulatory capital purposes.
Residential Real Estate Lending Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if the established policies, procedures, and strategic plans regarding residential real estate lending adequately address safety and soundness, and compliance with laws
and regulations.
To ascertain if credit union officers and employees conform with established guidelines.
To evaluate if the management reports provide accurate and necessary information to assist management and the board in fulfilling their responsibilities.
To initiate corrective action when deficiencies exist that could affect safety and soundness,
or when noncompliance to law and regulations are identified.
AUDIT PROCEDURES
Date
Completed
Determine the extent that the credit union is engaged in secondary mortgage
market activities (e.g., mortgage servicing, warehousing operations, and
loan origination for resale).
Verify whether the credit union engages in subprime lending in this area or
plans to in the future. If subprime lending exists or is planned, consider the
subprime lending examination procedures in conjunction with these guidelines.
Ascertain if one- to four-family real estate mortgage lending policies, procedures, and practices are adequate and appropriate for the size and nature
of the credit union’s real estate lending activities.
Establish if the loan policy contains a general outline, or if there is a spe-
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cific residential real estate loan policy, setting forth the way in which
real estate mortgage loans are to be originated, serviced, and collected. In particular, credit union policies on real estate lending should:
Establish a loan portfolio diversification policy and set limits for real estate loans by type.
Establish prudent loan-to-value ratios and guidelines for when mortgage insurance or additional collateral is required. (For loans
where the loan-to-value ratio exceeds 90 percent at origination, a
credit union should require appropriate credit enhancement in the
form of either mortgage insurance or readily marketable collateral).
Individual loans, of significant size, in excess of supervisory loanto-value limits should be reported to the board.
The aggregate of loans in excess of supervisory loan-to-value limits should be reported to the board at least quarterly.
Aggregate loans in excess of supervisory loan-to-value limits
should not exceed 100 percent of total capital.
Establish loan administration procedures. (Note: Loan administration procedures and documentation requirements may be separate from, but
still referenced by, the loan policy.) These procedures should cover:
Application and financial statement requirements, including procedures
to verify information provided by the borrower.
Frequency of financial information on income producing properties.
Loan closing and disbursement.
Payment processing.
Escrow administration.
Collateral administration.
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Loan payoffs.
Collections and foreclosure, including:
Delinquency follow-up procedures.
Foreclosure timing.
Extensions and other forms of forbearance.
Acceptance of deeds in lieu of foreclosure.
Claims processing.
Servicing and participation agreements.
Establish prudent real estate appraisal and evaluation programs consistent with appraisal regulations.
Management should monitor conditions in the residential real estate markets
in its lending areas so that it can react quickly to changes in market conditions. However, the credit union’s trade area may not necessitate sophisticated monitoring. If information is readily available, evaluate if management adequately monitors and has a general understanding of the following market conditions:
Economic indicators, including population and employment trends.
Zoning requirements.
Current and projected vacancy, construction, and absorption rates.
Current and projected lease terms, rental rates, and sales prices, including concessions.
Current and projected operating expenses for residential property.
Valuation trends, including discount and direct capitalization rates.
Speculation through new construction or investments in existing struc-
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tures.
Review the credit union’s accounting for one- to four-family residential mortgage loan fees, points, and costs to determine if the practices are consistent with accounting standards.
Substantiate escrow analysis reports to determine the adequacy of escrow
accounting and the status of property tax payments and escrow advances
by the credit union to cover delinquent property taxes.
Confirm the status of mortgage insurance claims to determine collectibility.
(Note: Consider the credit union’s compliance with the procedures imposed by government or private mortgage insurance companies for filing
claims.)
Review the loan files for the maintenance of appropriate documentation:
Determine if the following loan documents are on file:
Application
Credit report
Mortgage (or deed of trust)
Note
Attorney’s opinion or title insurance
Appraisal or collateral evaluation
Evidence of appropriate insurance (property, liability, flood)
Commitment letter (the final signed version)
Settlement sheet (HUD-1)
Validate if real estate loan credit files contain sufficient information regarding
additional pledged collateral or credit enhancements.
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Authenticate the residential real estate loan portfolio for significant exposure
in soft or declining markets and evaluate management’s efforts to mitigate
increased risks.
Analyze if loans meet secondary market guidelines.
Prepare comments regarding deficiencies or violations of law for inclusion in
the audit report.
Prepare appropriate write-ups for the report of audit.
Update work papers with any information that will facilitate future audits.
One- to Four-Family Residential Real Estate Lending Review
(Core Analysis)
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To evaluate the one- to four- family residential loan portfolio for credit quality and risk.
To determine if the credit union’s lending policies regarding real estate lending activities are
adequate, and appropriate to the size and complexity of the credit union’s lending operations.
To assess management’s and lending personnel’s conformance with established policies
and guidelines, and compliance with applicable laws and regulations.
To determine if the credit union’s risk management practices and internal controls regarding
residential real estate lending activities are adequate.
To initiate corrective action as appropriate.
AUDIT PROCEDURES
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Review findings to determine whether the loan policies and procedures include guidance related to the types of one- to four- family residential lending programs the credit union offers, and whether the portfolio risk management practices and internal controls adequately address these programs.
Verify that the lending policies and practices are consistent with the regulations and appropriate for the nature and risk of the real estate lending activities conducted.
Review loan portfolio performance, identify performance concerns, and determine whether additional review is needed to assess any performance
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concerns.
Identify any new lending activities, programs or strategies to evaluate as part
of this review.
Review any prior audit reports and all lending related exceptions noted, and
determine if management took appropriate corrective action.
In conjunction with the board and management report reviews, ascertain if
any problems or concerns regarding real estate lending were noted.
Review MIS reports related to one- to four- family residential lending to identify potential areas of concern and to assess the adequacy of reporting to
the board and management on the performance of the real estate portfolio
(trends, delinquencies, exceptions, losses, collections, etc.).
Verify that the credit union is properly classifying past due one- to four- family
mortgages and home equity loans.
Ensure that the credit union’s appraisal practices are sound and do not otherwise impact the risk of the credit union’s lending operations.
Ensure that the credit union adequately covers the one- to four- family residential lending within the scope of the compliance management oversight,
and that there are no material violations of consumer lending laws or deficiencies in the compliance management function that could impact the
risk profile of the real estate loan portfolio.
Where you determine that the credit union has sound underwriting policies
and practices, and strong internal controls and risk management practices, you might limit your review to higher risk lending activities (e.g., subprime lending), areas with identified performance concerns, or newer
lending activities or programs (e.g., interest-only loan programs) where
the credit union’s track record is limited.
Based on your review, determine the need for sampling of homogeneous assets.
One- to Four-Family Residential Real Estate Lending Review
(Extended Analysis)
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
The following procedures should be implemented for one- to four- family residential real estate review if the core analysis indicates inadequate monitoring, or internal controls are suspect.
AUDIT PROCEDURES
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Determine whether the credit union has established procedures to verify borrower provided information (such as sending out verification of deposit letters and verification of income letters).
Determine whether the association has established procedures to perfect its
interest in the security property.
Verify that the credit union adequately prices mortgage loans to provide sufficient yield to cover the operating expenses, funding costs, and risk premium attendant to the extension of credit.
If applicable, determine whether the credit union has appropriate controls,
oversight, and underwriting policies and procedures to address low-doc
loan programs.
For FHA-insured and VA-guaranteed loans:
Determine that a valid certificate of insurance or guaranty is on file by reviewing management’s procedures to obtain such insurance or guaranty or by test checking a representative sample of such loans.
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Determine that required delinquency reports are being submitted.
Adjustable Rate Mortgages
Verify that the points the credit union receives for originating the ARM loans
compensate the credit union for the discount that the secondary market
would demand to accept the risks of that ARM product.
Determine which index (Treasury bill rate quoted on a discount basis or on
the constant-maturity yield rate) the credit union uses for adjustable rate
mortgages (including interest-only mortgages). Verify that credit union’s
mortgage documents state precisely which index is used.
For discounted or “teaser” ARMs:
Determine if the credit union’s current pricing structure or policy is sufficient to cover the credit union’s operation expenses, funding costs,
and risk premium. If not, determine the soundness of management’s
strategy, such that:
Deeply discounted ARMs, even in periods of stable or falling interest
rates, may not reach profitability until at least two or three repricings occur.
Any interest-rate movement above the yearly interest-rate cap must be
absorbed by the credit union.
Refinancing existing ARMs at lower rates offered on new ARMs reduces the opportunity to recoup initial losses in subsequent repricings.
Determine if the credit union’s lending policies and procedures and underwriting guidelines adequately address the increased default risk by
qualifying borrowers at or near fully indexed rates.
Verify that the credit union properly accounts for interest rate buydowns according to SFAS No. 91.
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Home Equity Lending
If the credit union originates home equity loans, verify that the credit union:
Adheres to the guidance set forth regarding high LTV loans.
Has adequate underwriting procedures.
Has an adequate servicing and collection department and staffing.
Has adequate monitoring and reporting systems.
Negative Amortization Loans
If applicable, determine whether the credit union has underwriting policies and
procedures that adequately address negatively amortizing loans, including
limits on the amount of negative amortization allowed on a loan compared
with its current market value.
Interest Only Loans
If applicable, determine whether the credit union has underwriting policies and
procedures that adequately address interest-only loans.
Subprime Mortgage Lending
If the credit union is engaging in subprime mortgage lending, verify that the
credit union:
Segregates its subprime loans to manage risks and monitor performance.
Has sufficient staff training and resources to manage any additional collection burden.
Has sufficient ALLL and capital to cover the additional risks inherent in its
subprime lending operation.
As appropriate, conduct additional subprime lending examination procedures.
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Select a sample of subprime loans for review and analyses. Sampling is
mandatory for credit unions with subprime lending programs.
Reverse Mortgage Loans
Determine if the credit union engages in reverse mortgage lending. If so, verify that the credit union:
Calculates the risk-based capital requirement separately for each reverse
mortgage loan.
Assesses each borrower’s life expectancy for each reverse mortgage
loan.
Performs a sensitivity analysis on the reverse mortgage loan program’s
profitability for:
A range of alternative mortality rates.
A variety of possible appreciation and depreciation scenarios.
Determine whether the credit union structures reverse mortgage loan contracts to withhold the appreciation portion of payment until appreciation
actually occurs.
Manufactured Home Financing
Determine whether the credit union engages in manufactured home financing.
If so, determine whether the credit union:
Originates residential real estate loans secured by permanently affixed
manufactured homes; or invests in retail manufactured home chattel
paper that is insured or guaranteed.
Has adequate policies and procedures specific to manufactured home financing.
Has staff with expertise in this area.
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Uses professional appraisers experienced in manufactured home valuation.
Sells manufactured home chattel paper without recourse.
Sampling
If concerns are noted in reviews, select for review a sample of one- to fourfamily mortgages. You should base this decision on the performance of
those portfolios, whether the credit union offers new loan programs, and
the adequacy of the credit union’s lending policies, practices, oversight,
and controls. Focus transactional testing on the higher risk areas. Use
transactional testing to provide reasonable confidence that the conclusions regarding one- to four-family residential lending are valid.
Summarize findings, obtain management responses, and update programs
with any information that will facilitate future audits.
Ensure that your review meets the objectives. State your findings and conclusions, as well as appropriate recommendations for any necessary corrective measures, on the appropriate work papers and report pages.
Construction and Land Development Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if the established policies, procedures, and strategic plans regarding construction and land development adequately address safety and soundness, and compliance with
laws and regulations.
To ascertain if credit union officers and employees conform with established guidelines.
To evaluate if the management reports provide accurate and necessary information to assist management and the board in fulfilling their responsibilities.
To initiate corrective action when deficiencies exist that could affect safety and soundness,
or when noncompliance to law and regulations are identified.
AUDIT PROCEDURES
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Determine whether policies and procedures promote prudent lending practices. Consider the following items within the context of the credit union’s
size and complexity:
Feasibility studies, risk analyses, and sensitivity of income projections to
economic variables.
Minimum requirement for initial investment and equity maintained by the
borrower.
Standards for net worth, cash flow, and debt service coverage of the borrower or underlying property.
Standards for the use of interest reserves or stipulation that interest re-
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serves will not be used.
Standards for the level of speculative loans relative to capital.
Pre-sale and minimum unit release requirements for non-income producing property loans.
Limits on lending with partial or no recourse to borrowers, if permitted.
Take-out commitment requirements.
Minimum covenants for loan agreements, such as financial statement requirements.
Periodic inspection during the construction phase.
Lien waivers from subcontractors.
Disbursement controls.
Inventory control records or unreleased units.
Curtailments when original projections are not met.
Certificates of occupancy.
Joint ventures, such as profit sharing or equity arrangements.
Equity withdrawals from loan proceeds.
Contractor’s performance bonds for loans over a specified dollar amount.
A survey before construction and after the foundation is in place to ensure proper setbacks are maintained.
Procedures to ensure that the project complies with local codes and
meets certificate of occupancy requirements.
Maximum loan amount, pricing, and maturity by type of property.
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Value and marketability of the mortgaged property.
Secondary sources of repayment.
Additional collateral or credit enhancements.
Verify if the credit union is providing permanent financing. (If the credit union
provides permanent financing, determine if credit terms are consistent
with the credit union’s normal underwriting standards.)
Review loan histories as needed for the following items:
Disbursements conforming to loan agreements (e.g., funds earmarked
for hard costs should not be used for soft costs such as interest, marketing, administrative, architectural, engineering or legal expense).
Lot releases corresponding to principal payments.
Ascertain if the following loan documents are on file:
Mortgage (or deed of trust)
Note
Attorney’s opinion or title insurance
Appraisal or collateral evaluation
Evidence of appropriate insurance (property, liability, flood)
Feasibility study
Business plan for the development
Take-out commitment(s)
Commitment letter (the final signed version)
Establish if acquisition, development, and construction credit decisions and
loan administration include the following credit evaluation factors:
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Feasibility study that includes, if applicable to the project, the following
items:
Engineering surveys and tests
Soil borings
Character of adjacent properties
Flood plain and water table concerns
Intrusions
Seepage
Zoning
Political impact
Jurisdiction of state and federal agencies
Water availability
Take-out commitments.
Financial capacity of the take-out lender.
Marketability of properties without take-out commitments.
Borrower’s outside repayment sources.
Control of funds when the loan agreement contains hold-back, retention,
or interest reserve provisions.
Adequate hazard, builder’s risk, and workman’s compensation insurance
with the credit union named as loss payee where appropriate.
Lien searches prior to disbursement or loan funds.
Lien priority as additional funds are advanced.
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Timely payment of subcontractors and suppliers.
Substantiate if the undisbursed loan balance is sufficient to complete the
project. Consider the following items:
Reports used to monitor construction progress, advances, sales, and
pertinent factors.
Review inspection reports.
Compare budget to actual costs.
Compare draws to degree of completion.
Confirm if the construction loan amount and the project’s estimated completion date correspond to the amounts and expiration dates of the take-out
commitment and completion bonds, if any.
Examine if loans are based on inflated collateral values caused by rapid
turnover of ownership but without any corresponding property improvements.
Prepare comments regarding deficiencies or violations of law for inclusion in
the audit report.
Prepare the appropriate write-ups for the report of audit.
Update work papers with any information that will facilitate future audits.
Commercial/Industrial Real Estate Loan Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if the established policies, procedures, and strategic plans regarding commercial and industrial real estate lending adequately address safety and soundness and compliance with laws and regulations.
To ascertain if credit union officers and employees conform with the established guidelines.
To evaluate if management reports provide accurate and necessary information to assist
management and the board in fulfilling their responsibilities.
To initiate corrective action when deficiencies exist that could affect safety and soundness,
or when noncompliance to law and regulations is identified.
AUDIT PROCEDURES
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Within the context of the credit union’s size and complexity, determine the
adequacy of the commercial and industrial real estate lending policy. Determine if policies appropriately address the following areas:
The credit union’s target market and circumstances under which the
credit union may extend commercial real estate credits on properties
located outside that market.
Maximum loan amount, loan maturity, amortization schedule, and pricing
structure for each type of real estate loan.
LTV limits in accordance with real lending standards. (Note: It is important to distinguish between regulation standards and agency
standards.)
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Guidelines for minimum debt service coverage ratios.
Consideration of the overall creditworthiness of the borrower.
The level of the borrower’s equity invested in the property.
Any secondary sources of repayment.
Any additional collateral or credit enhancements, such as guarantees,
mortgage insurance, or takeout commitments.
Lending with partial or no recourse to the borrower.
Guidelines for initiating foreclosure actions.
Allowance for Loan and Lease Losses (ALLL) guidelines that address
impaired real estate values and ALLL adequacy.
Verify if the appraisal and evaluation policy includes appropriate guidance
for collateral valuation.
Ascertain if all commercial real estate transactions of $250,000 or more
contain appraisals performed by a certified appraiser. (Note: Any
transaction not requiring the service of a certified appraiser must still
be supported by a collateral valuation that is consistent with safe and
sound practices.)
If an appraisal was not required or obtained, review management’s procedures for valuing collateral. Determine if assumptions are reasonable.
Review the adequacy of management’s guidelines that describe when
collateral reassessments are necessary (e.g., prior to restructuring or
refinancing the credit, or when problems with the primary source or
repayment arise).
Review the credit union’s underwriting practices. The following situations
may indicate liberal underwriting practices:
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Inadequate credit or collateral documentation.
Loan terms, such as interest rates, limited recourse to the borrower, and
LTV requirements that appear to be based on competitive factors and
not underlying credit risk.
No or minimal borrower equity.
Real estate collateral values that have been driven up by rapid turnover
of ownership without any corresponding improvements to the property or supportable income projections to justify the increased values.
Additional advances to service an existing loan without evidence that the
entire loan will be repaid in full.
Renewals, extensions, and refinancings that lack credible support for full
repayment from reliable sources and do not have a reasonable repayment schedule.
Establish if real estate taxes are current.
Review the loan file to determine if all necessary documentation is included
and accurately completed.
The following documents should be in the file:
Recorded mortgage (or deed of trust)
Recorded note
Attorney’s title opinion or title insurance
Appraisal or collateral evaluation
Evidence of appropriate insurance (property, liability, flood)
Assignments of leases
Copies of leases (if not included as part of the appraisal)
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The following documents should generally be considered as part of the
credit analysis.
Loan presentation or approval memorandum
Commitment letter (the final signed version)
Current operating statements of the project
Credit union prepared spreadsheets or analysis
Rent rolls
Financial statements of other repayment sources
Tax returns
Loan officer’s comment sheets
Correspondence
Guarantees (identify extent of guarantor liability)
Substantiate if management is aware of current market conditions and appropriately responds to changes. The following indicators or references
are useful in evaluating the conditions of the real estate markets:
Permits for new construction.
Estimated absorption periods.
Employment trends.
Vacancy rates.
Tenant lease incentives.
The level and trend in rental rates.
Internal resources.
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Confirm if repayment sources involve any intercompany borrower transactions.
Consider comparing rent tolls to rental income reflected in tax returns.
Determine if difficulties or weaknesses exist in individual commercial real
estate projects.
Loan arrearages.
Tax arrearages.
Loans secured by junior loans.
Protracted amortization programs or maturity dates.
Excessive supply of similar projects in the same area.
Lack of sound feasibility study or analysis.
Concept or plan changes.
Projects financed at the peak of the real estate cycle.
Projects refinanced for nonproject-related purposes.
Rent concessions resulting in cash flow below the level projected in the
original feasibility study, appraisal, or evaluation.
Special purpose properties that are not supporting debt service or providing a reasonable rate of return to the owner.
Concessions on finishing tenant space, moving expenses, and lease
buyouts.
Slow leasing, lack of sustained sales activity, and increasing sales cancellations.
Purchase money financing based on market values of collateral that are
significantly higher than the actual purchase prices.
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Land values that assume future rezoning.
Borrowers inexperienced in managing the type of property financed.
Environmental hazards.
Authenticate the credit quality of sampled loans.
Evaluate the cash flow potential of the underlying collateral to repay the
loan within a reasonable amortization period.
Evaluate the borrower’s willingness and ability to repay the loan from
other resources, if necessary, and according to existing loan terms.
Consider present and past performance on the credit relative to contractual terms.
Consider the prospects for support from any financially responsible guarantors, with emphases on excess liquidity, cash flow, and demonstrated willingness to honor guaranty agreements.
Review the underlying real estate collateral.
When a formal appraisal is required, consider the following items:
A thorough market analysis section generally indicates that the overall quality of the appraisal is acceptable.
The most reliable sales comparisons are those that require only
modest adjustments.
When the direct capitalization approach to value is used, the operating statement in the appraisal should be comparable to the actual
operating results.
The appraiser’s reconciliation of the three approaches to value
should be reasonable. Any significant variation among approaches should be adequately explained.
Assess the reasonableness of the facts and assumptions used in the most
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recent appraisal or evaluation.
If material deviations from facts or assumptions are determined, adjust
the estimated value of the property, if reasonably possible and supportable, for the purpose of the credit analysis.
Consider the following items as part of the assessment:
Current and projected vacancy and absorption rates
Lease renewal trends and anticipated rates
Volume and trend in past due leases
Feasibility study and market survey
Rental rates or sales prices
Operating expenses
Deferred maintenance
Net operating income of the property as compared with projections
Discount and capitalization rates
Marketing period estimated to achieve appraised value
Conclusions
When determining the appropriate classification of troubled commercial real
estate loans when there are no other available and viable repayment
source other than the collateral, remember the definitions of Substandard, Doubtful, and Loss are different.
Prepare comments regarding deficiencies or violations of law for inclusion in
the audit report.
Prepare the appropriate write-ups for the report of audit.
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Update work papers with any information that will facilitate future audits.
Agriculture Lending Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if the established policies, procedures, and strategic plans regarding agriculture lending adequately address safety and soundness and compliance with laws and regulations.
To ascertain if credit union officers and employees conform with established guidelines.
To evaluate if management reports provide accurate and necessary information to assist
management and the board in fulfilling their responsibilities.
To initiate corrective action when deficiencies exist that could affect safety and soundness,
or when noncompliance to law and regulations is identified.
AUDIT PROCEDURES
Date
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Determine if policies are appropriate for the credit union’s agriculture lending
activities.
Ascertain whether policies address agriculture loan structuring.
Evaluate if the policy addresses and identifies potential environmental
concerns.
Confirm if collateral margins are established for specific types of agricultural lending.
Crops
Cattle (herd, feeder, back grounding, or dairy operations)
Date
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Swine (farrowing or finishing operations)
Poultry
Exotic animals
Other agriculture products
Machinery and equipment
Real estate
Evaluate documentation and minimum appraisal requirements.
Determine if the policy establishes guidance for monitoring hedging
strategies, forward contracting, third-party contracts, and timing of
cash market sales.
Verify if the policy establishes restrictions on split-line financing.
Substantiate if thresholds for agriculture concentrations are established.
Review the credit union’s standard agriculture loan agreements.
Analyze if management adequately evaluates the management ability of agricultural producers.
Evaluate management’s familiarity with changes in government subsidy programs, production advances, environmental regulations, and tax laws.
Conclude if management is familiar with bankruptcy provisions for agricultural operators under Chapter 12 of the U.S. Bankruptcy Code (if Chapter 12 filing is available).
Review controls established to ensure that loan disbursements are monitored and documented.
Assess the effectiveness of agriculture loan structuring. Consider the following:
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Loan purpose.
The growing season for crops, useful life of equipment, or type of livestock operation.
Carry-over operating debt amortization.
Amortization of capital improvements that derive value from longer term
production contracts.
Split-line borrowing arrangements.
Land payments.
Determine if any of the following credit enhancements are used to support
loans:
Personal guarantees.
Farm Service Agency programs.
Small Business Administration programs.
State-level programs, including guarantees, deposit-link arrangements,
interest rate buy-downs, and specialized tax incentives.
Determine whether management manages collateral margins through the
following activities:
Annual on-site inspection of capital assets, machinery, and equipment.
Physical inspection of livestock collateral.
Use of feed on hand and equipment as additional equity.
The monitoring of culling practices.
Periodic valuation of feed and grain collateral.
Periodic valuation of farm machinery and equipment.
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Periodic valuation of livestock collateral.
Periodic valuation of registered livestock collateral.
Periodic valuation of exotic animal and specialty crop collateral.
Evaluate management’s review of and response to changing agricultural
market conditions.
Validate management’s financial analysis of agricultural borrowers. The following items are common to agricultural credit analysis:
Borrower information often is limited to tax returns, which are prepared
on a cash basis.
Agricultural balance sheets typically value machinery and equipment at
estimated market value.
Partial real estate and equipment ownership interests are common and
related debt should be identified.
Collateral values should be frequently adjusted to reflect current market
conditions.
Borrower values for growing crops are frequently listed at input value.
Hedging and off-balance sheet positions are common and may not be reflected in financial statements.
Storage and transportation costs can be substantial and can significantly
impact net income.
Substantiate whether agricultural loans are supported with appropriate cash
flow projections.
Product price assumptions must be validated.
Yield assumptions must be verified.
Operating expense projections should be compared to historical aver-
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age.
Affirm if cash flow assumptions encompass the borrower’s entire operation,
family living expenses, and reasonable capital expenditures.
Review grain operations.
Revenues are generally recognized at harvest.
Yield information is supported by historical production data.
Price estimates can be supported by hedged positions, forward contracting prices, the local cash price, or Farm Services Agency prices.
Operating expenses can be reviewed for consistency with historic performance and recognition of current costs.
Cash flow can be affected by government price stabilization.
Review cow/calf operations.
Income is normally recognized in the spring and fall after the sale of
calves.
Registered herd production will usually command higher prices since animals are sold for breeding purposes rather than slaughter.
Production information should consider historical conception rates and
death rates.
Price projections can be supported by local cash market or Farm Service
Agency price estimates.
Projected feed costs are closely related to pasture conditions and availability.
The severity of weather conditions can substantially affect the production
and quality of calves.
Review cattle back-grounding operations.
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Revenue is generally recognized in the spring or fall as calves are raised
to feeder weights.
Revenues can be derived from sale of owned cattle or from payment for
contract back-grounding services.
Revenue projection will be primarily influenced by anticipated daily
weight gain and projected sale price.
Cash flow data should be supported by historical weight gains.
Estimated pricing can be supported by local cash or future markets.
Review feeder cattle or fat hog operations.
Revenues are generally recognized at least monthly.
Livestock loans should be supported by a pen-specific or herd-specific
break-even analysis reflecting daily feed conversion factors and a
hedged or forward contracted price.
Review contract livestock and poultry operations.
Revenues are generally recognized at least monthly.
Contracts are usually long-term and specify inputs and production practices.
Contractors provide animals and feed. Expenses are primarily capital,
utilities, and labor costs.
Producers are paid specific prices for production, including significant incentive bonuses.
Review dairy operations.
Milk revenue is generally received twice per month. Secondary income
will be received from semi-annual sale of calves.
Primary expense considerations are feed costs and capital expenditures.
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Production is generally well-documented by the operator.
Prices are established under contract but can fluctuate widely over several growing seasons.
Review vegetables and specialized crops.
Crops, including confectionery seeds, nut products, and fruits are usually
produced on a contract basis or marketed through cooperatives.
Production levels are generally well established.
Prices are established under contract but can fluctuate widely over several growing seasons.
Ascertain if credit file documentation is adequate to legally identify collateral.
Verify if appropriate lien instruments are executed and perfected.
A properly executed security agreement should be on file.
A UCC-1 for most non-titled farm assets is filed at the county and state of
domicile and operation. Extensions must be filed within five years of
original filing date.
A UCC-1 for growing crops must identify specific crop locations and must
be filed annually.
UCC-1 filings for livestock should include provisions for offspring and future acquisitions.
Assignments of milk production checks, U.S. Government payments,
livestock production contract payments, brokerage accounts, and life
insurance policies should be recorded.
Review real estate appraisals or evaluations to determine if they identify the
following items:
Soil types
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Topography
Rainfall and water table data
Crop production information
Capitalization rate (3 to 6 percent range)
Prepare comments regarding deficiencies or violations of law for inclusion in
the audit report.
Prepare the appropriate write-ups for the report of audit.
Update work papers with any information that will facilitate future audits.
Real Estate Development Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine the level of risk that the related credit union’s real estate development activities present to the parent and to implement corrective actions as necessary.
AUDIT PROCEDURES
Date
Completed
Review the previous audit reports and all real estate development-related
exceptions noted and determine if management has taken appropriate
corrective action.
Determine the type of development projects and/or services in which the related credit union engages.
Determine the risk associated with speculative practices (i.e., acreage warehoused for future development or disregard for negative factors pertaining to initial market or site analyses).
Identify any concentration of development funds and determine the materiality of the risk involved.
Confirm that the qualifications and expertise of individuals assigned the primary responsibilities for overseeing real estate operations have been
thoroughly evaluated and verified.
Verify that the related credit union has established and adheres to minimum
documentation standards regarding real estate activities.
Determine the extent to which the related credit union’s procedures and internal controls serve to identify and control risk. Specifically, review a se-
Date
Completed
lected sample of asset files to:
Pre-acquisition Activity
Ascertain the role assumed by the related organization (i.e., property
manager, developer, lender, and/or leasing manager) and other primary project participants.
Verify the results of management’s risk versus return analysis. (Are underlying assumptions reasonable and based on adequate analyses?)
Determine whether management is making fundamental decisions concerning market characteristics, development costs, project constraints
(i.e., physical, environmental, zoning), financing alternatives, and project feasibility.
Verify that the service corporation (if applicable) has thoroughly evaluated its development partners’ reputation, experience, expertise, and financial capabilities. (Do partners have the capacity to meet financial
and other obligations? Can personal guarantees be enforced?)
Determine the adequacy of management’s project feasibility analysis.
(Does the site meet suitability and desirability requirements? Was the
site evaluated for environmental hazards? Are future after-tax cash
flow and development cost estimates realistic? Are construction plans
and designs reasonable, cost-effective and based on sound assumptions?)
Ascertain whether an appraisal was prepared by a qualified appraiser
and whether the information was evaluated and verified by management.
Verify that management has taken action to ensure that real estate activities comply with local, state, and federal regulations (i.e., planning,
zoning, housing codes, and environmental restrictions).
Post-acquisition Oversight and Control
Determine the related organization’s form of real estate ownership (i.e.,
Date
Completed
active, passive, joint venturer, general partner, limited partner) and related risk factors.
Identify the organization’s obligations and those of other parties as set
forth in contracts, agreements, or other legally binding arrangements.
(For example, how are profits, losses or additional funding requirements to be divided among general partners? What are the equity
contributions of each development partner?)
Ascertain whether management is effective in ensuring compliance with
the terms and conditions of financing arrangements.
Determine the risk related to financing arrangements for development activities and any guarantees made by the parent or the service corporation developer. (What is the potential liability regarding loans to the
service corporation, joint venture or partnership?)
Determine whether competitive bidding is used for awarding contracts
and the adequacy of the service corporation’s evaluation of contractors and consultants.
Verify that construction contracts and measures for enforcing compliance
with related provisions are effective in minimizing risk associated with
development activity (i.e., provisions for inspection of completed
phases, project scheduling, or grounds for termination).
Verify that projects are sufficiently insured and bonded.
Evaluate the adequacy of systems for monitoring development progress
and disbursing funds. (Do fund disbursements conform to predetermined cost estimates?)
Compare development plans, budgets and marketing strategies to practices and progress. (Trends or material variances that may violate
contractual obligations and/or effect project viability or marketability
should be explained.)
Confirm that the value of the land and any improvements are at least
equivalent to the total amount of funds disbursed.
Date
Completed
If material, assess the effect of any economic changes since the onset of
development on the project’s feasibility.
Determine the amount of any contingent or other potential liabilities.
Post-development Activity
Determine whether projections pertaining to leasing or sales activity are
reasonable and whether established goals have or will, in all likelihood, be attained.
Verify that marketing plans are based on a sufficiently current market
analysis.
Determine whether income and expense projections are reasonable (i.e.,
brokers’ fees, leasing arrangements).
Ensure that gains and losses on property sold are properly recognized in
accordance with GAAP.
Evaluate financing arrangements, sales/purchases of real estate or other
transactions with affiliates or insiders to determine their effect on the service corporation or its parent.
Verify that the credit union’s real estate activity and related transactions are
properly accounted for under NCUA capital reporting requirements.
Loan Portfolio Diversification Review
Performed by:
Reviewed by:
W/P Reference:
AUDIT OBJECTIVES
To determine if the established policies, procedures, and controls regarding loan portfolio
diversification adequately ensure safety and soundness, profitability, and compliance with
laws and regulations.
To document if the officers and employees of the credit union are aware of the policies and
are conforming to them.
To verify the loan portfolio mix and assess the effects on credit risk.
To evaluate management’s awareness of potential strengths and problem areas of the loan
portfolio mix.
To assess risk reduction efforts and surrounding factors where concentrations exist.
AUDIT PROCEDURES
Date
Completed
Obtain and review written policies, procedures, strategic plans, and board
minutes or work papers derived from these sources. From these
sources, record management’s goals and objectives on loan portfolio diversification.
Document whether the lending policy addresses avoidance of or otherwise covers specific concentrations of credit.
Verify if the goals and objectives concerning the mix of the loan portfolio
are quantified.
Ascertain whether the quantified goals and objectives constitute a
change in management’s direction from the previous examination.
Date
Completed
Note who has authority to determine mix.
Establish that guidelines and procedures on minimizing credit risk
through diversification are disclosed to lending personnel.
Evaluate how compliance with policy is ensured and monitored.
Review the preceding audit and all loan portfolio diversification-related exceptions noted and determine if management has taken appropriate corrective action.
Validate procedures for monitoring local, regional, national, and international
economic conditions as appropriate for the credit union.
Review regulatory limits on loans to one borrower and comment on violations.
Through the review of gathered information, observation, and discussions
with management and other employees, determine:
The adequacy of established policies, procedures, and strategic plans for
addressing safety and soundness, including internal controls, profitability, and compliance with laws and regulations.
The level of compliance with policies, procedures, and strategic plans.
Management’s competence to carry out duties and responsibilities in a
manner that provides for profitability, safe and sound operations, and
compliance with laws and regulations.
The adequacy of management reports and information systems to provide management and directors with accurate decision-making information and the ability to monitor compliance with internal guidelines
and regulatory investment limits and limits on loans to one borrower.
The level of compliance with laws and regulations.
The existence, cause, and extent of any factors that threaten or enhance
future viability of the credit union.
Date
Completed
Corrective action to be recommended or required.
List all significant concentrations of credit with dollar amounts and percentages of total assets or of capital and allowances, as applicable. This
should include totals on participations purchased from each source. The
analysis will disclose the composition of the loan portfolio as of a recent
convenient date. Significant changes and trends in the composition of a
comparable date should be noted with management’s comments as to
why significant changes occurred.
Prepare comments regarding deficiencies or violations of law for inclusion in
the audit report.
Prepare the appropriate write-ups for the report of audit.
Update work papers with any information that will facilitate future audits.
FHA Home Improvement Loans Questionnaire
Yes
Are designated personnel responsible for processing all improvement loan applications received by the credit union?
Are loan limits established for each employee or officer authorized to make loans?
Is credit information obtained for all borrowers?
Are discount calculations on new loans rechecked before
notes are prepared for signature?
Are all improvement loans approved by the credit committee
or loan officer?
Is a loan register maintained?
Is a new number assigned to each new loan made, including
modified and refinanced loans?
Are all documents and supporting papers checked for completeness, accuracy, and uniformity within each loan file
by designated employees other than personnel from the
loan department?
Is a follow-up procedure in effect to ascertain that all necessary documents are accumulated in an individual loan file
for each new loan?
Does a designated person within the loan department have
the responsibility for determining that all documents on
each new loan are complete and properly drawn?
Is a collateral register maintained?
Are physical inspections made of installed improvements?
Are the loan approval and the loan disbursement functions
No
Remarks
Yes
performed by separate persons?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Real Estate Loans Examination Equity Lending Questionnaire
Yes
Is a monthly review made for loans with past-due payments?
Is the responsibility for follow-up on delinquent loans definitely
placed?
Does the credit union maintain a delinquent list and follow up
collection records?
Are delinquent loans reported to the board at each regular
meeting?
Are all charge-offs of uncollectible loans approved by the
board?
Is the record of charged-off loans maintained by a person
other than the one who has custody of the notes and receives collections for them?
Are all notes canceled and returned along with other related
documents to the members when loans are fully paid?
Does the credit union adhere to a policy of not holding members’ notes signed in blank?
Does the credit union correspond with borrowers to determine
the authenticity of the debt when loans are purchased
from or made through dealers?
Does someone review the dealers’ procedures in granting
credit?
Are periodic financial statements and credit reports obtained
on dealers with which the credit union has a continuing relationship?
No
Remarks
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
Escrow (Impound) Accounts Questionnaire
Yes
Is there a file or other system to ensure that current, adequate
insurance is in place?
Are escrow account trial balances reconciled to the general
ledger on a regular basis?
Are escrow statements mailed to members on an annual basis?
Are escrow accounts reviewed annually to correct shortage or
overage situations?
Are escrow agreements periodically agreed to loan closing
documentation or escrow documentation?
Is there adequate segregation of duties with regard to escrow
payments:
Reconciling escrow accounts to the general ledger
Processing receipts and disbursements of escrow payments
Mailing member escrow statements
Responding to member inquiries
Establishing escrow accounts with members
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Appraisal Questionnaire
Yes
Appraisal Policies, Practices, and Procedures
Does the credit union have a written appraisal policy?
Has the policy been adopted by the board of directors?
Does the policy require that:
Appraisals be based on the definition of market value?
Appraisals be presented in narrative format, except when
approved forms are used?
Appraisals disclose, analyze, and report in reasonable detail any prior sales of the property being appraised that
occurred within one year of the date the appraisal was
prepared for one- to four-family residential property,
and within three years of the date the appraisal was
prepared for all other properties?
Does management provide appraisers with a letter of engagement containing:
A legal description of the subject property?
A description of the property to be appraised?
The value estimate requested?
Are appraisers paid regardless of loan approval?
Are loan approval and appraisal functions separate?
Are appraisal reports prepared at the request of the lender or
its agent?
If so, who is responsible for ordering appraisals?
No
Remarks
Yes
Who is responsible for reviewing appraisals?
Is the reviewer qualified?
Does the policy state the conditions when letter updates to
appraisals will be permissible?
Hiring Guidelines
Has management developed and adopted guidelines and instituted procedures related to the hiring of appraisers to
perform services for the credit union?
Do the guidelines address:
Professional education?
Licensing?
Type of experience?
Membership in professional organizations?
Annual Performance Review
Does management review on an annual basis the performance of all approved appraisers employed or retained
within the preceding 12-month period?
If so, who is responsible for the performance review?
Is the reviewer qualified?
Does the review consider:
Compliance with the credit union’s appraisal policies and
procedures?
The reasonableness of the value estimates reported?
No
Remarks
Yes
Appraisal Review
Are appraisal reports prepared for the credit union?
Does the credit union use only board-approved appraisers or
appraisers hired by management under board-delegated
authority?
Are appraisers’ qualifications appropriate for the types of
properties being appraised?
Were the appraisals reviewed sufficiently current at the time
the loan was funded?
Do appraisals appear discriminatory on the basis of the age
or location of the subject property?
Do appraisals:
Report all three approaches to value or contain an explanation that supports the omission of one or more approaches?
Indicate a properly supported estimate of the highest and
best use consistent with the definition of market value,
whether or not the proposed use of the property is in
fact the highest and best use?
Identify, by legal description or otherwise, the real estate
being appraised as this information is provided to the
appraiser by management?
Identify and reflect the market value of the property rights
in the real property being appraised?
Include any current agreement of sale, option, or listing of
the subject property, if available?
Include a history of sales for comparable properties when
such properties have been sold several times during a
No
Remarks
Yes
brief period, or if the sales prices have decreased or
increased at an atypical rate for that market?
Base their conclusions on the most recent plans and specifications for proposed properties?
Set forth the effective date of the value estimateand the
date of the report?
Contain summaries of actual annual operating statements
for existing income-producing properties, made available to the appraiser by the lender and/or borrower, together with a supported forecast of the most likely future financial performance?
Include current rents and current occupancy levels?
Set forth all material assumptions and limiting conditions
affecting the value conclusion in one separate section
in the report?
Include in the appraiser’s certification:
A statement that the appraiser has no present or prospective interest in either the property being appraised or with the parties involved?
A statement indicating whether the appraiser made a
personal inspection of the subject property?
A statement indicating that to the best of the appraiser’s ability, the analysis, opinions, and conclusions
were developed and the report was prepared in accordance with the appraisal standards of the credit
union?
For all properties, do reports include “as is” market value on
the appraisal date?
For properties wherein a portion of the overall real property
No
Remarks
Yes
rights or physical assets would typically be sold to the ultimate user over a future time period, do reports include
the following estimates of value:
“As is” market value on appraisal date?
Market value as if complete on appraisal’s date?
Prospective future value upon completion of construction?
For properties where anticipated market conditions indicate
that stabilized occupancy is not likely, do reports include
the following estimates of value:
“As is” market value on appraisal date?
Market value as if complete on appraisal’s date?
Prospective future value upon completion of construction?
Prospective future value upon reaching stabilized occupancy on the date of stabilization?
For appraisals that include the cost approach to value:
Are values for land and improvements presented separately?
Do cost estimates appear to be reasonable?
Are land values supported by comparable sales?
Do estimates for depreciation appear reasonable?
For appraisals that include the income approach to value:
Do potential gross income projections appear reasonable?
Do adjustments for vacancy and credit loss appear adequate?
No
Remarks
Yes
Do operating expenses appear reasonable?
Do capitalization rates appear reasonable and are they
supported by market data?
For appraisals that include the market approach to value:
Are comparable properties physically similar?
Are comparable properties economically similar?
Are comparable sales sufficiently recent ( i.e., substantial
changes in the market have not occurred)?
Are adjustments to comparables made for sales with favorable financing?
Are market values determined by correlating the values indicated by the individual approaches to value?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Loan Department Questionnaire
Yes
Is an overall test of real estate loan interest income performed?
Does the credit union periodically verify loans by correspondence with borrowers?
Does the credit union maintain a satisfactory record of loan
commitments?
Is a monthly list of delinquent loans and loans in foreclosure
prepared and is the board notified?
Are the functions of collecting and processing loan payments
and preparation of delinquency lists prepared by employees not associated with the underwriting?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Loan Fees Questionnaire
Yes
Is there a policy regarding loan fees?
Is there a review of fees collected by a third party?
Are the fees reviewed and updated periodically?
Are there properly prepared source documents regarding fee
postings to the general ledger?
Are loan fees properly documented in the required compliance documents?
Are loan fee accounts reconciled on a periodic basis?
Are all fees collected and recognized in accordance with generally accepted accounting principles?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Real Estate Lending Standards Questionnaire
Yes
Has the board adopted written loan portfolio management
policies and objectives that:
Establish suggested guidelines for distribution of loans in
real estate, consumer, and member business loan
categories?
Establish geographic limits for loans?
Establish guidelines for aggregate outstanding loans in
relation to other balance sheet items?
Define acceptable types of loans?
Establish maximum maturities for various types of loans?
Establish loan pricing?
Establish appraisal policy?
Establish minimum financial information required at inception of credit?
Establish limits and guidelines for purchasing eligible obligations?
Establish collection procedures?
Define the duties and responsibilities of loan officers and
credit committees?
Outline loan portfolio management objectives that
acknowledge:
The need to employ personnel with specialized
knowledge and experience?
Are loan portfolio management policies and objectives re-
No
Remarks
Yes
viewed at least annually to determine if they are compatible with changing market conditions?
Are the following various items reported to the board of directors or its committees at their regular meetings (at least
monthly):
Past-due single-payment notes?
Notes on which interest only is past due?
Term loans on which one installment is past due?
Total outstanding loan commitments?
Loans requiring special attention?
Loan modifications, renewals, or restructured loans?
Are reports submitted to the credit committee rechecked by a
designated individual for possible omissions before their
submission?
Are written applications required for all loans?
Are credit files maintained for all borrowers?
Does the credit file contain information on:
The purpose of the loan?
The planned repayment schedule?
The disposition of the loan proceeds?
Is there an internal review system which covers each department and:
Rechecks interest and maturity date computations?
Reexamines notes for proper execution, receipt of all re-
No
Remarks
Yes
quired supporting papers, and proper disclosure
forms?
Determines that loan approvals are within the limits of the
credit union’s lending authority?
Examines entries to various general ledger loan controls?
Does the credit union have a loan review section or the
equivalent?
Is the loan review section independent of the lending function?
Are the initial results of the loan review process submitted to
a committee that is also independent of the lending function?
Are all loans exceeding a certain dollar amount selected for
review?
Are internal reviews conducted at least annually for all lending areas?
Is the credit union’s problem loan list periodically updated by
the lending officers?
Does the credit union maintain a list of loans reviewed, indicating the date of the review and the credit rating?
Are loan review summations maintained in a central location
or in appropriate credit files?
Are follow-up procedures in effect for internally classified
loans, including an updated memo to the appropriate
credit file?
Are loan records retained in accordance with record retention
policy and legal requirements?
No
Remarks
Yes
Is a systematic and progressively stronger follow-up notice
procedure used for delinquent loans?
Does the credit union maintain records in sufficient detail to
generate the following information by type of loan:
The cost of funding loans?
The cost of servicing loans, including overhead?
The cost factor of probable losses?
The programmed spread?
Member Business Loans
Does the credit union require periodic submission of financial
statements for member business loans?
Does the credit union require submission of audited financial
statements based on the dollar amount of commitment?
Does the credit union perform a credit investigation on proposed and existing borrowers for new loan applications?
Is it required that all loan commitments be in writing?
Are borrowers’ outstanding liabilities checked to appropriate
lines of credit before granting additional advances?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Real Estate Mortgage Lending Questionnaire
Yes
Has the board adopted written real estate loan policies that
define:
Geographic lending areas?
Acceptable types of properties?
Lending authority of the credit committee and individual
loan officers?
Minimum financial information required of borrowers for
specific types of mortgage loans?
Minimum appraisal standards for real estate mortgage
loans?
Maximum advance as a percentage of appraised value of
purchase price?
Limits on the amount of negative amortization allowed on
a mortgage as compared to its current market value?
Maximum loan maturities?
Sound review standards for real estate loan applications
which require that the underwriting analysis/decision
be documented?
Minimum standards for loan documentation?
Limitations on the number or amount of loans involving
any individual borrower?
Are loan underwriting standards reviewed at least annually to
determine if they are compatible with changing market
conditions?
Does the credit union have written collection policies and
No
Remarks
Yes
procedures that are approved by the board?
Does the credit union have a written schedule of fees, rates,
terms, and collateral requirements for all new loans?
Has the board:
Adopted an appraisal policy?
Developed written hiring policies for appraisers?
Developed a review system for appraisers?
Has the board adopted a current approved appraiser list and
are appraisers approved before they are used?
Is information from loan applications and listing prices for
properties withheld from appraisers?
Are appraiser’s fees based on a set fee and not the granting
of the loan or the appraised value of the property?
If staff appraisers are used, does the credit union periodically
have test appraisals made by independent appraisers to
check the accuracy of appraisal reports?
If appraisers who are not employees of the credit union are
used, does the credit union adequately investigate their
report quality, reputation, and qualifications?
Do loan approval and appraising functions maintain adequate
independence internally?
Does the credit union refrain from using borrower-supplied
appraisal reports?
Are appraisal review personnel identified and given specific
limits as to the types and amounts of appraisals that can
be reviewed?
Are appraisers paid the same amount whether or not the loan
No
Remarks
Yes
is granted?
Does the credit union have a sound policy of crosscollateralizing security properties for major loans?
Are loan advances supported by written evidence or reinspection of property?
If supplemental collateral is held on loans, is it secured and a
record of its status maintained?
Is written acknowledgment obtained from the borrower for the
pledging of share accounts or the assignment of life insurance policies?
Are procedures in effect to ensure compliance with the requirements of governmental agencies insuring or guaranteeing the loans?
Has a system for maintaining adequate loan document files
been established, including:
A check sheet to assure that required documents are received and on file?
Inspection performed by internal loan review personnel?
Are procedures in effect to protect notes and other documents from theft or damage?
Are all real estate loan commitments issued in written form?
Are approvals of real estate advances reviewed before disbursement to determine that such advances do not increase the borrower’s total liability to an amount in excess
of the credit union’s legal lending limit?
Is the preparation of interest earned or loan fee subsidiary
journals reviewed by personnel who do not issue checks
or handle cash?
No
Remarks
Yes
Are interest and fee computations made and tested by persons who do not also issue checks/drafts or handle cash?
Does the credit union properly account for deferred and
earned loan fees?
Is the preparation and posting of subsidiary loan records performed or reviewed by persons who do not also issue official checks/drafts or handle cash?
Are the subsidiary loan records reconciled daily with the appropriate general ledger accounts and are reconciling
items investigated by persons who do not also issue official checks/drafts or handle cash?
Are delinquent account collections requests and past-due notices checked to the trial balances used in reconciling
loan subsidiary records to general ledger accounts and
are they handled by persons who do not also issue official
checks/drafts or handle cash?
Are detailed statements of account balances and activity
mailed to mortgagors at least annually?
Are inquiries about loan balances received and investigated
by persons who do not also handle cash?
Are documents supporting recorded credit adjustments
checked or tested by persons who do not handle cash?
Is a daily record maintained summarizing loans made, payments received, and interest collected to support applicable general ledger accounts?
Are note and liability ledger trial balances prepared and reconciled to controlling accounts by employees who do not
process or record loan transactions?
Are records and files for serviced loans segregated and identified?
No
Remarks
Yes
Is an overdue accounts report generated on a timely basis?
Are loan officers prohibited from processing loan payments?
Are loan payments received by mail recorded independently
upon receipt before they are sent to and processed by a
teller?
Are advance loan payments adequately controlled if they are
not immediately credited to the loan account?
Does the credit union have a mortgage errors and omissions
policy?
Is there an effective, formalized system for determining
whether insurance premiums are current on collateral
properties?
Does the credit union require that insurance policies include
a loss payable clause to the credit union?
Are disbursements for taxes and insurance supported by
records showing the nature and purpose of the disbursements?
If advance deposits for taxes and insurance are not required,
does the credit union have an effective system for determining whether taxes and insurance have been paid?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Secondary Market Questionnaire
Yes
Is there a policy regarding the selling of loans?
Are all sales approved?
Does the loan application log reflect the necessary information regarding a sale?
Are the loans reviewed for completeness before being sold?
Are the required compliance documents completed at the
time of the sale?
Are the general ledger accounts reconciled?
Periodically?
By loan sale?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Member Business Lending Portfolio Questionnaire
Yes
Is the following documentation required by the credit union:
Plan specifications, blueprints for the project?
Cost estimates or sworn statements from the contractor on
cost breakdowns?
Financial statements, credit reports, and other information
on the borrower?
Loan agreement, note, or deed of trust?
For construction loans, certificate of completion?
Are financial statements on the borrower submitted to the chief
financial officer (CFO) for review and comment before the
loan is approved?
Are appraisals performed by appraisers approved by this credit
union?
Have appraisals been reviewed for completeness and realistic
results?
Are inspectors’ duties rotated and is their work periodically
checked by others?
Are sales and marketing programs reviewed when considering
a tract loan?
Are periodic reports required on sales, contracts for sales,
lease agreements, and rentals?
Are analyses and reports prepared periodically to determine
that actual costs are close to estimates on large, extended
projects?
Are financial data on the development updated at least semi-
No
Remarks
Yes
annually on extended projects?
After review of inspection reports and waivers of lien, are disbursements from loans in process approved in writing by
someone other than the inspector?
Are unannounced trial balances taken periodically to prove
general ledger controls on loans in process?
Are monthly trial balances prepared by someone other than
the employee posting detailed accounts?
Are loans-in-process balances periodically reviewed to determine that adequate funds are available to finish the project?
Are loans-in-process records periodically reviewed for old balances and debit balances to determine proper disposition?
Are checks disbursed from loans in process periodically reviewed for proper amount, name, and endorsement?
Is there adequate review of delinquent interest and past-due
loans?
Are past-due loans and delinquent interest listed and submitted to officers and the board for review?
Is there effective follow-up on delinquent interest and pastdue loans?
Are charged-off loans approved by the board?
Is control maintained over loans charged-off?
Are adequate controls in place to ensure that members
whose loans have been charged-off are not extended
credit again?
Are adequate detailed records kept of accrued interest on
No
Remarks
Yes
loans?
Are these records balanced frequently with the general
ledger by someone unconnected with recordkeeping of
interest and its collection?
Are these records maintained by loan class?
Are effective procedures in place to ensure billing of all interest?
Do effective controls and adequate follow-up procedures exist
for delinquent interest?
Is there adequate segregation of duties among employees
who:
Approve loans?
Disburse and receive payments for such loans?
Perform collection and follow-up functions for loans?
Post all activity to the general ledger and subsidiary ledgers?
Reconcile the subsidiary ledger to the general ledger?
Receive and investigate any discrepancy reported by others?
Verify the stage of completion for construction draws?
Maintain collateral?
Reconcile accounts?
Control the accuracy and completeness of electronically
processed data?
Are there formal policies for extension of loan modifications?
No
Remarks
Yes
Are lending officers capable of modifying delinquent or potentially nonperforming loans (e.g., loans on construction projects with cost overruns) only with the approval of the loan
committee, the board, or both?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Member Business Loans Questionnaire
Yes
Has the board of directors approved policies for member
business loans?
Does the credit union utilize the services of an individual with
at least two years of direct experience with the type of
member business lending the credit union is engaged in?
Does the policy outline who is permitted to receive a member
business loan?
Are employees aware of what activity is prohibited from receiving a member business loan?
Does any member business loan exceed the aggregate of
the member’s net worth balance that is greater than 15
percent of the credit union’s net worth?
Does the borrower have at least 25 percent equity interest in
the project?
Does the member business loan meet the collateral and security requirements under section 723.7?
Does any member business loan exceed the greater of 15
percent of the credit union’s net worth or $100,000?
Are the employees aware of what waivers are available from
NCUA regarding member business lending requirements?
Do the employees know the procedures required to seek a
waiver of a member business loan requirement?
Are employees aware that member business loans are to be
separately identified in credit union records?
No
Remarks
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
Construction Lending Questionnaire
Yes
Has the board adopted written construction lending policies
that:
Establish procedures for reviewing construction loan applications?
Require agreements by borrowers for completion of improvements in accordance with approved construction
specifications, and cost and time limitations?
Define qualified collateral and minimum margin requirements?
Identify acceptable appraisal or valuation techniques?
Specify inspection procedures?
Define methods of dispersing loan proceeds?
Delineate standards for take-out commitments?
State completion bonding requirements?
Establish minimum standards for documentation?
Outline aggregate limit for construction loans?
Specify extensions of credit in particular types of construction projects?
Are construction lending policies and objectives reviewed at
least annually to determine if they are compatible with
changing market conditions?
Does the credit union require:
A history of the contractor’s prior construction experience
and a schedule of other projects the contractor cur-
No
Remarks
Yes
rently has under construction?
Trade reputation credit checks, current and historical financial statements?
Do project cost estimates include:
Land and construction costs?
Related off-site expenses?
Legal services and insurance expenses?
Loan interest?
Are estimated cost breakdowns available for each stage of
construction?
Are cost estimates of more complicated projects reviewed by
qualified personnel (i.e., an architect, construction engineer, or estimator)?
Do construction borrowers contribute equity to a proposed
project in the form of money or real estate and is it included in the budget?
Are commitment fees required on construction loans?
Does the credit union require:
Personal guarantees by the borrower?
Personal completion by the contractor?
Are construction and loan agreements signed prior to actual
loan disbursement?
Are construction and loan agreements reviewed by experts:
To determine that building specifications conform to appropriate codes, ordinances, and restrictions?
No
Remarks
Yes
To ensure a perfected lien position?
Are all change orders approved in writing?
Do construction and loan agreements set a specific date for
project completion and sell-out?
Do construction and loan agreements require that:
The contractor not start work until authorized to do so by
the credit union?
On-site inspections be permitted?
Disbursement of funds be based on progress of the project?
The credit union be allowed to withhold disbursements if
work is not performed in accordance with approved
specifications?
A portion of the loan proceeds be retained pending satisfactory completion of construction?
The lender be allowed to assume prompt and complete
control of the project in the event of default?
The contractor has builder’s risk and hazard insurance?
If financing an entire project that is being developed in
stages, does the credit union authorize individual
starts and require periodic sales reports?
Does the credit union use first liens on real estate in order to
secure collateral?
Are chattel mortgages taken on real estate construction improvements?
Do business construction loans have take-out commitments
that are predicated upon achievement of a specified min-
No
Remarks
Yes
imum rent or lease occupancy?
Are project construction loans subject to the credit union’s
own take-out commitment limited to a percentage of the
appraised value of the completed project?
In conjunction with a project construction loan review, are
unsecured lines of credit to contractors periodically monitored by management?
Are feasibility studies obtained, and do they support the viability of new development projects?
Are appraisals approved in writing by the permanent lender
where construction loans are subject to a take-out commitment?
Does the credit union have an internal review procedure by
appropriately qualified personnel to determine whether
construction appraisal procedures are consistently being
followed and whether the appraisal documentation supports the appraiser’s conclusions?
Are inspections conducted on a timely basis in order to allow
monitoring of the project during all stages of construction?
Are inspection reports sufficiently detailed and documented
to support disbursements?
Are inspection and disbursement functions segregated?
Are spot checks made of the inspector’s work?
Do inspectors have sufficient expertise to determine compliance with plans and specifications?
Does a review of the undisbursed loans-in-process account
indicate there are sufficient funds to complete projects?
No
Remarks
Yes
Are disbursements advanced on a percentage of completion
method?
Does the credit union obtain waivers of subcontractors’ and
materialmen’s liens as work is completed and disbursements are made?
Does the credit union obtain sworn and notarized releases of
mechanic’s liens from the general contractor at the time
construction is complete and before final disbursements?
Are take-out agreements reviewed by counsel for enforceability?
Are the financial statements of permanent lenders obtained
and reviewed to determine their financial viability?
Does the credit union require take-out agreements to include
an act-of-God clause which provides for an automatic extension of the completion date in the event that construction delays occur for reasons beyond the builder’s control?
Does the credit union require a completion bond for all construction loans?
Has the credit union established minimum financial standards
for borrowers who are not required to obtain completion
bonding?
Does legal counsel review completion bonds for acceptability?
Does the credit union require that documentation files include:
Loan applications?
Financial statements for the borrower, builder, and guarantors?
No
Remarks
Yes
Credit and trade checks on the borrower and builder?
A copy of plans, specifications, and building permits?
A survey of the property?
Construction and loan agreements?
Appraisal and feasibility study?
Up-to-date preliminary title search?
Assigned tenant leases or letters of intent to lease, if applicable?
Copy of take-out commitment?
Inspection reports?
Disbursement authorizations?
Undisbursed loan proceeds and contingency or escrow
account reconcilements?
Insurance policies?
Are standardized checklists used to control documentation
for individual files?
Do documentation files note all of the borrower’s other loans
and share account relationships?
Does the credit union maintain tickler files that will give at
least 30 days’ advance notices before expiration of:
Take-out commitment?
Hazard insurance?
Public liability insurance, if applicable?
No
Remarks
Yes
Is the preparation, addition, and posting of subsidiary real
estate construction loan records performed and/or adequately reviewed by persons who do not also issue official checks or drafts or handle cash?
Are subsidiary real estate construction loan records reconciled, at least monthly, to the appropriate general ledger
accounts and are reconciling items adequately investigated by persons who do not also handle cash?
Are documents supporting recorded credit adjustments
checked or tested subsequently by persons who do not
also handle cash?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Real Estate Held for Investment Questionnaire
Yes
Are separate subsidiary records maintained for each parcel
showing capital items, expenses, rentals, etc.?
Are subsidiary ledgers for the individual properties reconciled
to the general ledger at least monthly?
Are separate files maintained for each parcel of real estate
and are such files complete?
Is adequate control maintained over rental income?
Are agents who collect rents and/or manage property bonded?
Are security deposits properly controlled?
Are adequate controls maintained over all disbursements?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Real Estate Loans Questionnaire
Yes
Has management adopted written real estate lending policies
that define:
Target market?
Acceptable collateral?
Prudent, clear, and measurable underwriting standards for
each type of property such as:
Maximum loan amount and maturity date?
Repayment terms?
Pricing structure?
LTV limits?
Approval procedures and authority limits?
Loan administration procedures that include documentation, disbursement, collateral inspection, collection,
and loan review?
Minimum loan documentation standards, such as minimum frequency and type of financial information required for each category of real estate loan?
Appraisals and evaluations?
Reporting requirements to the main office, relative to loan
portfolio monitoring, including items such as compliance with lending policies and procedures, delinquency trends, and problem loans?
Are policies and procedures appropriate to the size and sophistication of the credit union and are they reviewed annually to ensure they are compatible with changing market
No
Remarks
Yes
conditions?
Has an employee been assigned the responsibility for maintaining the document files?
Are notes and other original documents properly safeguarded?
Is a checklist used to ensure that required documents are received and on file?
Are loan files reviewed after closing to determine if all documents are properly drawn, executed, recorded, and filed
within the loan files?
Is there a procedure for monitoring escrow accounts to determine that PMI insurance premiums and hazard insurance premiums are current?
Do hazard insurance policies include a loss-payable clause to
the credit union?
Are escrow accounts reviewed at least annually to determine
if monthly deposits will cover anticipated disbursements?
Are disbursements for taxes and insurance supported by records showing the nature and purpose of the disbursement?
Does the credit union have adequate collection procedures to
monitor delinquencies and pursue foreclosure?
Are “in substance foreclosure” properties appropriately identified?
Are properties to which the credit union has obtained title appropriately transferred to other real estate owned?
Do appraisal policies include:
No
Remarks
Yes
Guidelines for selecting, evaluating, and monitoring the
individuals performing appraisals or evaluations,
whether third-party or in-house?
Procedures for when to obtain appraisals and evaluations
on new loans, as well as reappraisals or evaluations
on existing loans?
Review procedures to determine that appraisals and evaluations comply with supervisory guidelines?
If appropriate, does the appraisal meet the minimum standards of the appraisal regulations and the Uniform Standards of Professional Appraisal Practice, including:
Purpose?
Market value?
Effective date?
Marketing period?
Sales history of subject property?
Reflect the valuation using the cost, income, and comparable sales approaches?
Evaluate and correlate the three approaches into a final
value estimate, based on the appraiser’s judgment?
Explain why an approach is inappropriate and not used in
the appraisal?
Fully support the assumptions and the value rendered
through adequate documentation?
Are staff appraisers independent of the lending, investment,
and collection functions?
Are fee appraisers engaged directly by the credit union, and
No
Remarks
Yes
do they have no direct or indirect interest, financial or otherwise, in the property or transaction?
Are fee appraisers paid the same fee whether or not the loan
is granted?
If the transaction is outside the local geographic market of the
credit union, does the credit union engage an appraiser
with knowledge of the market where the real estate collateral is located?
Do loan applicants provide information on environmental matters pertaining to their business facilities?
If the credit union acquires a loan, either by purchase or participation, does it ensure that adequate due diligence regarding environmental risk matters has been performed by
the lead lender?
Are potential environmental problems noted in an environmental risk report considered by senior management prior
to loan approval?
Are procedures established for reviewing collateral prior to
foreclosure to ensure that environmental risk has been
addressed?
Are training programs conducted so that lending personnel
are aware of environmental liability issues and are able to
identify borrowers with potential problems?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Credit Risk Management Questionnaire
Yes
Has a policy for credit (loan) risk management been adopted
that specifically:
Establishes suggested guidelines for distribution of loans
in all categories?
Establishes geographic limits?
Establishes suggested guidelines for aggregate outstanding loans in relation to other balance sheet categories?
Establishes loan authorities of committees and individual
lending officers?
Defines acceptable types of loans?
Establishes maximum maturities for various types of
loans?
Establishes loan pricing?
Establishes appraisal policy?
Establishes minimum financial information required at the
inception of the loan?
Establishes limits and guidelines for purchasing loans?
Establishes collection procedures?
Defines the duties and responsibilities of loan officers and
the loan committee?
Outlines loan portfolio management objectives that
acknowledge the need to employ personnel with specialized knowledge and experience?
No
Remarks
Yes
Are the following reported to management at least quarterly?
Past-due loans
Loans on nonaccrual
Classified loans
Loans requiring special attention
New loans, loan renewals, and restructured loans
Are reports checked by a designated employee for possible
omissions before they are submitted to management?
Are written applications required for all loans?
Do loan files contain the following information?
The borrower’s name, address, ownership, and affiliations
A description of the borrower’s business or employment
Amount, rate, and maturity of the loan; type of loan; appropriate approvals
The purpose of the loan
The primary and secondary sources of repayment
The planned repayment schedule
The disposition of the loan proceeds
Current financial information on the borrower and/or guarantor (if applicable)
Three years of previous financial statements
An analyses of the borrower’s and guarantor’s (if applicable) financial conditions
No
Remarks
Yes
Projections for the borrower’s future financial performance
A description of the collateral, its location, value, and condition
Does the credit union perform a credit investigation on proposed and existing borrowers for new loan applications?
Is it required that all loan commitments be in writing?
Are lines of credit reviewed and updated at least annually?
Are members’ outstanding liabilities checked to appropriate
lines of credit before additional advances are granted?
Is there an internal review system that:
Rechecks interest, discount, and maturity date computations?
Reexamines notes for proper execution, receipt of all required supporting papers, and proper disclosure
forms?
Determines that loan approvals are within the limits of the
credit union’s lending authority?
Determines that notes bear the initials of the loan officer?
Ascertains that new loans are within the limitations set for
the member by credit union policy?
Rechecks the liability ledger to determine that new loans
have been accurately posted?
Is a systematic and progressively stronger follow-up notice
procedure utilized for delinquent loans?
Are loan proceeds ever disbursed in cash? If so, does the
credit union check for BSA requirements?
No
Remarks
Yes
Are loans ever paid off by liquidating cash collateral? If so,
does the credit union check for BSA requirements?
Are adequate accounting and control procedures in effect
with respect to recoveries?
Are adequate procedures in effect to monitor compliance with
the lending limits?
Are original loan documents safeguarded properly?
Are notes and collateral periodically verified by an independent party (CPA)?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Mortgage Lending Questionnaire
Yes
Have management and the board of directors established
general operating policies and procedures, as well as defined responsibilities, for the mortgage lending operation?
Have management and the board defined permissible business activities?
Have management and the board communicated performance goals to the mortgage lending unit?
Have management and the board implemented a risk management program for the mortgage lending unit?
Is mortgage lending integrated into the credit union’s overall
asset/liability management strategies and risk limits?
Does each mortgage lending function have adequate independence and segregated reporting lines?
Are comprehensive management information systems in
place?
Are comprehensive procedures in place to ensure compliance
with laws and regulations?
Has the board or the loan committee, consistent with its duties and responsibilities, adopted written policies that govern:
The types of loans that the credit union will originate inhouse (retail) and/or purchase from outside sources
(wholesale)?
The forces the credit union will use to acquire loans?
The underwriting standards and procedures for approved
exceptions to written policies?
No
Remarks
Yes
Is the operation and supervision of each facet of the production process sufficiently separated (e.g., underwriting and
originations)?
Are records maintained that detail the number and dollar volume of loans acquired through retail and wholesale
sources?
Does the credit union track the number and type of documentation exceptions and unmarketable loans by origination
source?
Is a system in place for tracking loan delinquencies, foreclosures, and losses?
Does the quality control unit report outside of the production
unit?
Does the credit union prepare quality control reports on a
monthly basis?
Does the quality control function meet investor requirements
for content, scope, and timeliness?
Has a unit or individual been assigned responsibility for fraud
detection?
Are losses on portfolio loans recognized in a timely manner
and taken against the ALLL?
Are losses on loans sold with recourse recognized in a timely
manner and recorded against the recourse reserve?
Has the board of directors or its loan committee, consistent
with its duties and responsibilities, adopted written mortgage lending policies governing secondary marketing activities that define:
The secondary marketing programs used to sell mortgages?
No
Remarks
Yes
Permissible credit enhancement?
The responsibilities of the secondary marketing unit for
sale and delivery of loans?
Procedures for tracking and obtaining missing loan documents?
Procedures for mortgage pricing?
Are profit and loss records for individual transactions periodically reconciled to the general ledger records?
Are procedures in place that ensure mortgage pools are certified in a timely manner?
Are post-closing documentation tracking systems in place?
Are post-closing documents obtained in a timely manner and
in accordance with investor requirements?
Has the board of directors or its loan committee, consistent
with its duties and responsibilities, adopted written mortgage lending policies governing mortgage servicing activities?
Is a schedule maintained that lists all investors for whom servicing is being performed?
Is a written master servicing agreement on file for each investor?
Are disbursements from custodial accounts adequately controlled?
Are custodial accounts reconciled in a timely manner?
Are the duties associated with the administration of custodial
accounts properly segregated?
Are controls in place that ensure that custodial account funds
No
Remarks
Yes
are deposited only in qualified financial institutions?
Are procedures and controls in place that ensure that investors (Freddie Mac/Fannie Mae) receive payments on
schedule?
Has management established controls to prevent delinquent
loans from being prematurely removed from mortgage
pools?
Are adjustable mortgage loan interest adjustments properly
performed?
Is a monthly report sent to each applicable investor detailing
principal and interest collections from homeowners, delinquency rates, foreclosure actions, property inspections,
loan losses, and OREO status?
Are loan documents stored in a secure and protected area?
Is an inventory log maintained listing documents held in safekeeping?
Are copies of critical loan documents maintained in a location
separate from the originals?
Are procedures in place that ensure that the amount of escrow funds collected from each homeowner does not exceed the limit?
Is every escrow account analyzed annually and an annual recap of escrow account activity sent to each member?
If an escrow account overage or shortage is found, is the
homeowner notified in writing of the method that will be
used to adjust the account?
Are controls in place that prevent the credit union from using
homeowner’s escrow account balances to meet other obligations?
No
Remarks
Yes
Are procedures in place that ensure collection activities conform to investor requirements?
If a forbearance arrangement is made with a delinquent mortgagor, is the reason for the forbearance action documented?
Is a system in place to ensure that, if required, the forbearance arrangement is approved by the investor?
Has the credit union established a foreclosure reserve?
Are uncollectible investor advances charged-off in a timely
manner?
When title has or will be obtained to an OREO property, does
the credit union follow applicable laws, regulations, and financial reporting rules?
Do controls exist to ensure loans are set up on the servicing
system accurately and in a timely manner?
When a borrower pays off a loan, does the credit union file
the mortgage (reconveyance) satisfaction and return the
original promissory note to the borrower in a timely manner?
Does a member service unit exist to handle member questions and ensure member complaints are properly resolved?
Has the credit union formulated written policies and procedures governing mortgage servicing rights (MSRs)?
Is the board required to approve significant sales and purchases of servicing rights?
Does management conduct a due diligence review before
purchasing a bulk servicing portfolio?
No
Remarks
Yes
Are due diligence reviews documented and reviewed by the
board before the transaction is approved?
Does the credit union have an adequate recordkeeping system in place to support and account for MSRs?
Are records maintained that document original valuation assumptions for each bulk acquisition of servicing rights?
Are records maintained by product type and month of origination for MSRs acquired through retail production (origination) and production flow (purchase) activities?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Loan Portfolio Diversification Questionnaire
Yes
Has the credit union established written goals and objectives
for diversifying the loan portfolio?
Has a strategy for diversifying loans been written?
What management reports are used to monitor various concentrations of credit? List reports:
Are these same reports given to the board?
If the credit union does not have a written policy on loan portfolio diversification, ask management to elaborate on the
following:
The percentage of loans to assets that the credit union
strives to maintain.
The composition of the loan portfolio.
The various concentrations that have been identified.
If these concentrations expose the credit union to more
than acceptable risk.
The efforts that have been taken to reduce risky concentrations and/or minimize the risk they present.
What areas of the loan portfolio mix does the credit union anticipate changing in the next 13 to 24 months?
No
Remarks
Yes
Does management anticipate introducing a new loan product
within the next 12 to 24 months?
Does management anticipate originating or purchasing loans
in the near future?
What means does the credit union use to monitor the economic conditions?
List the sources from which loans are purchased:
Describe any risk reduction efforts and factors besides diversification that the credit union has implemented to limit risk
from concentrations:
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Real Estate Settlement Procedures Act Questionnaire
Yes
Within three business days of receiving a written application
for a Federally Related Mortgage Loan, does the credit
union provide the applicant with a copy of the Special Information Booklet?
Are good faith estimates of settlement costs provided to all
applicable loan applicants within three business days following the written application?
Do the good faith estimates provided to an applicant bear
a reasonable relationship to the charges the applicant
will likely be required to pay at settlement?
Does the form on which the credit union provides its good
faith estimate include the credit union’s name, and set
forth in bold type the statement required?
Does the form include all charges that will be listed in Section L of the HUD 1 settlement statement?
Where the credit union requires that a particular individual,
firm, or company be used to provide legal services, title
examination services of title insurance, or to conduct settlement, and requires the borrower to pay for any portion
of the cost of such services, does the good faith estimate:
Clearly indicate which estimated charge is to be imposed
by each designated provider?
State the name, address, and telephone number of each
designated provider; the services to be rendered by
each provider; and the fact that the credit union’s estimate for the services is based upon the charges of the
designated provider?
State whether each designated provider has a business
No
Remarks
Yes
relationship with the credit union?
Does the credit union use and properly prepare the HUD-l for
settlements of applicable loans?
Does the HUD-l show itemized charges to be paid by the
borrower and seller, including and/or excluding contract charges to be paid outside of settlement which
were imposed by the credit union?
During the business day immediately preceding the day of
settlement is the borrower permitted, upon request, to
inspect the HUD-l or HUD-l A completed as to those
items known at the time to the person who will conduct
the settlement?
Unless waived or exempt, is the HUD-l delivered or mailed
to the borrower and seller or their agents at or before
settlement?
Does the credit union retain a copy of the uniform settlement statement for two years after the date of settlement?
Does the credit union refrain from charging a fee for the preparation and distribution of HUD-l or documents required
under the Truth-in-Lending Act?
Does the credit union observe, both at settlement and with
each monthly installment payment, the limitations placed
on amounts that may be deposited in an escrow account
for the payment of taxes, insurance premiums or other expenses?
Is the credit union aware of, and in compliance with, the prohibitions against kickbacks and unearned fees?
Does the credit union have an affiliate relationship or a direct
or beneficial ownership interest of more than 10 percent in
a provider of settlement services, and does the lender di-
No
Remarks
Yes
rectly or indirectly refer business to the provider?
Does the credit union disclose the nature of the relationship and estimate charges made by such provider?
Does the credit union require the use of such a provider?
Does the credit union receive only a return or payment
permitted by RESPA?
Does the credit union require borrowers to use a particular
title company when the credit union holds title to the property being sold?
Does the credit union provide the required initial escrow
statement within 45 days of the establishment of the escrow account?
Does the initial escrow statement include:
The monthly mortgage payment?
The portion going to escrow?
Itemized estimated taxes, insurance, premiums and other
charges?
The anticipated disbursement dates of those charges?
The amount of the cushion?
A trial running balance?
Does the credit union perform annual escrow account analysis and refund any surplus exceeding $50 within 30 days
of performing the analysis?
Does the credit union provide annual statements not less than
once each 12-month period and not more than 30 days after the end of each 12-month period?
No
Remarks
Yes
Does the annual escrow account statement contain:
The account history?
Projections for the next year?
Current mortgage payment and portion going to escrow?
The amount of last year’s mortgage payment and the portion going to escrow?
The total amount paid into the account during the past
year?
The amount paid from the account?
The balance at the end of the period?
An explanation of how the surplus, shortage, or deficiency
is being handled?
Any reasons why the estimated low monthly balance was
not reached?
Does it appear the borrowers are notified at least annually of
any shortage of funds in the escrow account?
Does the credit union pay escrow disbursements by the disbursement date?
Does the credit union provide the required transfer of servicing disclosure within three days after receipt of the application and is there a written acknowledgment that the applicant has read and understood the transfer of service
disclosure?
When servicing is sold, or purchased, does the credit union
provide the required disclosures in a timely manner?
No
Remarks
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
Management Official Interlocks Questionnaire
Yes
Does a management official of this credit union also serve as
a management official of another type of depository organization?
Complete the remainder of this checklist if the answer to
the above question is “Yes.”
Does the credit union and the other depository organization of
the management official have offices in the same community?
Does the credit union and the other depository organization of
the management official have offices in the same RMSA
and are they both greater than $20 million in assets?
Does the credit union’s total assets exceed $5 billion and
does the other depository organization have assets greater than $5 billion?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Home Mortgage Disclosure Act Questionnaire
Ye
s
Did the credit union originate, in the preceding calendar year, at least
one home-purchase loan (other than temporary financing such as
a construction loan) or refinancing of a home purchase loan secured by a first lien on a one- to four-family dwelling?
Did the credit union have a home or branch office in a Metropolitan
Statistical Area (MSA) on December 31 of the preceding year?
Did the credit union have assets of more than that published by the
Federal Reserve Board? (See this website for the most current
asset threshold: http://www.ffiec.gov/hmda/reporter.htm.)
If all of the answers to questions 1, 2, and 3 are “Yes,” the credit
union is subject to HMDA and the remainder of the checklist
should be completed (unless exempt by virtue of similar state
law). If the answer to anyone of the questions is “No,” then the
credit union is exempt from HMDA. Credit unions that are not federally insured are subject to HMDA only if they answered “Yes” to
questions 1, 2, and 3 and at least one of the loans in question 1
was insured, guaranteed, or supplemented by a federal agency or
was intended by the credit union for sale to Fannie Mae or Freddie Mac.
Is the credit union ensuring data regarding applications for, and originations and purchases of, home purchase loans (including refinancings), and home improvement loans for each calendar year
are properly compiled?
Does the credit union maintain the necessary records to compile the
required data?
Is there an adequate audit trail to test the accuracy of the data compiled?
Is accurate census tract information available for the compilation of
No
Remarks
Ye
s
data?
Are loan/application registers (Form FR HMDA-LAR) completed fully
and accurately?
Is the credit union properly collecting data on ethnicity, race, and income?
If an applicant chooses not to provide information, for applications
taken in person, on ethnicity, race, or sex, is this fact noted on
the form and is this data noted, based on visual observation or
surname, to the extent possible?
Does the credit union avoid reporting data on transactions excluded
by the regulation?
If the credit union reports 26 or more entries, is the credit union submitting data in an automated, machine readable format conforming to form FR HMDA-LAR no later than March 1 following the
calendar year for which data was compiled?
If the credit union reports 25 or fewer entries on their HMDA-LAR
and submits reports in paper form, does the credit union submit
two copies that are typed or computer printed in the format of form
FR HMDA-LAR?
Are applications and loans recorded on the credit union’s register
within 30 calendar days after the end of the calendar quarter in
which final action is taken?
Is the disclosure statement prepared by the FFIEC made available to
the public at the credit union’s home office no later than three
business days after receiving it from the FFIEC?
Is the disclosure statement made available to the public, within ten
business days of receiving it, in at least one branch office in each
other metropolitan area (MSA) where the credit union has offices?
Does the credit union post the address for sending written requests in
No
Remarks
Ye
s
the lobby of each branch office in other MSAs where the credit union has offices and mail or deliver a copy of the disclosure statement within 15 calendar days of receiving the written request?
Does the credit union make its modified loan application register
available to the public after removing the application or loan date,
the date the application was received, and the date action was
taken?
Are the disclosure statements and modified registers available to anyone for inspection and copying during normal public business
hours?
Are disclosure statements made available to the public for five years
and modified registers made available to the public for three
years?
Has the credit union posted a general notice about the availability of
its HMDA data in the lobby of its home office and of each branch
office located in a MSA?
Are policies, procedures, and training adequate on an ongoing basis,
to ensure compliance with HMDA?
Does management ensure that affected personnel are aware of the
requirements of HMDA?
Prepared by:
Title:
Date:
ADDITIONAL COMMENTS:
No
Remarks
Exhibit 6.1:
Date
Rev.
List of Closing Documents Most Often Found in Mortgage Loan Files
Closing Document
Data Reviewed
Recorded security instrument
Borrower and lender name
Property address and legal description
Note date and loan amount
Riders correctly referenced
Signatures
Mortgage loan note
Date
Borrower name(s)
Property address
Terms: Interest rate, payments, first and
last payment dates, adjustment and caps if
applicable
Signatures
Assignment of mortgage loan
Lender Name
Date
Assignee
MERS registration, if applicable
Mortgage insurance certificate or
policy
MI Provider
Percent of Coverage
Product type – e.g., single premium or
monthly
VA Loan guaranty, certificate, RD Issue date
loan note guarantee, FHA mortBorrower name(s)
gage insurance certificate, or HUD Property address
Indian Loan guarantee certificate,
if applicable
Title evidence
Title policy with schedules
Borrower name(s)
Property Address
Exclusions
Date
Rev.
Closing Document
Data Reviewed
Plat or survey, as applicable
Property address/legal descriptions
Encroachments, easements
Final Truth-in-Lending disclosure
Loan amount
Interest rate
Terms
HUD -1 settlement statement
All pages and addenda
Sales price, if applicable
Loan amount
Settlement charges
Amounts paid by or on behalf of borrower
Cash in from borrower
Costs paid by seller and buyer
Signatures of borrower and seller
Evidence of hazard and, if applicable, flood insurance
Date of policy
Amount of coverage
Type of policy
Other closing documents as appli- Documents that apply to subject transaccable
tion and are appropriate
Exhibit 6.2:
Member Disclosure for Voluntary Escrow Payments
The bills paid out of your escrow account are expected to increase substantially after the
first year[.] [because____________________]. Under normal escrow practices, your monthly escrow payment in the second year could be much higher than in the first.
You may voluntarily choose to make higher payments during the first year to reduce or eliminate the monthly payment increase in the second year. If you are interested in doing this,
contact: [insert name, title, and address].
Note: This form is voluntary, but HUD is encouraging its use when the loan originator or
servicer expects a substantial increase in the second year escrow payment.
Exhibit 6.3:
Sample Appraisal Review Order Form
Exhibit 6.4:
Model Audit Report for Loan Interest
Real Estate (Lending) Department Audit
as of MMDDYYYY
Audit reference:
Source: Loan Interest
Account
Number
#1
Principal
MMDDYYY
Y
#3
Principal
MMDDYYYY
#2
Interest
Rate
#4
Interest
Paid
#2
Interest
Calculated
Comments
Legend:
#1 Start at Loan #______ and then every 20th to ensure that
MMDDYYYY balance
appears (See Column 2)
#2 Loan Trial Balance
#3
#4 Terminal
+ Reasonable
Appendix 6.1
Sample Loan Review Program
LOAN REVIEW
Objective
To establish a formalized quality control review plan that utilizes a program of internal and external examination and provides for an independent review by the credit union’s management and audit loan personnel, who are knowledgeable, but have no direct loan processing, underwriting, or servicing responsibilities. The quality control plan will provide for periodic reports that will identify areas of deficiency including errors and omissions, unacceptable patterns or trends, as well as fraud and intentional violations
of regulations. The reports will allow senior management to initiate prompt and effective corrective
measures to eliminate any deficiencies. All employees within the lending function of the credit union will
be familiar and understand policies and procedures regarding quality control functions.
The primary objectives of the quality review plan are to:

Assure compliance with regulations.

Assure that the credit union’s policies and procedures are known and adhered to by its personnel.

Assure that the credit union’s procedures are revised in a timely manner to accurately reflect
changes of lending regulations; keep the credit union’s personnel informed of the changes; and
assure that employees are held accountable for performance failures or errors.

Assure that prompt and effective corrective measures are taken and documented when deficiencies in loan origination, underwriting, or servicing are identified and to inform its personnel when
deficiencies are found.

Assure that procedures exist for expanding the scope of quality control reviews where fraudulent
activity or patterns of deficiencies are identified.
Scope
The quality control program provides for a review of not less than 10 percent of loans originated by the
credit union on a monthly basis. The quality review will occur in the first week of the month, or later if
need be, following a loan being funded. A representative percentage of loan programs reviewed are as
follows:
FNMA Qualifying Conventional Firsts ............... 10% of loans funded
FNMA Qualifying Conventional Seconds ........... 10% of loans funded
EZ Qualifying (Reduced Documentation) ........... 50% of loans funded
Third Party (Broker) Originations ....................... 25% of loans funded
Appendix 6.1
Sample Loan Review Program (cont.)
FHLMC Qualifying Conventional Loans ............ 10% of loans funded
VA/FHA/Title I (Rehabilitation) Loans ............... 25% of loans funded
Major Loans (In excess of $250,000) .................. 50% of loans funded
Commercial Loans (If applicable) ....................... 50% of loans funded
90% LTV Loans................................................... 100% of loans funded
REO Loans ........................................................... 100% of loans funded
Other Loan Programs ........................................... 10% of loans funded
The quality review will include:

Selection of loans on a random basis including all programs, branch offices, agents, and servicers.

Assurance that all loan officers, agents, underwriters, and appraisers are subject to quality review.

Analysis of all loans that go into default with 12 or fewer payments from the borrower.

Procedures for expanding the scope of the quality review where a pattern of deficiencies or
fraudulent activity is disclosed.
Credit Committee (Loan) Committee
The resolution by the board of directors creating the current credit committee (loan) committee, and its
loan authority, is attached to this overview (see Exhibit A).
Quality Review for Funded Loans
The board report and the funding logs will be used to determine how many loans were funded in each category during the proceeding month. The two records will be compared to ascertain that all funded loans
have been disclosed to the board of directors.
The loan review officer will receive the loan files to be reviewed under the quality control procedures and
will perform the tests described below.
The loan officer will order a credit report, using one of the credit bureaus on the credit union’s approved
list, making sure that it is a different bureau than the one used by loan origination.
This report will be used to compare it with the original reports, using the credit report checklist (see Exhibit B).
Appendix 6.1
Sample Loan Review Program (cont.)
In addition, the original application will be compared to the original report to ensure all debts are disclosed and that any differences are explained. The original application and credit report will then be compared to the final application to ensure proper disclosures of all information.
Using a cover letter (see Exhibit C) with credit release (see Exhibit C-1) all full and part-time current employment will be verified using the verification of employment form (see Exhibit C-2), deposits verified
by using the verification of deposits form (see Exhibit C-3), and all loans verified using the verification of
loans form (see Exhibit C-4). Mortgage accounts are verified using the verification of mortgage accounts
form (see Exhibit C-5). In addition, all employment verifications will be addressed to the respective personnel department and marked “Confidential”. The original verification will be reviewed to ensure that
the forms were not mailed to the “attention of” any individual. A physical check will be made of the original verification document to ascertain that it was in fact mailed and not hand carried.
An explanation letter of the quality review (see Exhibit D) and a statement of information (see Exhibit D1) will be mailed to the borrowers to ascertain occupancy, were applicable. This letter will verify if the
borrowers received the necessary documentation regarding their loans. This letter will be sent certified,
with a return receipt requested, when a follow-up letter needs to be sent.
The loan review officer uses FNMA and FHLMC quality control guidelines in selecting appraisals for
review. The guidelines, in part state “ ... the lender must select for a full review 10% ... of the loans ... .
Lenders must assure that the representative ... loans reflect the scope of the lenders business, by including
review of loans ... of different mortgage types that the lender offers”. “ ... 10% of the mortgages originated ... by a party other than the seller ... that are sold to FHLMC”. All appraisers will be appointed by the
board of directors (see Exhibit E), after reviewing each individual who has been recommended.
The review procedures are:

All outside fee appraisers will have their submission reviewed by the chief appraiser of the credit
union. This review includes a drive-by of the property being appraised.

All permanent appraisers (credit union employees) will have their submissions desk reviewed.

The quality review will select 1 percent of the loans reviewed to have a separate appraisal review
(see Exhibits E-1 and E-2).

A quality review log will be completed within each separate loan review file folder showing
when the items are ordered and when they are received. If the items requested are not received
within 10 working days, a duplicate request will be sent. If still no reply, loan management is advised, and action of some type is recommended.

A file with a label showing the month of review (e.g., December 2000) will be set up. This file
will contain the list of loans reviewed, appraisals reviewed, documentation reviewed, and all others verifications noted. Any discrepancies will be noted and the final resolution of the discrepancies listed.
Appendix 6.1
Sample Loan Review Program (cont.)
The following documents will be subject to the quality review (see Exhibits F-1 to F-5):

Note and rider will be checked for accuracy and signatures, and proof of recordation.

Deed of trust and assignments will be checked for accuracy and signature, and proof of recordation.

The title policy will be checked for accuracy and all investors and this credit union’s requirements regarding endorsements.

Hazard insurance will be checked for accuracy and all investors and this credit union’s requirements regarding endorsements.

Private mortgage insurance will be reviewed were applicable.

The loan file will have a quality review on the following compliance documents:
 Original authorization to obtain and disclose credit.
 Original pre-application form for proper information and initialed, signed, and dated credit
application.
 A signed copy of the original good faith estimate and Regulation Z disclosures.
 Truth-in-Lending disclosure, except for refinanced loans, non-owner occupied loans, and equity loans.
 Original signed Right to Financial Privacy Act notice on FHA and VA loans.
 Original, final Regulation Z and estimate of closing costs forms signed by the borrower(s).

Original signed flood insurance notice in all files.

Original notice of rescission on all refinance loans and equity seconds, to be reviewed for the following:
 Date notice given borrower is the date the final documents are signed.
 Expiration date is computed properly.
 Loan was funded after the rescission period expired.
 Signed by all borrower(s).
 Settlement statement completed (HUD-1 or HUD-1A) (see Exhibit G).
These procedures should be performed as part of the review:

Compare funding sheet and closing statements to ensure all charges are shown properly and that
they are allowable.
Appendix 6.1
Sample Loan Review Program (cont.)

Review interest collected to verify that an overcharge has not occurred:
 VA and convention loans have interest collected from the date of funding up to and including
the last day of the month.
 FHA loans have interest collected from the date of recording up to and including the last day
of the month.
 If there are less than 30 days to the first payment, verify refund of interest for all days, including and after the first day of the month, to the funding.

Compare actual charges for credit reports and appraisal from bills to the actual amount collected
to ensure there is not an overcharge.

Review all conventional firsts and seconds per the underwriting guidelines of the credit union.
Completed Review of Funded Loans
A written report from the loan review officer will be prepared setting forth all findings and recommendations.
The loan review officer will keep the monthly review file and the individual audited loan files for a period
of two years.
Written Complaints
A copy of written complaints from borrowers regarding the handling of their loans will be investigated by
the loan review officer. This is to ensure that such complaints are properly handled by the loan department. All findings will be reported to the loan committee and any other interested parties. The loan committee will make the necessary recommendations.
Underwriting Approval
All underwriters must have a minimum of five years experience in the lending field. Two years must be
as an underwriter.
Loan Service Quality Review
It will be the responsibility of the loan service department manager to supply the loan review officer,
within 10 working days from the previous month-end, the following reports:

Returned payment coupons (see Exhibit H).

Conventional first and second loans, in foreclosure, which are less than 13 months aged (see Exhibit I).

First payment defaults (see Exhibit J). The loan review officer will be notified within 10 days after the first payment is due, whenever the tenth day appears.
Appendix 6.1
Sample Loan Review Program (cont.)

Name changes on hazard insurance without request for formal assumption (see Exhibit K).

Request for beneficiary statement on loans under 120 days old (see Exhibit L).

All discrepancies will be reviewed by the loan review officer who will, if necessary, recommend
appropriate action.
Underwriting Quality Control
A detailed discrepancy listing (see Exhibit M) will be prepared monthly by the loan underwriters for the
loan review officer, and submitted by the tenth working day from the previous month’s end. This report
will include all discrepancies on verification, credit reports, and appraisals in the documentation of a loan.
This report will indicate to management that the loan department is alert to errors.
Funding Quality Control
The funders are responsible for preparing a list of discrepancies (see Exhibit N) for the loan review officer by the tenth working day from the previous month’s end. This report is to denote discrepancies
found, or items missing in loans submitted for funding. This report will indicate to management that the
loan department is alert to errors.
Branch Office Review
Every year all branch offices will be reviewed by the loan review officer to ensure that originations of
loans comply with all investor, compliance regulations, and credit union policy and procedures (see Exhibit O and P). If major discrepancies are found, the loan review officer will make another visit to the office within six months to ascertain that all exceptions have been corrected. All reports will be submitted to
the loan committee and any other interested parties.
Denied or Cancelled Loan Applications
Each month all (or no less than 25 percent) denied loan applications (see Exhibit Q) will be reviewed for:

Race

Marital status

Sex

Income

Census trust

Reason for denial
Appendix 6.1
Sample Loan Review Program (cont.)
The review will ascertain if a compliance violation is occurring (e.g., more single women denied than
single males, more minorities denied than majorities).
Each month all cancelled loan applications will be audited for the applicants reasoning in canceling the
application.
The result of this review will be submitted to the loan committee on a quarterly basis to ascertain if any
trends are occurring that would cause inadvertent compliance violations.
Loan Review Questionnaire
Complete the questionnaire as it is to be used as reference whenever the certified public accountants
(CPAs) or NCUA examiners ask about the internal controls for the lending function of the credit union.
(see Exhibit R.)
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT A
BOARD OF DIRECTORS RESOLUTION
RESOLVED, that the Board of Directors have adopted and approved the following credit committee
(loan) committee and guidelines:
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT B
CREDIT REPORT CHECKLIST
LOAN NUMBER _________________
MORTGAGOR ___________________
ADDRESS ______________________
_______________________________
1. Does the length of employment agree?
YES ( ) NO ( )
2. Does the income agree?
YES ( ) NO ( )
3. Does the number of dependents agree?
YES ( ) NO ( )
4. Are all the accounts shown on the new report?
YES ( ) NO ( )
5. Are there any new accounts shown other than charge accounts?
YES ( ) NO ( )
6. Are there any legal items shown?
YES ( ) NO ( )
7. Were two repositories used?
YES ( ) NO ( )
8. Were inquiries checked?
YES ( ) NO ( )
Comments: ____________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT C
COVER LETTER
Name _____________________________
Presently we are in the process of conducting an audit on a portion of our loan files. Therefore, we request
that your office verify that the information indicated on the attached form was correct at the time of completion and that it was signed and mailed by your office.
Please complete the red-stamped area on the attached form. If there are any discrepancies, please note
them on the form and return as soon as possible. A return envelope is enclosed for your convenience.
Thank you for your cooperation in this matter. If you have any questions, please contact the undersigned.
Very truly yours,
_________________
Vice President
Internal Auditor
Enc.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT C-1
CREDIT RELEASE
TO WHOM IT MAY CONCERN:
I/We have applied for a real estate loan with a financial lending institution. You are hereby authorized to
release any information required by such lender to complete the processing of the loan request. Necessary
credit information may include savings deposits, checking accounts, consumer credit balances, payments
and history - including mortgage records and balances.
A photographic or carbon copy of this authorization (being a photographic or carbon copy of the signature(s) of the undersigned) may be deemed to be the equivalent of the original and may be used as a duplicate original.
Thank you.
_______________________
Signature
____________________
Social Security Number
_______________________
Signature
____________________
Social Security Number
Date: _____________________
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT C-2
VERIFICATION OF EMPLOYMENT FORM
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT C-3
VERIFICATION OF DEPOSITS
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT C-3 (cont.)
Consent to Investigate
I/We hereby authorize release of my/our credit, employment, and income information to
______________ for my/our pending real estate loan application. I/We acknowledge that there will be no
responsibility on your institution, officers, or employees for having furnished the same.
I/We further acknowledge and authorize that a reproduction or photocopy of this form may be made and
that such copies shall be as effective as the original, which I/we have signed.
_____________________
Applicant’s Signature
_____________________
Date
_____________________
Co-Applicant’s Signature
_____________________
Date
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT C-4
VERIFICATION OF LOANS
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT C-5
REQUEST FOR VERIFICATION OF MORTGAGE ACCOUNT
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT D
LETTER TO EXPLAIN THE QUALITY REVIEW
RE: Loan Number ______________________
As a credit union doing business with government agencies, we are required to comply with certain laws
and regulations. This is to ensure that all buyers are treated equally in obtaining a loan from this credit
union. If audited by a government agency, we must show that we have complied with these regulations
and are, in fact, an equal housing opportunity lender.
Therefore, we are requesting that you complete the attached form and return it as soon as possible to this
credit union. A return envelope is enclosed for your convenience.
If you should have any questions regarding this matter, please contact the undersigned at the telephone
number listed below.
Very truly yours,
_________________
Vice President
Internal Auditor
Enc.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT D-1
STATEMENT OF INFORMATION
Loan # _______________________
INFORMATION STATEMENT
Did a representative of ABC Federal Credit Union interview you? ( ) YES ( ) NO
If NO, please explain: ___________________________________________________________
_____________________________________________________________________________
What was the representative’s name? _______________________________________________
Did you review and sign a completed application: ( ) YES ( ) NO
If NO, please explain: ___________________________________________________________
_____________________________________________________________________________
Did you receive a RESPA booklet and a good faith estimate of closing cost? ( ) YES ( ) NO
If NO, please explain: ___________________________________________________________
Did you review the actual contents of your credit report at any time? ( ) YES ( ) NO
If NO, please explain: ___________________________________________________________
_____________________________________________________________________________
Are you occupying the property complying with the condition on which we made the loan to you?
( ) YES ( ) NO
If NO, please explain: ____________________________________________________________
_____________________________________________________________________________
____________________
Signature
________________________
Signature
____________________
Date
________________________
Date
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT E
FNMA NOMINATION AND RECOMMENDATION OF APPRAISER FORM
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT E-1
APPRAISAL REVIEW
RE: Loan Number:
Name:
Address:
Please review the attached appraisal report verifying information that does not require an interior inspection or measurement. Completion of a new appraisal report is not required.
INSTRUCTIONS
Following an exterior inspection of the property and the general neighborhood note in red ink on the copy
of the appraisal any error or deficiencies.
Comment specifically on the back of this letter on any adverse influences affecting the property that were
not mentioned in the original report. Comment on the suitability of the comparables used, value adjustments, and the indicated value.
Indicate your final judgement below, and sign and date the appraisal report in the space provided for the
review appraiser.
I have found the original appraisal to be ( ) accurate, ( ) inaccurate overall and believe the value is
( ) supported ( ) overstated ( ) understated.
Very truly yours,
__________________
Vice President
Internal Auditor
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT E-2
COMMERCIAL APPRAISAL REVIEW
RE: Loan Number:
Borrower:
Address:
Please review the attached commercial appraisal report, verifying all information that does not require an
interior inspection or measurement. Completion of a new appraisal report is not required. Please return
your response to the internal auditor, using the enclosed envelope.
Instructions:
1. Prepare the commercial appraisal review form.
2. Indicate your final judgement below, and sign and date the appraisal report form in the space provided for the review appraiser.
I have found the original appraisal to the ( ) accurate ( ) inaccurate overall. I believe the value is
( ) supported ( ) overstated, or ( ) understated.
Very truly yours,
________________
Vice President
Internal Auditor
Enc.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1
REVIEW CHECKLIST
Loan Number _________________ Purchase ______ Refinance _____ Owner _____ Non-Owner _____
Borrower ___________________________________________________________________________
Loan Amount _____________________ LTV _____ Type ______________ Rate __________________
AUDIT
Preliminary Title Report
□
□
□
□
□
□
Not over 90 days old at time of funding date.
Seller vesting (or borrower, if refinance).
Property address, if shown, agrees with application.
Plat Map
□
□
□
□
Agrees with legal description (lot/block/tract).
□
□
□
□
Lot dimensions agree with appraisal.
Ingress and egress to public street/road or right of way to property included in legal description.
Agrees with appraisers plat map (street name and modifier).
Impound Account Information
□
□
□
□
Completed.
Signed and dated/date stamped.
Loan Application (Original)
□
□
□
□
□
□
□
□
Date stamped.
Property address or legal description complete and correct.
Borrower’s social security number shown.
Financial data completed with totals.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
□
□
□
□
□
□
□
□
Occupancy statement checked.
Government monitoring section completed or initialed.
“For Lenders Use Only” section completed and signed by credit union employee.
Changes/white-outs initialed by borrower.
Addendum to Application (Original)
□
□
Signed and dated by all borrowers.
Fair Lending Notice
□
□
□
□
□
□
Completed — all sections.
Signed and dated by borrower.
Signature of credit union employee.
Occupancy Statement
□
□
□
□
Completed.
Signed and dated by borrower.
Good Faith Estimate (Purchase)
□
□
□
□
Mailed to borrower within 3 business days of receipt of loan application.
Signed by credit union employee.
Advance Disclosure — Reg. Z (Owner-Occupied Purchase)
□
□
Mailed to borrower within 3 business days of receipt of loan application.
Deposit Receipt/Sales Agreement
□
□
□
□
□
□
All information complete and correct (change orders and addendum received).
Signed by sellers (Name agrees with titles vesting on preliminary title report).
Signed by buyer.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
Appraisal
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
Address verified and agrees with loan application and sales agreement/escrow instructions.
Flood hazard area section completed.
Dated prior to loan approval and less than three months old.
Photos attached.
Sketch of lot and improvements.
Appraiser’s signature, class, and code number.
All conditions met or signed off by loan production manager.
If condominium or PUD checked by appraiser, verify with legal description, verify correct
appraisal form.
Appraisal Addendum
□
□
□
□
Flood insurance section completed.
Appraiser’s signature, date, class, and code number.
Escrow Instructions
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
Vesting correct.
Property address and legal description correct.
Sales price, down payment, fees, and changes correct (all deposits in escrow).
Loan amount correct.
Second trust deed amount as approved or less.
Credits to borrower approved by loan production manager.
Signed by buyers/borrowers.
Signed by seller/vestee (purchase only)
Certified by escrow officer with live signature.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
Credit Reports/Supplements
□
□
□
□
□
□
Less than 90 days old.
Supplements received, dated, and initialed.
Date stamped.
Applicants Certification: Loans to One Borrower
□
□
□
□
Completed.
Signed and dated by borrower.
Program Disclosure
□
□
□
□
Matches program type.
Signed and dated by borrower.
Transmittal Summary
□
□
□
□
Properly completed — all sections.
All required signatures.
Commitment Letter
□
□
□
□
□
□
□
□
Signed by at least one borrower.
Signed by loan production manager.
Servicing.
Right to appraisal.
Submitted Adjustment of Interest Agreement (Subsidy Buydown)
□
□
□
□
□
□
All information complete and correct.
Signed by credit union employee.
Signed by account holder.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
□
□
□
□
Signed by borrowers.
Copy on file.
Notice of Right to Cancel (Refinance/Owner Occupied)
□
□
□
□
Rescission expiration date completed.
Signed and dated by borrowers.
Agreement to Impound Funds (If Applicable)
□
□
□
□
Signed by borrowers.
Credit union employee signature.
Flood Insurance Identification Letter (If Applicable)
□
□
□
□
□
□
Completed.
Signed by loan closer.
Signed by borrowers.
Flood Insurance Application (If Applicable)
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
Borrower’s name correct.
Property address correct.
Description of improvements correct.
Flood program correct.
Credit union’s name and address correct.
Signed and dated by insurance agent.
Paid receipt first year’s premium OR
Verified paid on buyers/borrowers escrow instructions.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
Borrower’s Instructions
□
□
□
□
All information complete and correct.
Signed by borrowers.
Regulation Z — Final Disclosure (Owner Occupied)
□
□
Signed and dated by borrowers.
Escrow instructions
□
□
□
□
Signed by closer.
Acknowledged and dated by escrow officer.
Addendum to Escrow Instructions (Refinance/Owner Occupied)
□
□
□
□
Signed by closer.
Acknowledged and dated by escrow officer.
PMI Certificate (if applicable)
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
Borrower’s name correct.
Property address correct.
Loan amount and coverage correct.
Endorsed by insurer.
Conditions or subject to is satisfied.
Bottom portion completed.
Copy on file.
Copy of check in file.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
Hazard Insurance Requirements to Escrow Officer/Borrower
□
□
□
□
□
□
Signed by borrowers.
Signed by loan closer.
Acknowledged and dated by escrow officer.
Contract
□
□
□
□
□
□
Copy in file.
Legal description correct.
Correct term and type of service.
Insurance
□
□
Original policy or copy of policy certified by agent evidence of insurance or certificate of
insurance.
□
□
□
□
□
□
□
□
All borrowers insured per deed of trust.
□
□
□
□
□
□
□
□
□
□
□
□
□
□
Coverage equals loan amount: or replacement cost.
Subject property insured premises (address and number of units correct).
Term one year or more — new policy or
Six months or more remaining on existing policy. If less, refer to supervisor. (Only if loan
has insurance impounds).
Policy effective by date of funding.
Fire and extended coverage or better.
Deductible per credit union’s policy.
Credit union first mortgage (address correct).
Endorsement 438 BFU shown on declaration page.
Policy or copy in file.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
Closing Statement (Refinance Only)
□
□
□
□
□
□
Borrower’s name correct.
Fees, charges, and prepaid interest correct.
Original statement or copy certified by escrow officer with “live” signature (initials not
acceptable).
Promissory Note
□
□
□
□
□
□
□
□
□
□
□
□
□
□
Note agrees with deed of trust.
Loan amount correct.
Principal and interest payment and due date correct.
Addendums attached per loan program.
Borrower’s name typed and signed correctly.
No alterations.
Signed copy in file.
Form W-9 (Impounds and Subsidy)
□
□
□
□
□
□
□
□
Property address correct.
Signed and dated by primary borrower.
Signed and dated by seller (If seller owns subsidy buy down account).
Social security numbers correct.
Settlement Statement (Purchases Only)
□
□
□
□
□
□
□
□
□
□
Buyer’s/seller’s names correct.
Property address correct.
Sale price/down payment correct.
Second deed of trust correct (if applicable).
Credit union’s fees and prepaid interest correct.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
□
□
□
□
Credits to buyer as approved (if applicable).
Original statement or copy certified by escrow officer with “live” signature (initials not
acceptable).
ALTA Title Policy
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
Original signed policy and endorsements or
Certified copy with “live” or facsimile signatures.
Effective date and recording time agrees with deed of trust.
Credit union insured.
Vesting agrees with deed of trust.
Deed of trust recording date correct.
Legal description agrees with deed of trust.
Schedule B. Part I
□
□
□
□
□
□
□
□
Property taxes current.
Exceptions as approved.
Schedule B. Part II
□
□
□
□
Reads “none” or If approved.
□
□
Subordination agreement (If applicable).
Second deed of trust instrument/recorder’s number or book and page number
subsequent to our deed of trust.
CLTA endorsements (whichever is applicable)
□
□
□
□
□
□
□
□
100 (without deletion)
116
116.2
115
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
□
□
□
□
□
□
□
□
□
□
103.1
103.5
____________
____________
Copy in file.
Deed of Trust
□
□
□
□
□
□
□
□
□
□
Date agrees with promissory note.
All trustors’ names shown and correct.
Loan amount agrees with promissory note.
Trustor’s mailing address correct.
Riders attached (If applicable)
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
□
Condo
PUD
2 - 4 family
Other riders attached per loan program.
Legal description agrees with prelim.
Certified copy at funding.
Legal description initialed (if applicable).
No alterations (must be initialed if approved).
All signatures typed and signed correctly.
Notary form correct and completed.
Endorsed copy in file.
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-1 (cont.)
Certified Copies of Miscellaneous Documents
□
□
□
□
□
□
Power of attorney
______________
______________
Auditor: ___________________
_________________________
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-2
LOAN FILE EXCEPTION REPORT
Date: ____________________
Loan Name: ________________________
Loan No. ________________
We are returning the above loan file for correction of:
Document Exception:
Input Exception:
Internal Audit: ________________________________
Above numbered loan file approved for filing subject to:
_____ Corrected errors: __________________________________________________________
_____ Uncorrected errors: ________________________________________________________
_____ Non-correctable errors: _____________________________________________________
Internal Auditor: ________________________________
Audit/Loan File Copy
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-3
LOAN FILE AUDIT REPORT
Loan No: ____________________ Borrower(s): ______________________________________
Date Funded: ______________ Amount Funded: ______________________________________
Loan Agent/Broker: _____________________ Loan Approval: ____________ Date: _________
Address of Property: _____________________________________________________________
Fire Insurance Co: _________________________ Policy Amount: ________________________
Note Date: ______ Deed Date: ______ Title Policy Co: _________________________________
Appraisal Amount: __________ Appraisal Date: _________ Appraiser: ____________________
LTV: ______ PMI: ______ ARM: ______ FIXED: ______ Reg Z: ________________________
Closing Estimate: _________ Settlement: ___________ Fair Lending: _____________________
Obtain Credit: ____________ Good Faith: __________ Flood Notice: _____________________
Write-up: ______________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Pending Items:
Type
Date Sent
Date Re-sent
Date Received
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-4
ADJUSTABLE RATE EDP AUDIT
INQ (###)
Max CAP chg freq: ________________
Max CAP chg %: __________________
Max CAP life %: __________________
1st chg date: ______________________
beg int %: ________________________
INQ (###)
INQ (###)
Date pd to: _______________________
INQ (###)
Index id: _________________________
Margin: _________________________
Comments _____________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT F-5
EDP LOAN AUDIT WORKPAPERS
INQ (###)
fhlb: ____________________________
purp: ____________________________
type: ____________________________
ln $: ____________________________
ln dt: ____________________________
% rpt: ___________________________
Appr: ___________________________
INQ (###) Insurance
$ Cov: __________________________
exp dt: __________________________
pol #: ___________________________
INQ CIF “Multiple Borrowers” (name and address #10).
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT G
SETTLEMENT STATEMENT
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT G (CONT.)
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT G (CONT.)
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT H
PAYMENT COUPON REPORT
MONTH ENDING: _________
Loan Number
Borrower
Address
Date
Coupons
Returned
Date Re-Sent
Date Returned
Second
Time
Date Re-Sent
Reason for
Return and
Comments
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT I
CONVENTIONAL & SECOND LOANS FORECLOSURE
LESS THAN ONE YEAR OLD
MONTH ENDING: ___________
Investor
Loan Number
Borrower
First Pymt Due
Date
Date Int Paid
To
Comments
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT J
FIRST PAYMENT DEFAULT REPORT
The following loan(s) have missed their first payment date and are currently five days past due.
Loan Number:
Borrower(s):
Address:
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT K
NAME CHANGE ON HAZARD INSURANCE REPORT
MONTH ENDING: _________
Investor
Loan Number
Borrower
First Pymt
Due Date
Date Int Paid
to
Req for Bene
Statement
Rec’d.
Comments
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT L
REQUEST FOR BENEFICIARY STATEMENT
CONVENTIONAL, SECONDS & WAREHOUSE LOANS UNDER 120 DAYS OLD
MONTH ENDING: ___________________
Investor
Loan Number
Borrower
First Pymt
Due Date
Date Int Paid
To
Comments
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT M
UNDERWRITING AUDIT LOG
MONTH ENDING: ___________________
Loan Number
Borrower
Items Missing
Comments
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT N
FUNDING AUDIT LOG
MONTH ENDING: ___________________
Loan Number
Borrower
Items Missing
Comments
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT O
FUNDING AUDIT REPORT
MONTH ENDING: _______________
Branch
Loans Closed
# With Minor
Discrepancies
# With Major
Discrepancies
% Of Total With
Discrepancies
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________ ______________ ______________ ______________
Total
COMMENTS AND RECOMMENDATIONS:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
PREPARED BY: ____________________ REVIEWED BY: ______________
_____________________
Funding Supervisor
_______________________________
Loan Administrator
_____________________
Date
_______________________________
Date
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT P
AUDIT LOG
BRANCH ______________
□
□
DATE ______________
Notices
YES
NO
 Equal housing notice in English and Spanish?
_____
_____
 Fair lending notice posted where all applicants can see it?
_____
_____
 Business license posted?
_____
_____
 Is the branch manager’s copy of the branch operations manual available
for reference?
_____
_____
 Is the loan processor’s copy of the branch operations and lending manual available for reference?
_____
_____
_____
_____
 Does petty cash balance?
_____
_____
 Is the equal employment opportunity notice posted where all employees
can see it?
_____
_____
 Is the Safety and Health Act of 1973 notice posted where all employees
can see it?
_____
_____
_____
_____
_____
_____
Accounting and Personnel
 Are all other posters that are listed in the share branch audit program of
the internal audit manual visible to employees? If not, list those which
need to be posted?
□
File Retention
Branch is responsible for loan number _____ through ____
Total ____
Number of loans missing _____
Number of loans in process audited ___
% of total loans ____
% of loans with discrepancies ____
Number of loans cancelled/denied and reviewed for adverse statement
____
Number of loans missing adverse statement
____
Number of loans where adverse statement incomplete
____
Prepared by: _________________________ Date: ________________
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT Q
DENIED LOANS COMPLIANCE WORKSHEET
GENERAL INFORMATION:
Loan Number: ______________________________________ Loan Purpose: _____________________
Applicant’s Name: ___________________________________ Loan Type: _______________________
Co-Applicant’s Name: ________________________________ Term of Loan: ____________________
Property Address: ___________________________________ Rate of Loan: ______________________
__________________________________________________ Loan Amount: _____________________
MSA Code: _____ State Code: _____ County Code: ____ Census Tract: _________________________
NONDISCRIMINATION:
Applicant
Co-Applicant
Sex: M __ F __ Race/Natl Origin: ___________ Sex: M __ F __ Race/Natl Origin: _________
Marital Status: ________ Age: _____
Marital Status: _________ Age: ______
Public Assistance: Y ___ N ___
Public Assistance: Y ___ N ___
Combined Income: ________________________
LENDING STANDARDS
Appraised Value: _________ Sales Price: ________
Debt Income Ratio: _______% Total Debt Ratio: ______% LTV: _______% Loan Amount: _________
Reason for Denial/Cancellation: __________________________________________________________
____________________________________________________________________________________
TIMING:
Application Date: _______ TIL Date: ________ GFE Date: ________ Denial Date: _________
Comments:
________________________________________________________________________________
________________________________________________________________________________
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT Q (cont.)
LOAN DOCUMENTATION:
Yes/No
Application: _____ A. A. Notice: ______ Appraisal: _____ Credit Report: _____ GFE: _____
Verifications: _____ TIL Docs: ______ APR: ______ Rescission: ______ Other: __________
COMMENTS/EXCEPTIONS:
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
Prepared by: _________________________________ Date: ______________
Appendix 6.1
Sample Loan Review Program (cont.)
EXHIBIT R
LOAN REVIEW QUESTIONNAIRE
1. Does the credit union have a review program for real estate funded
loans?

If yes, who conducts the review?

If yes, is a report generated?
YES
NO
N/A
_____
_____
_____
______________________
_____
_____
_____
2. Does the review consider compliance matters?
_____
_____
_____
3. Does the review ascertain that staff is adhering to policy and procedures?
_____
_____
_____
4. Does the review ascertain that procedures are revised in a timely
manner?
_____
_____
_____
If yes, do these changes accurately describe the events needing
change?
_____
_____
_____
5. Does the loan review expand to cover areas where fraud or deficiencies are noted?
_____
_____
_____
6. Is a representative percentage of loans reviewed?
_____
_____
_____
7. Are there procedures covering loans that have been cancelled by the
member, or denied by the credit union?
_____
_____
_____
_____
_____
_____


If yes, is a report generated regarding the findings?
Prepared By:
Title:
Date:
ADDITIONAL COMMENTS:
Appendix 6.2
Sample Lending Quality Control/Audit
INTRODUCTION
The lending quality control/audit program includes the departments of real estate, consumer lending (titled loan origination), file maintenance, internal audit, security, and collections.
The Federal Home Loan Mortgage Corporation (Freddie Mac) has published loan industry guidelines for
quality control/audit. This credit union program, while covering all the aspects of the Freddie Mac guidelines, has assigned responsibility for quality control/audit differently (e.g., loan origination is recommended, by Freddie Mac, to re-verify employment, loans, deposits, etc., but in this program the internal
audit department (IAD) assumes the re-verification process).
This program is set forth in five sections:
Section 1. Quality Control/Audit — Loan Origination
Section 2. Quality Control/Audit — Post Funding/File Maintenance
Section 3. Quality Control/Audit — Third-Party Originators
Section 4. Quality Control/Audit — Lending Security
Section 5. Quality Control/Audit — Special Services (Collections)
From time to time, Freddie Mac will conduct a post funding quality control review, by requesting the
credit union to submit designated mortgage files to their office. These procedures are outlined in 46.1 to
48.10 of the Freddie Mac Seller and Servicer Guide.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
SECTION 1: QUALITY CONTROL/AUDIT — LOAN ORIGINATION
The primary purpose of a quality control/audit examination is to ascertain that all necessary documents
needed, are in the loan (credit)file and are correct. A secondary purpose is to verify the investment quality
of the loan(s), in the event they are sold to Freddie Mac or Fannie Mae.
A seller must operate a quality control/audit program for home mortgages originating on or after August
1, 1989, in order to maintain its eligibility as a seller/servicer. While one specific quality control program
cannot meet the needs of all investors, there are certain characteristics found in all effective quality control programs. For this reason Freddie Mac requires that a sellers’ quality control program just:

Be in writing.

Provide for standard operating procedures for all employees who will be involved with or affected by the quality control/audit process.

Operate independently from mortgage origination and underwriting departments.

Be capable of evaluating and monitoring the overall quality or mortgage production on a regular
and timely basis.

Include procedures to ensure that sample selection, mortgage file reviews, and the reporting of
findings to senior management are conducted on a timely basis.

Comply with specific requirements in section 48.4 of the Sellers’ and Servicers’ Guide that address sample size, sample selection, reverification, file review, and reporting.
The quality control/audit results must be presented in writing to the internal auditor on a quarterly basis.
These results will be included in the internal auditor’s quarterly report to senior management and the supervisory committee.
Included in this program is a quality control checklist, appraisal review, and hazard insurance review.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Quality Control/Audit Checklist — Loan Origination
Loan Number _____________ Loan Type __________ Borrower ________________________________
Source Broker ______________________ Property Address ____________________________________
LTV ________ Loan Amount _____________________ Close Date ___________ Term _____________
Interest Rate __________________ Audited by ________________________ Audit Date ____________
YN
W-9 Tax Form
__ __
Signed and dated.
Statement of Occupancy
__ __
Signed and dated.
Good Faith Estimate
__ __
Dated within three days of receipt of application.
__ __
Signed by the borrower.
Notice of Right of Rescission (refinances only)
__ __
Signed and dated.
Handwritten Application
__ __
Signed and dated.
__ __
Information agrees with credit report/VOE/VOD.
Typed Application
__ __
Signed and dated (including REO schedule when applicable).
__ __
Handwritten application is consistent with typed application.
__ __
Application’s liabilities consistent with credit report.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Credit Report
__ __
Less than 120 days from date of the note.
__ __
Updated report reflects same or similar open accounts and balances.
__ __
All derogatory statement explained.
__ __
All judgments, collection accounts paid.
__ __
All inquiries satisfactorily explained.
Verification of Employment
__ __
Signed by employer.
__ __
Covers two-year period of employment (if applicable).
__ __
Re-verified VOE agrees with original.
__ __
Original VOE dated less than 120 days from note date.
__ __
All corrections initialed.
Self-Employed (if applicable)
__ __
Signed tax returns received for prior two years (have returns re-signed in blue or red ink when
presented).
__ __
Current year-to-date signed financial statements.
Verification of Deposit(s)
__ __
Original VOD less than 120 day old from note date.
__ __
VOD is signed by depository institution.
__ __
Sufficient assets verified to close the loan.
__ __
Confirm the re-verified VOD agrees with the original.
__ __
Verified deposit accounts that have an open date of less than 90 days require a source of funds
explanation.
__ __
All corrections initialed.
__ __
Two months cash reserves for loan purchases, at loan closing.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Gift Letters (given by a relative only)
__ __
Donor’s address, relationship, telephone number, and account number shown.
__ __
Stated in writing that monies are a gift and are not to be repaid.
__ __
Monies verified in donor’s account (not a Freddie Mac requirement) but do require written evidence of monies being transferred from donor to the borrower.
__ __
Signed and dated by the donor.
__ __
Identify subject property being purchased.
__ __
State the amount of the gift.
Real Estate Credit Rating (RECR)
__ __
Confirm re-verified RECR to verify it agrees with the original.
__ __
Original must have all applicable information and must be dated and signed by the lending institution.
Appraisal
__ __
Does the appraised value differ materially from the sale price per the contract?
__ __
Appraisal is dated prior to the date of closing.
__ __
Appraisal is completed on the proper form.
__ __
Appraisal is signed and dated by the appraiser.
__ __
Appraisal address and legal description should match the title policy.
__ __
If approved appraiser signs as review appraiser, he or she must state that he or she physically inspected the property.
__ __
Term of loan does not exceed the economic life the property.
__ __
Flood hazard area is checked.
Termite Report
__ __
Treated for infestation.
__ __
All work requirements completed.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Condominiums and Planned Unit Developments
__ __
CC&Rs, articles of incorporation, and bylaws are in the file.
__ __
Fidelity bond insurance in force.
__ __
Budget and balances of home owner’s association on file.
Hazard and Flood Insurance
__ __
Coverage of replacement cost.
__ __
The policy is dated no later than the closing date.
__ __
Property address and borrower’s name(s) are correct.
__ __
Form 438 BFU lender’s loss payable stated.
Final Truth-in-Lending Act Disclosure
__ __
Charged paid by seller are not included.
__ __
Signed and dated at close of escrow.
__ __
Recompute the APR.
__ __
All the required disclosures are stated.
Note
__ __
Signed by the borrower exactly as the name is typed.
__ __
Loan amount does not exceed firm commitment loan approval.
__ __
Interest rate is correct.
__ __
Loan amount is correct — both the figure and written amount.
__ __
Loan term agrees with commitment loan approval.
__ __
Any and all corrections have been initialed by the borrower.
Trust Deed
__ __
Date is the same as in the note.
__ __
Loan amount is the same as the note — both the figure and written amount.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
__ __
Borrower’s name conforms to the note.
__ __
Address agrees with the preliminary title policy.
__ __
Legal description agrees with the title policy.
__ __
Signed by the borrower exactly as typed.
__ __
Properly notarized.
__ __
Appropriate riders attached.
Title Policy
__ __
Dated on or after recording of trust deed.
__ __
Amount of insurance is not less than the loan amount.
__ __
Title and vesting agrees with the trust deed.
__ __
Any references to taxes/assessments states “not yet due and payable.”
__ __
Check address on 116 endorsement.
Escrow Instructions
__ __
Sales price and loan amount must agree with the loan authorization and loan application.
__ __
Vesting should match the typed loan application and preliminary title report (sometimes vesting
will change at escrow or in the case of a purchase, vesting will not match preliminary title).
__ __
Escrow instructions must be certified from the escrow company.
Underwriting
__ __
Underwritten to Freddie Mac guidelines.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Results of Quality Control/Audit:
[S]____________________________________________ Date_________________________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Quality Control/Audit — Loan Origination
The following quality control/audit plan will explain in detail the procedures to follow in each one of the
below listed documents:
The following abbreviations were used to simplify documentation:
A. LAS:
Loan Authorization Sheet
B. CU:
Credit Union
C. DOC:
Documents
Yes
1.
No
N/A
Remarks
LOAN AUTHORIZATION SHEET — AT TIME OF DOC PREP
Agree to loan application —
Purchase.
____
____
____
______________________
Agree to title report — Refi.
____
____
____
______________________
Agree property address to
preliminary title report.
____
____
____
______________________
Agree description of property on appraisal.
____
____
____
______________________
C. Purpose:
Agree to loan application.
____
____
____
______________________
D. Appraisal/LTV:
Agree appraisal amount to
appraisal. Recalculate LTV.
Loan amount divided by
appraisal amount.
____
____
____
______________________
Make sure all conditions
have been satisfied.
____
____
____
______________________
One or the other has to be
circled.
____
____
____
______________________
XXX signatures required.
Must also be dated.
____
____
____
______________________
H. Rate:
Agree to rate sheet.
____
____
____
______________________
I. Fees
Agree percentage to rate
sheet and recalculate the
fees based on approved loan
amount.
____
____
____
______________________
Recalculate based on approved status. Round up.
____
____
____
______________________
A. Borrower:
B. Collateral:
E. Conditions:
F. Approved/disppr:
G. Signatures:
J. Payment:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
K. Special requir:
See that any additional conditions have been met.
Yes
No
N/A
Remarks
____
____
____
______________________
If there is more than one change in the loan committee action section, it should be retyped with the original stapled
to the back.
2.
INSTRUCTIONS TO ESCROW — AT TIME OF DOC PREP
A. Loan number:
Agree to loan the note.
____
____
____
______________________
B. Date:
Date of note.
____
____
____
______________________
C. Loan name:
Agree to LAS.
____
____
____
______________________
D. P&I:
Agree to LAS.
____
____
____
______________________
E. Prior to funding:
Agree to LAS.
____
____
____
______________________
F. Loan amount:
Agree to Note
____
____
____
______________________
G. Origination fees:
Agree to LAS.
____
____
____
______________________
H. Tax service:
Agree to realty tax service
form.
____
____
____
______________________
Recalculate from LAS.
Loan amount times loan rate
divided by 360.
____
____
____
______________________
First day of the month following date of note.
____
____
____
______________________
K. First pay date:
Agree to note.
____
____
____
______________________
L. Vesting:
Agree to LAS.
____
____
____
______________________
M. Address:
Agree to LAS.
____
____
____
______________________
N. Riders:
If the loan is an adjustable
loan, or if it is a two- to
four-unit property, an X
should be placed here and
reference to rider placed.
____
____
____
______________________
If the loan is a SFR and is a
refinance, then an X should
be entered and the rescission
notice attached.
____
____
____
______________________
These costs should be listed
here with disclosure of
amount paid and amount
due.
____
____
____
______________________
Q. Endorsements:
Agree to title policy.
____
____
____
______________________
R. Signature:
Must be signed by all parties on the note (after funding).
____
____
____
______________________
I. Daily interest:
J. Date:
O. Rescission notice:
P. Buyer’s costs:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
3.
4.
INSURANCE POLICY — AFTER FUNDING
A. Policy period:
Must be current.
____
B. Name/address:
Agree to LAS.
____
C. Mortgage:
CU, its successors and/or
assignees. Must include the
loan number.
____
D. Dwelling coverage: At least equal to loan
amount. Will accept replacement cost guarantee
from insurance company.
____
Coverage can be less than
the loan amount, but must
equal at least to “total estimated cost of new” per the
appraisal.
E. Locat of prem:
Must have property address
on the LAS.
____
F. 438BFU/AU319:
Must include this reference.
____
G. Endorsement:
Endorsement change must
be prior to recording of trust
deed.
____
H. Premium:
Must have premium
amount.
____
REALTY TAX SERVICE — AT TIME OF DOC PREP
A. Loan number:
Agree to note.
____
B. Contract number:
Must be recorded and dated
(after funding).
____
C. Member name/addr: CU.
____
D. Member number:
Should always be XXXXX.
____
E. Loan amount:
Agree to LAS.
____
F. Term of loan:
Agree to LAS.
____
G. Tax Service:
Agree to good faith estimate
sheet.
____
H. Service type:
If there are impound reserves, service type should
be impound/escrow service.
____
If loan is not impounded,
then delinquency service
and H should be checked.
____
I. Borr. name/addr:
Agree to LAS.
____
J. Legal description:
Agree to title report. May
have an attachment to contract if it is lengthy.
____
No
N/A
Remarks
____
____
____
____
______________________
______________________
____
____
______________________
____
____
______________________
____
____
____
____
______________________
______________________
____
____
______________________
____
____
______________________
____
____
______________________
____
____
____
____
____
____
____
____
____
____
______________________
______________________
______________________
______________________
______________________
____
____
______________________
____
____
______________________
____
____
____
____
______________________
______________________
____
____
______________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
5.
N/A
Remarks
COMMITMENT LETTER — AT TIME OF DOC PREP
Borrower’s name agree to
LAS.
____
____
____
______________________
Within a few days of the
date of the loan committee
action.
____
____
____
______________________
C. Information:
Agree to LAS.
____
____
____
______________________
D. Subject to foll:
Conditions from the LAS
that the borrower still needs
to satisfy.
____
____
____
______________________
Should be 10 days from date
of loan committee action.
____
____
____
______________________
Should be 21 days from
loan committee action.
____
____
____
______________________
Must be signed and dated by
authorized CU employee.
____
____
____
______________________
Must be signed and dated by
at least one borrower.
____
____
____
______________________
A. To:
B. Date:
E. Date:
F. Date:
G. Signature:
H. Accepted sig:
6.
No
GOOD FAITH ESTIMATE — AT TIME OF DOC PREP
A. Lender:
CU.
____
____
____
______________________
B. Borrower:
Agree to LAS.
____
____
____
______________________
C. Loan number:
Agree to note.
____
____
____
______________________
D. Address:
Agree mailing address to
loan applic.
____
____
____
______________________
E. Loan amount:
Agree to LAS.
____
____
____
______________________
F. Loan amount:
Agree to LAS.
____
____
____
______________________
G. Rate:
Agree to LAS.
____
____
____
______________________
H. Amount financed:
Total loan amount less total
prepaid finance charge.
____
____
____
______________________
Amount financed less
amount paid to others on
borrower’s behalf, and
amount paid on borrower’s
account.
____
____
____
______________________
J. Tot paid to others:
Sum of items III and IV.
____
____
____
______________________
K. Loan Fee:
Agree to LAS.
____
____
____
______________________
L. Prepaid interest:
Recalculate: Loan amount
times rate divided by 360
times 30.
____
____
____
______________________
I. Amt given direct:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
M. Tax service:
No
N/A
Remarks
____
____
____
______________________
____
____
____
______________________
N. Prepaid finance
chg:
Sum of items under V.
O. Purchase infor:
Should be completed if it
was a purchase.
____
____
____
______________________
Should show amounts if the
loan is impounded.
____
____
____
______________________
Should show amounts if
there is PMI.
____
____
____
______________________
Signed & dated by all parties on title.
____
____
____
______________________
____
____
____
______________________
____
____
____
______________________
P. Tax & ins. reserve:
Q. Mortg ins prem:
R. Signature:
7.
Recalculate: $52.00 for the
first $499,999.99; additional
$10.00 per each
$100,000.00 from
$500,000.00 and up.
Yes
FIXED-RATE NOTE — AT TIME OF DOC PREP
A. Loan number:
Agree to deed of trust.
B. Date:
Within a few days of commitment letter acceptance.
Must be the same date as the
deed of trust.
C. Prop address:
Agree to LAS.
____
____
____
______________________
D. Amount:
Agree to LAS. Must be the
same as the deed of trust.
____
____
____
______________________
E. Lender:
CU.
____
____
____
______________________
F. Rate:
Agree to LAS.
____
____
____
______________________
G. First payment:
First day of the second
month following the note
date. (i.e., if date of the note
is 12-19-93, then the first
due date is 2-1-94).
____
____
____
______________________
One month less than the
first due date plus the term
of the loan was for 30 years,
then the due date is 1-12024.
____
____
____
______________________
I. Address:
CU’s P.O. Box address.
____
____
____
______________________
J. Monthly payment:
Agree to LAS.
____
____
____
______________________
K. Late charge days:
15 calendar days.
____
____
____
______________________
H. Due date:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
L. Late charge %:
M. Signatures:
8.
Yes
No
N/A
Remarks
5% for Freddie Mac sellable
loans.
____
____
____
______________________
Signed by all parties on title
(after funding).
____
____
____
______________________
ADJUSTABLE-RATE NOTE — AT TIME OF DOC PREP
A. Loan number:
Agree to deed of trust.
____
____
____
______________________
B. Amount:
Agree to LAS. Must be the
same as the deed of trust.
____
____
____
______________________
A few days after acceptance
of commitment letter. Must
be the same as the deed of
trust.
____
____
____
______________________
Should spell out dollar
amount in B above.
____
____
____
______________________
E. Dollars:
Agree to B above.
____
____
____
______________________
F. Interest rate:
Agree to LAS.
____
____
____
______________________
G. Monthly payments: Agree to LAS.
____
____
____
______________________
First day of second month
following date of note.
____
____
____
______________________
One month less than first
due date, plus term of loan
per LAS.
____
____
____
______________________
6, 7, 6 months if it is to be
adjusted every 6 months.
____
____
____
______________________
Agree to LAS. Should be in
the form of XX.XXX%.
____
____
____
______________________
Agree to LAS. Should be in
the form of XX.XXX%.
____
____
____
______________________
Agree to LAS. If it is something other than 5%, the
correct % should be typed in
and initialed by the borrower.
____
____
____
______________________
15 business days should be
crossed out to be 15 calendar days, and initialed by
the borrower.
____
____
____
______________________
O. Attention:
Agree to LAS.
____
____
____
______________________
P. Property address:
Agree to LAS.
____
____
____
______________________
C. Date:
D. Principal sum:
H. Commencing on:
I. Due date:
J. Adj. interval:
K. Basis point diff:
L. First adj. interv:
M. Life cap:
N. Late charge:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Q. Signature:
9.
10.
12.
No
N/A
Remarks
____
____
____
______________________
ADJUSTABLE-RATE RIDER — AMLs (ARM) ONLY — AT TIME OF DOC PREP
A. Loan number:
Agree to note.
____
____
____
______________________
B. Date:
Agree to LAS.
____
____
____
______________________
C. Address:
Agree property address to
LAS.
____
____
____
______________________
D. Interest rate:
Agree to LAS.
____
____
____
______________________
E. Date:
Agree to date on federal
truth-in-lending disclosure.
____
____
____
______________________
F. Adjustable cap:
Agree to LAS.
____
____
____
______________________
G. Life cap:
Agree to LAS.
____
____
____
______________________
H. Adjustment interv:
Agree to note.
____
____
____
______________________
I. Signatures:
Signed by all parties on title
(after funding).
____
____
____
______________________
CONDOMINIUM RIDER — AT TIME OF DOC PREP
A. Loan number:
Agree to note.
____
____
____
______________________
B. Date:
Agree to note.
____
____
____
______________________
C. Lender:
CU.
____
____
____
______________________
D. Address:
Agree property address to
LAS.
____
____
____
______________________
Signed by all parties on title
(after funding).
____
____
____
______________________
E. Signatures:
11.
Signed by all parties on title
(after funding).
Yes
DUE ON TRANSFER RIDER — SECOND TRUST DEED LOANS ONLY — FIXED-RATE NONASSUMABLE LOANS ONLY — AT TIME OF DOC PREP
A. Loan number:
Agree to note.
____
____
____
______________________
B. Date:
Agree to date of note.
____
____
____
______________________
C. Lender:
CU.
____
____
____
______________________
D. Property:
Agree to LAS.
____
____
____
______________________
E. Signed:
Signed by all parties on title
(after funding).
____
____
____
______________________
DEED OF TRUST — AT TIME OF DOC PREP
A. Mail to:
CU.
____
____
____
______________________
B. Loan number:
Agree to note.
____
____
____
______________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
Remarks
Must be recorded and have
document number affixed.
Must agree to information
on title policy (after funding).
____
____
____
______________________
D. Date:
Agree to date of note.
____
____
____
______________________
E. Trustor:
Agree to LAS. Vesting must
be accurate.
____
____
____
______________________
Must agree to title policy,
including status.
____
____
____
______________________
F. Trustee:
Title insurance company.
____
____
____
______________________
G. Beneficiary:
CU.
____
____
____
______________________
H. Address:
CU address.
____
____
____
______________________
I. Amount:
Agree to LAS. Must be
spelled out.
____
____
____
______________________
Agrees to LAS. Should be
in numerical figures.
____
____
____
______________________
K. Due date:
Agree to note.
____
____
____
______________________
L. Prop location:
Agree to title policy. Legal
description must be exact.
____
____
____
______________________
Agree property address to
LAS.
____
____
____
______________________
Should be due on transfer
rider if it is a second trust
deed loan only. If it is an
AML, then the adjustablerate rider should be checked
off. If the loan is for a condominium, then the condominium rider should be
checked off.
____
____
____
______________________
____
____
____
______________________
____
____
____
______________________
C. Recorded stamp:
J. Amount:
M. Address:
N. Other:
O. Signatures:
P. Notarized:
13.
Must be signed by all parties on title (after funding).
Must be notarized (after
funding).
TITLE POLICY — MUST BE AN ALTA POLICY — AFTER FUNDING
A. Amt. of liab.
Loan amount — agree to
LAS.
____
____
____
______________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
Remarks
After date of loan. Should
be the same date as the recording of trust deed.
____
____
____
______________________
C. Name of insured:
CU.
____
____
____
______________________
D. Vested in:
Agree to LAS.
____
____
____
______________________
E. Indebtedness of:
Loan amount agree to LAS.
____
____
____
______________________
F. Dated:
Date of note.
____
____
____
______________________
G. Trustor:
Agree to LAS.
____
____
____
______________________
H. Trustee:
Title insurance company.
____
____
____
______________________
I. Beneficiary:
CU.
____
____
____
______________________
J. Legal descrp:
Must be the same as the
deed of trust.
____
____
____
______________________
Read the policy to see if
there are any restrictions
besides the normal.
____
____
____
______________________
They should be paid unless
they are not yet due (if the
due date is within 45
through escrow).
____
____
____
______________________
B. Date of policy:
K. Restrictions:
L. Taxes:
14.
TRUTH-IN-LENDING DISCLOSURE STATEMENT — AT THE TIME OF DOC PREP
A. Loan number:
Agree to note.
____
____
____
______________________
B. Date:
Agree to date of note.
____
____
____
______________________
C. Creditor:
CU.
____
____
____
______________________
D. Borrower:
Agree name and address to
LAS.
____
____
____
______________________
Recalculate using HP12
calculator.
____
____
____
______________________
Total of payments less
amount financed.
____
____
____
______________________
Agree to good faith estimate. Total loan amount
less total prepaid finance
charge.
____
____
____
______________________
Recalculate: Payment
amount times number of
payments. (Sum of F&G).
____
____
____
______________________
I. No. of payments:
Agree to LAS.
____
____
____
______________________
J. Payment:
Agree to LAS.
____
____
____
______________________
E. APR:
F. Finance charge:
G. Amount financed:
H. Total of pymts:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
Remarks
K. Month beginning:
Agree to note.
____
____
____
______________________
L. Security:
Real property. Agree address to LAS.
____
____
____
______________________
15 days. Amount equals
loan payment times 5%.
____
____
____
______________________
Will not be entitled to refund.
____
____
____
______________________
Will not have to pay penalty.
____
____
____
______________________
Cannot assume the mortgage on fixed loans only.
AMLs are assumable.
____
____
____
______________________
An X must be placed if
there is a balloon payment.
____
____
____
______________________
Q. Property ins:
Must be checked.
____
____
____
______________________
R. Flood ins.
Check the appraisal to see if
property requires flood insurance.
____
____
____
______________________
____
____
____
______________________
M. Late charge:
N. Prepayment:
O. Assumption:
P. Demand feature:
S. Signature:
Must be signed by all parties on title (after funding).
**For AMLs (ARM) review paragraph in the middle for rate and terms and agree to note and adjustable rate rider.
15.
PAYMENT LETTER TO BORROWER — AT TIME OF DOC PREP
A. From:
CU.
____
____
____
______________________
B. Loan number:
Agree to note.
____
____
____
______________________
C. Prop. address:
Agree to LAS.
____
____
____
______________________
D. To:
Agree to LAS.
____
____
____
______________________
E.. Monthly pay beg:
Agree to note.
____
____
____
______________________
F. Monthly until:
Agree to note.
____
____
____
______________________
G. P&I:
Agree to LAS.
____
____
____
______________________
____
____
____
______________________
Include them when applicable.
____
____
____
______________________
Signed by all parties on title
(after funding).
____
____
____
______________________
H. Make payments to: CU.
I. PMI, taxes, ings.
J. Signatures:
16.
OCCUPANCY DECLARATION — ONLY FOR OWNER OCCUPIED — AT TIME OF DOC PREP
A. To:
CU.
____
____
____
______________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
17.
N/A
Remarks
Agree to note.
____
____
____
______________________
C. Property address:
Agree to LAS.
____
____
____
______________________
D. Dated:
Date of note.
____
____
____
______________________
E. Signatures:
Signed by all parties on title
(after funding).
____
____
____
______________________
BILLING ADDRESS CONFIRMATION — AT TIME OF DOC PREP
A. Date:
Date of note.
____
____
____
______________________
B. Loan number:
Agree to note.
____
____
____
______________________
C. Property:
Agree to LAS.
____
____
____
______________________
D. Mailing address:
Should be filled out by borrower (after funding).
____
____
____
______________________
Signed by all parties on title
(after funding).
____
____
____
______________________
HAZARD INSURANCE REQUIREMENTS — AT TIME OF DOC PREP
A. Lender:
CU.
____
____
____
______________________
B. Escrow:
Agree to escrow instructions.
____
____
____
______________________
C. Date:
Date of note.
____
____
____
______________________
D. Escrow number:
Agree to escrow instructions.
____
____
____
______________________
E. Loan number:
Agree to note.
____
____
____
______________________
F. Lender loss pay:
CU, its successors and/or
assignees. Also include the
loan number.
____
____
____
______________________
Signed by all parties on title
(after funding).
___
___
___
______________________
Must be signed by an authorized CU employee.
____
____
____
______________________
G. Signatures:
H. Signature:
19.
No
B. Loan number:
E. Signature:
18.
Yes
BORROWER’S CERTIFICATION AS TO OTHER LOANS — AT TIME OF DOC PREP
Borrower’s names agree to
LAS.
____
____
____
______________________
B. Loan number:
Agree to note.
____
____
____
______________________
C. Property address:
Agree to LAS.
____
____
____
______________________
D. Amount:
Agree to LAS.
____
____
____
______________________
E. Other loans:
Take a computer inquiry.
Agree information to borrower’s disclosure.
____
____
____
______________________
A. To:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
F. Signatures:
G. Date:
20.
N/A
Remarks
Signed by all parties on title
(after funding).
____
____
____
______________________
Date the documents were
signed.
____
____
____
______________________
A. Borrowers:
Agree to LAS.
____
____
____
______________________
B. Loan number:
Agree to note.
____
____
____
______________________
C. Property address:
Agree to LAS.
____
____
____
______________________
D. Date of transact:
This date should be filled in
by escrow. If it is not filled
in, then number 3 should be
circled and dated by borrower.
____
____
____
______________________
Circled if date of transaction
is not filled in.
____
____
____
______________________
F. Name of creditor:
CU.
____
____
____
______________________
G. I wish to cancel:
This SHOULD NOT be
signed.
____
____
____
______________________
This should be signed by all
parties on title, unless there
was a waiver. If there was a
waiver, then it must be in
writing.
____
____
____
______________________
H. Signatures:
22.
No
NOTICE OF RIGHT TO CANCEL — ONLY ON OWNER-OCCUPIED REFI’S — AFTER FUNDING
E. Number 3:
21.
Yes
CORPORATION ASSIGNMENT OF DEED OF TRUST — AT TIME OF DOC PREP
A. Date:
Date of note.
____
____
____
______________________
B. Executed by:
Agree vesting to LAS.
____
____
____
______________________
C. Trustor:
Title insurance company.
____
____
____
______________________
D. Description:
Agree to title report.
____
____
____
______________________
ONE-TO-FOUR FAMILY RIDER — ASSIGNMENT OF RENTS — ONLY FOR TWO-TO-FOUR UNIT
— AT TIME OF DOC PREP
A. Loan number:
Agree to note.
____
____
____
______________________
B. Date:
Date of note.
____
____
____
______________________
C. Lender:
CU.
____
____
____
______________________
D. Security instr:
Agree to LAS.
____
____
____
______________________
E. Signature:
Signed and dated by all parties on title (after funding).
____
____
____
______________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
23.
N/A
Remarks
RESIDENTIAL LOAN APPLICATION — AFTER FUNDING
A. Property address:
Agree to LAS.
____
____
____
______________________
B. Legal descrip:
Agree to title policy.
____
____
____
______________________
C. Purpose of loan:
Must be filled in. Agree to
LAS.
____
____
____
______________________
Must be filled in. Agree to
LAS.
____
____
____
______________________
Must be filled in. Agree to
LAS.
____
____
____
______________________
Must be signed by all parties on title and dated.
____
____
____
______________________
Must have a loan application filled out for all parties
on title.
____
____
____
______________________
D. Title to be held:
E. Manner held:
F. Signature:
24.
No
RESIDENTIAL APPRAISAL REPORT — AT TIME OF DOC PREP
A. Borrower:
Agree to LAS.
____
____
____
______________________
B. Property address:
Agree to LAS.
____
____
____
______________________
C. Legal descrip:
Agree to preliminary title
policy.
____
____
____
______________________
D. Lender:
CU.
____
____
____
______________________
E. Address:
CU’s address.
____
____
____
______________________
F. Cost approach:
Must come up with a value
using the cost approach.
____
____
____
______________________
Must come up with a value
using the market approach.
____
____
____
______________________
Must come up with a value
on two-to-four units.
____
____
____
______________________
I. Freddie Mac 439:
Must be attached.
____
____
____
______________________
J. Market value:
Must come up with one value after evaluating all three
approaches.
____
____
____
______________________
Must be signed by one of
the approved appraisers.
The appraiser’s class must
correspond to the type of
property they are appraising.
Must have social security
number or tax ID number
for appraiser.
____
____
____
______________________
G. Market approach:
H. Income approach:
K. Appraiser:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
L. Review appraiser:
M. Subject to cond:
25.
Yes
No
N/A
Remarks
____
____
____
______________________
____
____
____
______________________
If there is one, then the review appraiser must physically inspect the property.
Must be met or waived in
writing by approving authority.
LOAN CLOSING STATEMENT — AFTER FUNDING
A. Loan number:
Agree to note.
____
____
____
______________________
B. Borrower:
Agree to LAS.
____
____
____
______________________
C. Date:
Within a few days of date of
note.
____
____
____
______________________
D. Loan amount:
Agree to LAS.
____
____
____
______________________
E. Cash deposited:
Agree to copies of GL tickets in file.
____
____
____
______________________
Agree to copies of GL tickets in file.
____
____
____
______________________
G. Credit report:
$50.00 per report.
____
____
____
______________________
H. Tax lien service:
Agree to realty tax sheet.
____
____
____
______________________
I. FHCI certificate:
$14.50 per loan.
____
____
____
______________________
J. Loan fee:
Recalculated by underwriter
at time of funding.
____
____
____
______________________
Agree to appraisal fee invoice.
____
____
____
______________________
L. Loan agent fees:
Agree to LAS.
____
____
____
______________________
M. Proceeds to title:
CU will first take out money
due us, the remaining proceeds will be sent to title
company.
____
____
____
______________________
Agree to good faith estimate.
____
____
____
______________________
O. Drawing doc fees:
Using $175.00 per loan.
____
____
____
______________________
P. Processing fees:
Usually $175.00 per loan.
____
____
____
______________________
Q. Interest:
Recalculate: Loan amount
times interest rate divided
by 360 times the number of
days till the end of the
month. Recalculated at time
of funding.
____
____
____
______________________
F. Cash deposited:
K. Appraisal fee:
N. Impounds:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
R. Totals:
S. Approved:
26.
27.
28.
Yes
No
N/A
Remarks
Footed by underwriter at
time of funding.
____
____
____
______________________
Must be signed and dated.
____
____
____
______________________
ESCROW FORM — AFTER FUNDING
A. Sum:
Agree to LAS.
____
____
____
______________________
B. Legal descr:
Agree to title policy and
trust deed.
____
____
____
______________________
C. Title vested in:
Agree to LAS.
____
____
____
______________________
D. Lien on tr. deed:
Must have CU and loan
amount. Some escrow forms
will not have CU, but will
have lender.
____
____
____
______________________
SETTLEMENT STATEMENT — AT TIME OF DOC PREP
A. Loan number:
Agree to note.
____
____
____
______________________
B. Borrower:
Agree to LAS.
____
____
____
______________________
C. Seller:
Name of seller if it was a
purchase.
____
____
____
______________________
D. Lender:
CU.
____
____
____
______________________
E. Prop. location:
Agree to LAS.
____
____
____
______________________
F. Settlement agent:
Agree to escrow.
____
____
____
______________________
G. Settlement date:
Same day or one day after
funding.
____
____
____
______________________
H. Loan amount:
Agree to LAS.
____
____
____
______________________
I. Origination fees:
Agree to LAS less prepaid
fees.
____
____
____
______________________
J. Tax service:
Agree to tax realty sheet.
____
____
____
______________________
K. FHCI certificate:
$14.50 per loan.
____
____
____
______________________
L. Interest:
Agree to closing statement.
____
____
____
______________________
M. Processing fee:
Agree to closing statement.
____
____
____
______________________
N. Document fee:
Agree to closing statement.
____
____
____
______________________
FORM W-9 — AFTER FUNDING
A. Name:
Agree to LAS.
____
____
____
______________________
B. Address:
Does not have to be property address.
____
____
____
______________________
C. Tax ID Number:
Must fill in one of the two.
____
____
____
______________________
D. Signature:
Must be signed and dated.
____
____
____
______________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
29.
30.
No
N/A
Remarks
NOTICE OF TRANSFER OF LOAN SERVICING/PROOF OF MAILING CERTIFICATE — AT TIME OF
DOC PREP
A. Loan number:
Agree to note.
____
____
____
______________________
B. Date:
Agree to note.
____
____
____
______________________
C. Lender:
CU.
____
____
____
______________________
D. Borrower:
Agree to LAS.
____
____
____
______________________
E. Prop. address:
Agree to LAS.
____
____
____
______________________
F. Signature:
Signed by all parties and
dated (after funding).
____
____
____
______________________
CORRECTION OF ERRORS — AT TIME OF DOC PREP
A. Date:
Agree to note.
____
____
____
______________________
B. Loan number:
Agree to note.
____
____
____
______________________
C. Amount:
Agree to LAS.
____
____
____
______________________
D. Address:
Agree to LAS.
____
____
____
______________________
E. Signatures:
Signed by all parties and
dated.
____
____
____
______________________
COMMENTS:
AUDITED BY: _____________________________________ DATE: ____________________________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
QUALITY CONTROL/AUDIT ACCOUNTING DEPARTMENT — LOAN ORIGINATION
The accounting department reviews the input regarding source documents for accuracy on each funded
loan. Each loan is logged after this examination.
This department also verifies and sends, or receives, wires regarding the funding or reconveyance of
loans. This department is also responsible for preparing and sending investor funds.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
SECTION 2: QUALITY CONTROL/AUDIT — POST FUNDING/FILE MAINTENANCE
The primary purpose of a quality control/audit examination is to ascertain that all necessary documents
needed, are in the loan (credit) file and are correct. A secondary purpose is to verify the investment quality of the loan(s), in the event they are sold to Freddie Mac or Fannie Mae.
A seller must operate a quality control/audit program for home mortgages in order to maintain its eligibility as a seller/servicer. While one specific quality control program cannot meet the needs of all investors,
there are certain characteristics found in all effective quality controls/audits. Therefore, the following procedure of selecting loans for mortgage file review is a requirement.
This is a review regarding input from source documents. It is to check for accuracy regarding all funded
loans as to information on the computer. Each file is portfolioed after this function.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Post-Funding Audit Checklist
Auditor: _________________________________
Date: __________________________________
Borrower: _______________________________
Loan No: _______________________________
Loan Type: ______________________________
Date Funded: ___________________________
Received
Missing
Copy of prelim title report in file
__________
__________
Original ALTA policy in file
__________
__________
Policy number matches throughout loan file
__________
__________
Vesting is correct per deed
__________
__________
Instrument is correct per deed
__________
__________
Property is a fee or leasehold per appraisal and loan approval
__________
__________
Effective date of policy is the same as loan closing
__________
__________
Amount of insurance is equal to or greater than loan balance
__________
__________
CU lien has priority over exceptions in title
__________
__________
No unauthorized second liens appear
__________
__________
All approved second liens have instrument filing number higher than CU’s
title
__________
__________
There are no unauthorized exceptions listed on the policy
__________
__________
All judgments/liens have been cleared
__________
__________
The policy insures the CU or its successors or assignors (if an ARM endorsement 111.5 is included)
__________
__________
If negative amortization loan, endorsement 111.8 is included or 125% insurance coverage
__________
__________
If the loan is a condo, endorsement 115 is included
__________
__________
No other exceptions that have not been verified
__________
__________
All other required endorsements are present
__________
__________
Policy signed by title company agent
__________
__________
Legal description in policy consistent with deed
__________
__________
Title Insurance
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Received
Missing
__________
__________
Verify CU as lender with correct address
__________
__________
File contains a recorded copy of deed
__________
__________
Document date on deed agrees with date of note
__________
__________
Compare to copy in file that recorded deed correct
__________
__________
Changes initialed by borrower(s)
__________
__________
Signed by borrower(s) as name typed
__________
__________
Certified copy of one-to-four rider on all SFR loans
__________
__________
Certified copy of other required riders (ARM, etc.)
__________
__________
Deed and riders recorded in proper county
__________
__________
Certified copy of signed note in file
__________
__________
Borrower(s) signature(s) as agreed to loan approval
__________
__________
Verify CU as lender and correct address
__________
__________
There are no alterations, not approved
__________
__________
Effective date is no later than date of funding
__________
__________
Term — one year or more (new policy) OR
__________
__________
Six months or more remaining on existing policy
__________
__________
Policy covers loan amount or has “replacement cost”
__________
__________
Signed by appropriate insurance representative
__________
__________
Borrower(s) names and property address are correct
__________
__________
Endorsement 438 BFU shows CU on declaration page
__________
__________
Copy of contract in file
__________
__________
Borrower(s) name(s) are on contract
__________
__________
Verify that address and parcel information correct
__________
__________
Verify the loan number
__________
__________
All taxes due at funding date are paid
Deed of Trust — Recorded
Promissory Note
Hazard Insurance
Tax Service Contract
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Received
Missing
Flood zone verified by vendor
__________
__________
Borrower(s) notification letter of flood zone insurance required
__________
__________
Insurance policy in effect at time of closing
__________
__________
Paid receipt of first year’s premium OR
__________
__________
Verified paid on escrow instructions
__________
__________
Borrower(s) name(s) and property address correct
__________
__________
Payee clause insures the CU or its successors
__________
__________
Verify signed final copy in file
__________
__________
Verify CU is lender
__________
__________
Has original signature(s) of all borrower(s) or is certified as true and exact
copy
__________
__________
Verify funding/settlement date
__________
__________
Verify mortgage amount
__________
__________
Verify (if required) impound deposits per lender
__________
__________
Any changes have been approved by CU and initialed
__________
__________
Legal description/address as reflected on deed
__________
__________
Insured names are correct
__________
__________
Policy covers amount above 80% LTV
__________
__________
Flood Insurance
Truth-in-Lending Disclosures
HUD-1 Settlement Statement
PMI
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
AML (ARM) Notices
Yes
No
N/A
Borrower(s) name and address agree to loan file
____
____
____
Loan number agrees to note
____
____
____
Property address agrees to loan file
____
____
____
Present interest rate — agrees to note or to last AML notification if not the first
adjustment
____
____
____
Next payment due date — ascertain loan is current
____
____
____
Original interest rate — agree to note
____
____
____
Original index — agrees to note
____
____
____
Margin — agree with note
____
____
____
Latest index — verify correct
____
____
____
Present interest rate
____
____
____
Difference — should be the margin plus latest index
____
____
____
New interest rate — should be the difference rounded to the nearest 1/8 of 1%
(.125) and no more or less than the cap per year per the note (see attached work
sheet)
____
____
____
Next adjustment date — per the note
____
____
____
Effective date — date when new rate will be in effect
____
____
____
COMMENTS:
Audited by: _______________________________________________ Date: ______________________________
Loan Name: ______________________________________________ Loan No: ____________________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
AML/ARM Rate Change Verification
Loan #:
Origination Date:
Original Interest Rate:
CAP: Per Change:
Life:
Current Due/Change Date:
Index Date:
Original Index:
Current Index:
Margin:
(1) Difference Interest /Index
(2) Negotiated
Nearest .125%:
New Interest Rate:
OR
Current Interest:
CAP per Change:
New Interest Rate:
VERIFICATION
Principal at Change Date:
Interest at Change Date:
Remaining Months of Loan:
Payment:
$
Payment Rounded:
$
Verified by:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
AUDIT OF INPUT SOURCE DOCUMENTS (FILE MAINTENANCE)
Yes
No
N/A
Loan Number — Agree to note
____
____
____
Audited by — Some employee other than loan processor
____
____
____
____
____
____
____
____
____
Collateral type — Should agree with type code above.
____
____
____
Collateral class — Should agree with description code above.
____
____
____
Origination date — Agree with note.
____
____
____
Original loan amount — Agree with note.
____
____
____
Interest rate — Agree with note.
____
____
____
Date paid to — Agree to note. XX days to the first due date.
____
____
____
Unusual amortization — Should be NO. Yes only if note specifies interest only.
____
____
____
First due date — Agree to note.
____
____
____
Type Code — Description should agree with one of the following type codes:
Code
01
02
03
04
24
25
63
66
Description
Conventional
FHA
VA
90% Loans
95% Loans
Participation purchase — conventional
Second TD — CU has first
Second TD — another holds first
Description Codes:
Code
11
12
19
20
30
40
41
42
50
61
62
99
Description
Single-family residence
Two to four units
Condo/home business
Five or more units
Commercial/industrial
Land acquisition/development
Developed building lots
Vacant land — long term
Other
Condo/less than four stories
Condo/four stories or more
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
Appraisal — Agree to appraisal report.
____
____
____
Amortization term in months — Agree to note.
____
____
____
Maturity date — Agree to note.
____
____
____
____
____
____
____
____
____
____
____
____
____
____
____
Total payment — Agree to payment coupon.
____
____
____
P&I payment — Agree to payment coupon.
____
____
____
Impound payment — Agree to payment coupon.
____
____
____
Taxes — Agree to LAS.
____
____
____
Hazard insurance — Agree to LAS.
____
____
____
PMI — Only if loan greater than 80% LTV.
____
____
____
Purpose code — Agrees to LAS as follows:
Code
01
02
03
04
05
06
07
08
10
11
Description
Construction speculative. To be sold
Construction by owner
Purchase new. New loan new owner
Purchase used. New loan to new owner
Previously owned
Purchased rewritten — used
Purchased rewritten — new
Refi in house
Refi other
Rewrite construction
Trust deed purchased
Unit count — Number of units agree to LAS.
Loan limit — Agree to code on LAS:
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
80% conventional
90% conventional
95% conventional
Second trust deed
Land
Area Code — First two numbers is county code:
20
21
30
40
41
66
Los Angeles
Orange
San Diego
Riverside
San Bernardino
Ventura
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
Liens — Should be zero.
____
____
____
Borrower(s) name — Agree to note.
____
____
____
Mailing address — Agree to payment coupon/note.
____
____
____
Tract/Lot — Agree to title policy.
____
____
____
Late charge — Verify to note.
____
____
____
Loan fee — Net to CU.
____
____
____
Origination expense — Verify to G/L.
____
____
____
Deferred fees — Verify to G/L.
____
____
____
Appraisal — Agree to LAS.
____
____
____
Year built — Agree to appraisal.
____
____
____
Appraisal date — Agree to appraisal report.
____
____
____
Sale price — Agree to appraisal.
____
____
____
Census tract — Agree to appraisal.
____
____
____
Prepayment code — If loan is coded, 01 if no prepayment.
____
____
____
Class code — Underwriter to determine if loan saleable:
____
____
____
Square feet —Agree to appraisal.
____
____
____
UCC date — Commercial loans only. Five fives from funding.
____
____
____
Broker fee — Fee paid to agent.
____
____
____
Multiple borrower(s) — Agree to borrower(s) certification as to other loans (see
application).
____
____
____
Code
01
02
03
04
05
06
07
08
09
10
11
12
13
Description
Conforms to FHLMC. A credit
Conforming loan. B credit
Jumbo. A credit
Commercial
Multifamily
Construction
Vacant land
Jumbo. B credit
Any C loan
Any corporate or partnership loan
Any non-owner. A credit
Any non-owner. B credit
Conform to FHLMC non-owner occupied
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
Share account — If utilized for payment withdrawals.
____
____
____
APR — Agree to TIL disclosure.
____
____
____
Miscellaneous Codes — Input applicable codes:
____
____
____
Total premium — Agree to insurance policy.
____
____
____
Expiration date — Agree to insurance policy.
____
____
____
Coverage amount — Agree to insurance policy.
____
____
____
Term — Agree to insurance policy.
____
____
____
Disbursement code — Agree to insurance policy:
____
____
____
Code
01
02
14
15
17
18
20
33
34
37
54
61
67
69
70
80
81
104
119
Code
01
02
03
Description
Assignment of rents
PMI
Share account pledged to loan
Second TD holder exists
Additional junior lien holder exists
Unusual amortization
Security agreement
Owner occupied
Employee loan
Construction loan
15-day grace period
Don’t print hazard insurance notice
Balloon payment
Standard conventional loan form used
(Freddie Mac/Fannie Mae)
Flood insurance
Owner occupied (one to four units)
Impound loan
AML/ARM
Corporation/business entity
Description
Annual premium
Renewal premium
Unusual renewal term
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
____
____
____
Re-write amount — Only for loans with purpose code 10.
____
____
____
Pay interest on impound — Yes if loan has impound.
____
____
____
Tax ID number — Agree to W-9.
____
____
____
Is it certified — Yes, if there is a W-9 in file.
____
____
____
Modify date — Establishes future date on which some activity must take place.
____
____
____
Is loan an AML/ARM? — Agree to note.
____
____
____
Adjustment loan code — Should be XXX for AML/ARM.
____
____
____
Adjustment state date — Set by system. Should be XX number of days, month, or
year after first prepayment.
____
____
____
Rounding code — Should be XX. XX represents .125% agree to note.
____
____
____
Index identifier — Should be XX (tied to fund index).
____
____
____
Original index — Agree to index history/note.
____
____
____
Margin — Agree to note.
____
____
____
Introduction period — Should be yes, if our initial rate is less than the margin plus
current index.
____
____
____
First interest rate change CAP — Should be XX. Our AML/ARM is tied to first
original rate.
____
____
____
Life CAP base — Should be XX same as above.
____
____
____
Review date — Should be XXXX is the calculation in the future is to be done automatically.
____
____
____
Type of insurance code — Agree to insurance policy:
Code
01
02
03
04
05
06
07
08
09
10
11
12
Description
General fire
Continuous fire
Homeowners
Continuous homeowners
Commercial
Continuous commercial
Blanket fire
Blanket commercial
Other
Master policy exists (condo — PUD)
Flood
Course of construction
AML/ARM Loans
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
Interest rate change next date — Should be number of days, month, or year from
first change date.
____
____
____
Interest rate change frequency — Agree to note.
____
____
____
Interest rate change maximum change — Agree to note.
____
____
____
Interest rate change maximum for life — Agree to note.
____
____
____
Interest rate maximum decrease — Agree to note.
____
____
____
Interest rate change minimum decrease — Agree to note.
____
____
____
Maximum LTV — Should always be XX%.
____
____
____
P&I change date next — Agree to note.
____
____
____
P&I change frequency — Agree to note.
____
____
____
Adjustable code — Should be X. Our AML/ARM notes state that members will be
notified XX days in advance of change.
____
____
____
Auditor — Should be initialed by someone other than loan processor.
____
____
____
ID Number (Loan number) — Agree to note.
____
____
____
Transaction code — Always XX.
____
____
____
New record or change — Should be N for new.
____
____
____
Application number — Agree to application log.
____
____
____
Application date — Agree to application log (should be date application received).
____
____
____
____
____
____
____
____
____
Supplemental Loan Data Input Sheet
Type — Agree to loan application:
Code
1
2
3
Description
Conventional
FHA
VA
Purpose — Agree to loan application:
Code
1
2
3
4
Description
Home purchase (one to four)
Home improvement (one to four)
Refinancing (one to four)
Multi-family (five and up)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Yes
No
N/A
____
____
____
Amount — Should agree to note.
____
____
____
Action taken — Agree to loan processor log.
____
____
____
Action date.
____
____
____
MSA, state code, county code — Agree to application log.
____
____
____
Census tract — Agree to appraisal.
____
____
____
HMDA requirements — Agree to application log.
____
____
____
Loan number — Agree to note.
____
____
____
Amount of loan — Agree to LAS.
____
____
____
L I P number — Agree to application log.
____
____
____
G/L number — Always XXXX.XX.
____
____
____
Interest amount — Agree to loan closing/note.
____
____
____
Document fees — Agree to loan closing/HUD-1.
____
____
____
Processing fees — Agree to loan closing/HUD-1
____
____
____
Loan fees — Agree to loan closing/HUD-1.
____
____
____
Agent fees (if applicable) — Agree to loan closing/HUD-1.
____
____
____
Balance — The sum of credits and debits must equal zero.
____
____
____
Check number — Agree to checks issued log.
____
____
____
Amount — Agree to checks issued log.
____
____
____
Occupancy Code — Agree to LAS:
Code
1
2
3
Description
Owner occupied — principal dwelling
Non-owner occupied
Not applicable
Loan Funding Cash Source Document
COMMENTS:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
SECTION 3: QUALITY CONTROL/AUDIT — THIRD-PARTY ORIGINATIONS
Freddie Mac purchases loans that are from third-party originators (TPO) (loan brokers).
A TPO home mortgage is an entity other than the seller (NAME) that receives or obtains an application
for a home mortgage. A TPO may completely or partially take the application, process credit documents,
underwrite or fund the mortgage, then subsequently transfer, assign, or sell the mortgage to a Freddie Mac
seller (e.g., a home mortgage for which any entity other than the seller receives or obtains the application
from the borrower and the mortgage is subsequently sold to Freddie Mac, by the seller, is a TPO home
mortgage).
Whether (NAME) is considering selling to Freddie Mac or not, a background examination of a TPO applicant will be part of any broker approval process. When a TPO is approved by the loan committee to
represent (NAME), a quality control/audit review will be conducted on all loan applications submitted.
The Freddie Mac Sellers’ and Servicers’ Guide, specifically section 22.15, will be utilized for the TPO
audit programs. Loans submitted by a TPO will be subjected to a quality control review. After a loan is
funded, it is further examined by the internal audit department. A quarterly report will be issued to senior
management regarding all findings.
Approval Process
A TPO applicant will receive a residential mortgage broker application packet when requesting to represent the credit union in the real estate loan market. Upon receipt of the application packet, the loan department will ascertain that the broker meets its guidelines. If so, the packet is referred to the internal audit department for a documentation, credit, and reference check.
Upon completion of the background check of the broker, the packet is submitted to the loan approval for
approval/disapproval. If approved, the broker will be given an independent loan broker agreement to sign.
While in each given month, broker loans are audited, one loan at a minimum per broker, will be subject to
the re-verification process.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Mortgage Broker Guidelines
(DATE)
Dear (NAME):
Enclosed is your broker loan package. NAME has a wide variety of programs available to our approved
brokers. We commit to our brokers to provide excellent services, competitive rates, realistic underwriting,
and the expeditious funding of your loans.
Please read the enclosed carefully and fill out the forms properly, making sure that all the items requested
in the questionnaire are returned. If you have any questions concerning the contents, please do not hesitate
to contact me and I will see that they are answered.
I am sure this working relationship will develop into a mutually productive and profitable institution.
Very truly yours,
(NAME)
(TITLE)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Sample Residential Mortgage Broker Application Packet
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Residential Mortgage Broker
Application Form
Please print.
Company Name:
Address:
Telephone ( )___________________________ Facsimile ( )
Organization was founded (date) _____________________________________________________ as:
_____ a corporation, under the laws of:
_____ a partnership, with fictitious name filed on:
_____ sole proprietor
Owners Name
% of Ownership
Title of Ownership
_________________________
_________________________
_________________________
_________________________
_________________________
_________________________
_________________________
_________________________
_________________________
Residential Volume (Past Year: $_______________________)
FHA/VA: _____________________ % Conventional:
Origination Areas:
Has your firm even been the subject of disciplinary action by the Department of Real Estate? ( )no ( )yes
(if yes, give details)
Attach your fiscal year-end financial statements for the past year and related income and expense statements.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Please attach/provide the following:
_____Current financial statements (balance sheet and income statement)
_____Copy of brokers license
_____Copy of HUD or Fannie Mae/Freddie Mac approval, if applicable
_____Resume(s) of principal officers and marketing, processing, underwriting and shipping managers or
supervisors
_____Tax identification number (TIN)
Please provide at least three references showing the contact and telephone number.
Lender:
Contact: ___________________________________ Phone ( )
Lender:
Contact: ___________________________________ Phone ( )
Lender:
Contact: ___________________________________ Phone ( )
By:
Title:
Date:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Credit Package Checklist
RIGHT SIDE OF FILE:
()
Loan broker transmittal
()
Credit package checklist
()
Prelim
()
Escrow instructions
()
Appraisal
()
Types transmittal summary (Freddie Mac/Fannie Mae 1008)
()
Types loan application (Freddie Mac/Fannie Mae 1003)
()
Original signed loan application with monitoring information
()
Schedule of real estate owned
()
Credit reports and supplements (must include business credit report for partnerships and corporations)
()
Explanations of credit items
()
Credit ratings on all real estate loans
()
Verifications of employment (Fannie Mae 1005 or equivalent)
()
Verifications of current salary (W2s and current pay stubs)
()
Explanations of borrowers income or employment gaps if required (must cover full two years)
()
Current balance sheet and year to date profit and loss (if self employed, must be signed and dated)
()
Two years tax returns (and/or extensions) signed and dated (needed for self or for commissioned or bonus to
borrowers)
()
Verification of deposit
()
Cash in escrow, verified by receipt or verification of deposit
()
Gift letter with source of funds and relationships signed by donor (notarized)
()
Proof of funds received from gift letter (VOD in proper acct)
()
Corporate or partnership returns and partnership K-1s (if applicable)
()
Proof of alimony/child support/divorce decrees
()
Rental/lease agreements — signed and dated (by present owner on title)
()
Verification of stocks and/or bonds as income
()
Copy of note income (indicating monthly payment and remaining term)
()
Pension/social security income (verified by agency)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
()
Sale of residence owned by applicant, verified by a closing statement, verification of deposit, or estimated
escrow closing instructions stating residence will close concurrently
()
Initial Regulation Z disclosure with good faith estimate included
()
ARM disclosure if applicable with booklet notice
()
Interest rate disclosure
()
Completed ECOA notice
()
Fair lending notice
()
Occupancy statement, if applicable
()
CC&Rs, HOA budget, bylaws, income and expense statement, verification of reserves
()
Condominium information letter
IF BORROWING ENTITY IS OTHER THAN AN INDIVIDUAL PLEASE PROVIDE:
PARTNERSHIP
TRUST
Partnership agreement
Trust agreement/amendments
LP-I-certificate of good standing
Tax ID #
Current financial statement
Two years tax returns
Two years tax returns & extensions
Letter stating trust is still in effect and there are no new
amendments
CORPORATIONS
JOINT VENTURE
Articles of incorporation
Joint venture agreement
Bylaws
Tax ID #
Corporation resolution to borrower
Two years tax returns & extensions
Current financial statement
Two years tax returns & extensions
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Broker Transmittal Sheet
Date Received
(NAME) Application #
NAME OF BROKER
ADDRESS OF BROKER
PERSON TO CONTACT
BORROWER’S NAME
PROPERTY ADDRESS
LOAN AMOUNT $
SECOND T.D. $
TELEPHONE
SALES PRICE $
APPRAISAL $
INTEREST RATE
LTV
PROGRAM
PURPOSE
OCCUPANCY
( ) 30-year fixed
( ) 15-year fixed
( ) 20-year fixed
( ) Fixed 30 due in 5 (conf.)
( ) Fixed 30 due in 7 (conf.)
( ) 5/25 Jumbo
( ) 7/23 Jumbo
( ) 6-month ARM Libor
( ) 6-month ARM CD
( ) 1-year ARM T-Bill
( ) Portfolio 6-month ARM CD
( ) Other __________________
( ) Purchase
( ) Ref
( ) Refi-Cash out
( ) Owner occ.
( ) Non-owner
( ) Second home
PURPOSE TYPE
( ) Single-family residence
( ) Condominium
( ) PUD
( ) DeMinimus PUD
( ) Units #
MONTHLY INCOME
BORROWER
CO-BORROWER
OVERTIME
BONUS
COMMISSIONS
DIV/INTEREST
NET RENTAL INCOME
OTHER
OTHER
TOTAL INCOME
PAYMENT/INCOME RATIO
$
$
$
$
$
$
$
$
$
$
%
%
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
MONTHLY OBLIGATIONS
PRINCIPAL & INTEREST
SECOND TRUST DEED
HAZARD INSURANCE
TAXES
MORTGAGE INSURANCE
HOMEOWNERS DUES
FLOOD INSURANCE
TOTAL HOUSING PAYMENT
ALL OTHER MONTHLY DEBTS
TOTAL MONTHLY DEBT
$
$
$
$
$
$
$
$
$
$
TOTAL DEBT/INCOME RATIO
LOAN FEE DUE (NAME)
LOAN FEE DUE BROKER
TOTAL FEE (%) PAID
BY BORROWER
_______%
_______%
_______%
(NAME) FEES (SUBJECT TO CHANGE WITHOUT NOTICE
REVIEW APPRAISAL
$
DOCUMENT FEE
$
REDRAW FEE
$
TAX SERVICE
$________**
UNDERWRITING FEE
$
** Increments over 500,000, $10.00 for every $100,000
BROKER INVOICE
LOAN FEES DUE BROKER (_________________%)
PROCESSING FEE (INCLUDES ALL MISC FEES)
CREDIT REPORT $_____________ AMOUNT PAID $_________ BALANCE DUE
APPRAISAL FEE $_____________ AMOUNT PAID $_________ BALANCE DUE
TOTAL DUE BROKER
(FOR (NAME) USE ONLY)
FEES CONFIRMED PRIOR TO FUNDING BY:
COMMENTS:
$
$
$
$
_____________________ (NAME) EMPLOYEE
_____________________ BROKER EMPLOYEE
_____________________ DATE
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Condominium Information Letter
TO:
RE:
Borrower:
Project Name:
Address:
(NAME) is considering the extension of mortgage financing secured by one or more units located in the
above referenced project. In order for us to extend financing, we require certain information about the
project. Any officer of the homeowner’s association, the managing agent, or the attorney for the association may respond. This form must be completed in full in order for the project to be considered for approval.
1. How many units are included in the project?
2. How many units are closed and sold?
3. How many units are sold but not yet closed?
4. How many units are occupied by their owners as their first homes?
5. How many units are occupied by their owners as their second homes?
6. How many units are occupied by tenants?
7. What is the monthly assessment fee for each unit?
8. What is the monthly assessment for the master/umbrella association? (if applicable)
9. How many units are one month or more delinquent in their association dues?
10. What is the total dollar amount of delinquent fees due the association?
11. Has all construction and/or rehabilitation at the project been completed?
12. Have the unit owners taken control of the association?
a) If so, on what date?
b) What was the approximate date that the project construction was completed?
13. Does any one person/entity own more than 10 percent of the total units?
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
14. Does the project’s legal documents allow for the project to be expanded by additional phases or
by units not yet constructed?
15. Are all units owned fee simple — not leased land?
16. Are there any assessments now planned or have there been any in the last two years?
a) If so, please provide purpose, term and assessment per unit.
17. Is the association involved in any pending litigation?
a) If so, please attach a complete explanation of circumstances.
The information is accurate to the best of my knowledge as of _____________________. It is provided
on behalf of the homeowner association noted below.
__________________________________
Signature
_________________________
Date
Print Name and Title ___________________________________________________________________
Name of Homeowner’s Association _______________________________________________________
Telephone Number _____________________________________________________________________
Address ______________________________________________________________________________
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
(NAME)
Rate Lock-In Request
Borrower Name:
Property Address:
Property Address:
Broker Company:
Contact Person:
Loan Amount:
Program:
Interest Rate:
Discount:
Date of Lock:
Expiration of Lock:
Requested by Name:
Requested by Signature:
**For Credit Union use only**
Approval/Confirmed by:
cc: Borrower file
Broker
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Loan Procedures Certification Indemnification Agreement
I.
We understand that we have been approved by (NAME) to produce loan applications and packages for closings by you based upon information submitted to your credit committee concerning our
experience and reputation within the mortgage community as well as financial statements attesting to our financial stability. We understand that you have relied upon these assurances that we
are capable of producing quality loans and that we are financially responsible.
II. We warrant that all loans placed with you are truthful and honest, and that the mortgagors do, in
fact, exist as portrayed. Support documentation including: credit; verification of income and assets; and the appraisal report have been obtained through legitimate means.
III. We warrant that we will comply with the following:
A. All applicable requirements of the federal Truth-in-Lending Act and Regulation B.
B. Regulation C, Equal Credit Opportunity Act.
C. Real Estate Settlement Procedures Act (RESPA).
D. All state laws in the state in which the mortgage was originated.
IV. In consideration of these assurances and promises we certify that we will hold you harmless from
loss on any loan where it is determined that these assurances are invalid.
Signed this _________________ day of _____________
Title:
Company Name:
Tax ID #/Social Security #:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Authorization/Application to Release Credit Information
NAME OF BROKER:
SOCIAL SECURITY NUMBER:
RESIDENCE ADDRESS:
RESIDENCE PHONE:
BUSINESS NAME:
TAXPAYER ID NUMBER:
BUSINESS ADDRESS:
BUSINESS PHONE:
I understand that (NAME) will be obtaining a credit report on me and/or my business. I hereby grant them
permission to verify credit, bank account, references, and all other credit matters.
A photographic copy of this authorization bearing a photographic copy of the signature(s) of the undersigned may be deemed to be equivalent of the original hereof and may be used as a duplicate of the original.
DATE:
SIGNATURE:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Credit Union
Independent Loan Broker Agreement
THIS INDEPENDENT LOAN BROKER AGREEMENT (the “Agreement”) dated as of
____________________________, 20___, is made by and between Credit Union, a federal
credit
union
(NAME)
and
____________________________________________________,
a
___________________________ organized and existing under the laws of the state of
(STATE) (“Broker”).
RECITALS
A. Broker is in the business of negotiating loans on behalf of others (“Borrower(s)”) for a fee or other
consideration.
B. (NAME) is in the business of, among other things, making loans secured by real property.
C. Broker desires, from time to time, to submit loan applications for Borrower(s) along with a related
credit and other documentation and information (individually, a “Credit File” and collectively, “Credit
Files”), to (NAME) for possible funding, subject to certain terms and conditions.
D. (NAME) desires, from time to time, as its needs dictate and in accordance with its underwriting guidelines and other applicable criteria, to fund acceptable loans based upon Credit Files submitted by Broker
(individually, a “Loan” and collectively, “Loans”).
E. (NAME) and Broker desire to establish the terms and conditions under which Credit Files may be submitted to (NAME), and to establish the obligations of Broker with respect thereto.
AGREEMENT
1. Submission of Credit Files
During the term of this Agreement, Broker may submit Credit Files to (NAME) for evaluation and review.
At Broker’s sole expense, Credit Files shall include such credit, financial, and other information concerning Borrower(s) and the security real property as (NAME) may require, and be completed in accordance
with such loan program specifications, terms, and requirements as (NAME) may establish from time to
time. All Credit Files shall contain the sole, original credit application and the originals of all verifications, credit reports, and appraisal reports. Broker shall perform, at Broker’s sole expense, such other services as the credit union shall require in connection with the origination and funding of any Loan. Upon
submission of a Credit File, Broker assigns all rights, title and interest in such Credit File to (NAME)
without any delegation of duties, with the exception of Broker’s interest in any fee or other lawful consideration associated with such Credit File in the event (NAME) makes a loan.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
2. No Commitment to Make Loans
Neither this Agreement, no any prior, contemporaneous or future course of dealing between the parties
hereto, shall be deemed or interpreted to constitute a commitment on the part of (NAME) to approve
and/or fund any loan based on any Credit File submitted by Broker. Approval and/or funding of any proposed loan shall be and at all times remain within (NAME) absolute discretion. Broker shall not convey,
communicate or provide any assurances to any Borrower(s) that (NAME) has approved or will approve
and fund any proposed loan until such time as Broker is so informed by (NAME) in writing. Broker agrees
that it shall not rely upon any oral statements concerning approval or funding of any proposed loan made
by (NAME), its employees or representatives, and that any such reliance upon such oral statements is
without justification and at Broker’s sole risk.
3. Representations and Warranties
3.1 Representations and Warranties of Broker. Broker represents and warrants to (NAME) that as of the
date of this Agreement and as of the date on which each Credit File is submitted to (NAME):
(A) Broker is duly organized, validly existing and in good standing under the laws of the State of
(NAME), and has the requisite power and authority to enter into this Agreement and to engage in
the activities contemplated hereby.
(B) This Agreement has been duly authorized, executed, and delivered to (NAME) and constitutes a
valid and legally binding agreement, enforceable in accordance with its terms, and Broker shall,
concurrently with the execution of this Agreement, provide (NAME) with a certified copy of a
resolution of its Board of Directors providing the requisite authority herefor, if Broker is a corporation, or such other evidence of Broker’s authority herefor as (NAME) seems appropriate if Broker is not a corporation.
(C) There is no action, suit, proceeding, or investigation pending or threatened against or affecting
Broker or the properties of Broker, or any basis therefor known to Broker, which draws into question the validity or prospective validity of this Agreement, or any material element upon which
this Agreement depends, or any action to be taken by Broker pursuant to this Agreement, or Broker’s ability to perform its obligations hereunder.
(D) Insofar as the capacity to carry out any and all of its obligations under this Agreement is concerned, Broker is not in violation of any charter, certificate of incorporation, bylaw, mortgage, indenture, indebtedness, agreement, instrument, judgment, decree, order, statute, rule, or regulation,
and no provision of any of the foregoing adversely affects Broker’s capacity to carry out any such
obligation. Broker’s execution of, and performance pursuant to, this Agreement will not result in
any such violation.
(E) Broker and each and every employee or agent thereof who performs activities hereunder which
require licensure under applicable law is, and shall remain, duly licensed, in good standing and in
full compliance with all licensing laws, regulations and rules of all regulatory authorities to which
they are subject.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
(F) In connection with Broker’s activities in general and with the preparation and submission of
Credit Files, Broker will comply with all applicable state and federal laws, rules, and regulations
(and any amendments thereto), including, but not limited to, the Truth-in-Lending Act and Regulation Z; the Fair Credit Reporting Act; the Equal Credit Opportunity Act and Regulation B; the
Real Estate Settlement Procedures Act and Regulation X; Real Estate Lending Regulations of the
Office of Thrift Supervision; and all State and Federal Fair Lending Laws and Regulations.
3.2 Representations and Warranties Concerning Credit Files. As to each Credit File submitted to
(NAME), Broker represents and warrants as follows:
(A) Each Credit File complies in all respects with the terms of this Agreement and with all of the requirements, conditions and procedures set forth in the guidelines designated by (NAME) as being
applicable thereto (including, but not limited to (NAME), Fannie Mae, Freddie Mac, GNMA,
HUD, or VA guidelines), as those guidelines are revised and amended from time to time.
(B) After a reasonable and careful investigation conducted with due diligence, Broker represents and
warrants that documentation and information in the Credit File, including, but not limited to, the
credit application, preliminary title report, purchase and sale agreement, credit reports, appraisals,
federal tax returns, W-2 forms, pay stubs or vouchers, bank statements, financial data and verifications, are accurate and complete, do not contain any misstatement of materials facts and do not
omit a material fact necessary to make the statements or information therein contained not misleading.
(C) If a Credit File indicates that the property which is to secure a proposed loan is or will be occupied by the Borrower(s) as the primary residence, then, to the best of Broker’s knowledge, such
Borrower(s) shall occupy such property as the primary residence for a period of at least 12
months commencing no later than 60 days from the date of close of escrow of such loan.
(D) The Credit File delivered by Broker arises out of a bona fide, genuine and non-collusive application for credit. All documents or instruments submitted in the Credit File, and any signatures or
initials appearing thereon, are genuine and duly authorized.
(E) Broker has not advanced, and shall not advance, funds to Borrower(s) in connection with the
transaction contemplated by the Credit File, nor has Broker induced or solicited any advance of
funds by any other party to Borrower(s) in connection with such transaction.
3.3 Reliance by (NAME); Warranty of Accuracy. Broker acknowledged and understands that the documents and information contained in each Credit File will be relied upon by (NAME), its successors and
assigns, including without limitation, purchasers of Loans, mortgage insurance companies, and governmental agencies guaranteeing or insuring Loans. BROKER UNDERSTANDS AND AGREES THAT
THE REPRESENTATIONS AND WARRANTIES MADE IN THIS SECTION 3 CONSTITUTE A
MATERIAL INDUCEMENT TO (NAME) TO ENTER INTO THIS AGREEMENT AND TO FUND
ANY LOAN. BROKER FURTHER UNDERSTANDS THAT IN MAKING THE REPRESENTATIONS
AND WARRANTIES IN THIS SECTION 3, BROKER IS WARRANTING THAT BROKER HAD
CONDUCTED A REASONABLE AND CAREFUL
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
INVESTIGATION OF THE ACCURACY, COMPLETENESS AND GENUINENESS OF THE CONTENTS OF EACH CREDIT FILE SUBMITTED TO (NAME) AND THAT BROKER’S FAILURE TO
PROVIDE EVIDENCE SATISFACTORY TO (NAME) OF SUCH INVESTIGATION SHALL CONSTITUTE A MATERIAL BREACH OF THIS AGREEMENT.
3.4 Continuing Nature of Representations and Warranties. The representation and warranties made by
Broker to (NAME) shall be true in all respects on and after the date(s) each Loan is closed and funded by
(NAME). If, at any time during the period between the submission of any Credit File to (NAME ) and the
closing and funding of any Loan or thereafter, Broker learns, or has reason to believe or suspect, that any
representation or warranty made hereunder no longer is or may cease to be true, Broker shall give immediate written notice thereof to (NAME). The representations and warranties made hereunder shall survive
the termination of this Agreement.
4. Verification of Information; Grant of Authority for Third-Party Reporting
Notwithstanding the representations and warranties contained in Section 3, Broker understands that
(NAME) may elect to independently verify information contained in Credit Files, including appraisals, by
oral or written inquiries either during the underwriting of a Credit File or subsequent to approval and
funding of any Loan. Broker further understands that such independent verification may, at (NAME) sole
discretion, occur under reduced documentation programs. Broker agrees that no independent investigation
or verification undertaken by (NAME) shall in any way diminish or alleviate Broker’s duties and obligations respecting representations and warranties made to (NAME) hereunder.
For any discrepancies involving information contained in Credit Files, Broker acknowledges that File discovered by (NAME), whether during any independent verification process or otherwise, may constitute
grounds for immediate termination of this Agreement, as well as for reporting to governmental agencies
and/or other entities established to collect and disseminate historical and experiential data concerning
mortgage brokers. By its signature below, Broker, its employees, agents and representatives, expressly
consent to such third-party reporting by (NAME).
5. Broker’s Fees
Any fee or other lawful consideration to be received by Broker with respect to any Loan shall be paid by
(NAME) to Broker only after (NAME) receives the full amount of its fees and charges in connection
therewith. No payment whatsoever shall be owed to Broker by (NAME) on account of any proposed loan
which is not closed and funded. All fees and charges of Broker shall be disclosed to Borrower(s) on the
good faith estimate of closing costs and charged by (NAME) pursuant to Borrower(s) signed and dated
escrow instructions. Broker agrees that (NAME) shall have the right to limit the total fees and other consideration to be paid to Broker in connection with a Loan, whether such fees or other consideration are
payable to Broker by Borrower(s) or by (NAME). As of the date of execution of this Agreement, such fees
and other consideration shall be limited to the greater of a maximum of three points (3%) based upon the
principal amount of the Loan. (NAME) hereby reserves the right to modify this maximum limitation on
Broker’s fees and other consideration by written notice given not less than 10 days prior to the effective
date of any such modifications. Any fees or costs collected by Broker for or in connection with any Loan
which exceed this maximum limitation shall be considered a breach of this Agreement. (NAME) may,
upon written notice, require Broker to refund any such excess fees collected to the Borrower(s) under that
Loan. (NAME) hereby authorized to exercise the right of setoff under Paragraph 9 for the purposes of
making such refund on Broker’s behalf, if Broker neglects or refuses to do so within a reasonable time.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
6. Broker’s Indemnification
Broker shall indemnify and hold (NAME), its successors and assigns, harmless from and against, and shall
reimburse (NAME) with respect to, any and all claims, losses, damage, suits, fees, liability, costs, and expenses incurred by (NAME), including without limitation reasonable attorney’s fees, arising out of, resulting from or relating to (a) any breach of any representation or warranty contained in Section 3 of this
Agreement, (b) the failure of Broker to perform any obligation required of Broker under this Agreement,
and (c) the enforcement of Broker’s obligations under Section 7 of this Agreement. (NAME) shall have
the right, but not the obligation, to indemnify (NAME) hereunder, at Broker’s cost and expense. (NAME)
reserves the right of approval of Broker’s selection of attorneys and the right to engage attorneys of its
own selection, at Broker’s expense, to protect (NAME) interests. This indemnity shall survive the termination of this Agreement.
7. Purchase of Loans
7.1 Obligation to Purchase; Alternative Damages Provision. In addition to its obligation to indemnify
(NAME) under Section 6, Broker shall, at (NAME) option, either purchase any funded Loan from (NAME)
or pay the alternative damages, as set forth hereinbelow, if any representation, warranty or agreement
made in this Agreement is breached. (NAME) shall exercise such option by giving written notice to Broker, which notice shall state the reason for the demand and either itemize the purchase price of the Loan
as hereafter described or state the alternative damages, as applicable, to (NAME) in certified funds. If the
loan is purchased by Broker, (the credit union) shall promptly thereafter deliver the appropriate Loan
documentation, including the note and deed of trust and appropriate instruments of assignments, to Broker. If the purchase price or alternatives damages is/are not paid in full by the due date, then Broker shall
also pay to (the credit union) a late fee equal to one percent (1.0%) of the overdue amount to cover administrative costs associated with such late payment, including, but not limited to, processing and accounting charges. Acceptance of any late fee shall not constitute a waiver with respect to the requirement
for timely payment and/or of any other rights and remedies available to (NAME).
7.2 Purchase Price. The purchase price for any Loan subject to purchase under this Section 7 shall be as
follows:
Price if Loan Originated for Credit Union Portfolio. If the Loan has not been sold by
(NAME) to a third party, the purchase price shall be the total of the following: (a) the
principal amount outstanding of the Loan as of the date of payment of the purchase price,
plus (b) interest on such principal amount at a variable rate of the current approved index
________, calculated on a daily basis, from the date the Loan was funded through the
date of payment of the purchase price by Broker, less any interest payments made by the
Borrower(s).
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Price if Loan Sold or Originated for Sale. If the Loan has been sold by (NAME) to a third
party, or was originated for sale to a third party, the purchase price shall be the total of
the following: (a) (i) all sums paid by (NAME) to such third party to repurchase the Loan,
including without limitation, all costs, penalties, and fees associated with such repurchase
(hereinafter, the “Repurchase Amount”), or (ii) all costs, penalties and fees incurred by
(NAME) for failure to deliver such Loan to any third party pursuant to commitment (hereinafter the “Non-delivery Fee”), as applicable, plus (b) interest on the Repurchase
Amount or the Non-delivery Fee, as applicable, at a variable rate equal of the current approved index ______________, calculated on a daily basis, from the date of payment of
said Repurchase Amount or Non-delivery Fee by (NAME) through the date of payment of
the purchase price by Broker, less any interest payments made by the Borrower to
(NAME).
7.3 Alternative Damages. The alternative damages for any Loan under this Section 7 shall be equal to the
present value, using a discount factor equal to the most recent value of the monthly weighted average cost
of funds of members of the current approved index _____________, or an additional one-half of one percent (0.50%) interest per annum applied to the outstanding balance of the Loan over its remaining term to
maturity. The parties agree that proof of actual damages in the event of a breach of any representation,
warranty or agreement made herein would be both costly and inconvenient. Accordingly, the parties agree
that the alternative damages represents a reasonable substitute for purchase of the Loan by Broker, if
elected by (NAME), considering all of the circumstances existing on the date of this Agreement, and further, that the alternative damages represents a fair and reasonable estimate of the losses, expenses, and
costs, (NAME) will incur by reason of such breach.
8. Right to Specific Performance
Broker acknowledges that in the event of Broker’s insolvency, repudiation of this Agreement or failure to
perform any of Broker’s obligations hereunder, money damages may not adequately compensate (NAME)
for its losses and the credit union may be unable to effect cover in order to satisfy its commitments or perform obligations with third parties. Accordingly, Broker agrees that (NAME), at its sole option, shall be
entitled to specific performance of this Agreement, including the right to replevin documents, or to any
other equitable remedy. (NAME)’s right to specific performance shall be in addition to and not in lieu of
any other rights or remedies which (NAME) may have at least or in equity.
9. Right of Setoff
Broker grants (NAME) the right of setoff. This means that (NAME) shall have the right to deduct any
payments, charges, or other amounts of any kind owed by Broker to (NAME) from amounts payable to
Broker in connection with any Loan, even if the amounts deducted by (NAME) do not relate to that Loan.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
10. Financial Statements, Books and Records
Broker acknowledges and agrees that (NAME) reasonably expects Broker to maintain a financial condition consistent with its direct obligations and contingent liabilities under this Agreement. Accordingly,
Broker shall furnish to (NAME) annual financial statements in form and content satisfactory to (NAME),
including balance sheets and profit and loss statements. Such financial statements shall be received by
(NAME) no later than sixty (60) days after the end of Broker’s fiscal year. Upon (NAME)’s request and at
Broker’s sole expense, Broker agrees to make available to (NAME) an individual knowledgeable in financial and accounting matters for the purpose of answering questions regarding the financial statements and
any developments affecting the financial condition of Broker. Broker also agrees that (NAME) shall be
entitled, at reasonable times and upon reasonable notice to Broker, to audit Broker’s application origination procedures and practices and to examine such records and policy of Broker as may be necessary to
satisfy (NAME) that Broker is in compliance with the terms of this Agreement and has the ability to purchase any Loans as may be required by and in accordance with the terms hereof. (NAME) reserves the
right to suspend Broker’s ability to submit Credit Files and to decline to approve any proposed loans if
Broker fails to comply with this section.
11. Provision of Information
During the term of this Agreement, Broker shall furnish (NAME) with such periodic, special, or other reports or information, whether or not specifically provided for herein, as (NAME) shall deem necessary,
reasonable, or appropriate with respect to Broker, or otherwise with respect to the purposes of this
Agreement, all such reports or information to be as provided by and in accordance with instructions and
directions of (NAME). Broker hereby authorizes (NAME) to obtain such credit and financial reports on
Broker, any principal, owner or partner of Broker and any guarantor for Broker, as (NAME) deems necessary or advisable, at any time during the time of this Agreement or thereafter in connection with the enforcement of any provisions hereof.
Broker agrees to execute and deliver all instruments and take all action as (NAME) may reasonably request, from time to time, in order to effectuate the purposes and carry out the terms of this Agreement.
12. Status of Broker
Nothing in this Agreement shall be construed as making the Broker a joint venturer, partner, agent (except
as expressly provided in Addendum “A” hereto), affiliate, representative, or employee of (NAME). Broker
shall not hold itself out as such, nor shall it use the name of (NAME) in any form of advertising. Broker’s
status is that of an independent contractor, and Broker shall be responsible for determining the method,
details, and means of performing the services described herein. Broker has no authority and is intended to
have no power to create, extinguish, or modify any right, obligation, or liability of (NAME) to any person
whatsoever.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
13. Non-Exclusively
This Agreement shall be non-exclusive as to (NAME) and Broker. It is expressly understood by the parties
that notwithstanding the execution of this Agreement and/or the submission of any Credit Files by Broker
to (NAME) hereunder, (NAME) may originate or fund loans with or without the assistance of Broker and
may use the services of other brokers.
14. Termination
This Agreement shall continue in full force and effect until it is terminated as herein provided. Either party may terminate this Agreement for any reason, with or without cause, at any time, by giving written notice to the other; provided, however, that such termination shall not affect Broker’s obligations and
(NAME)’s rights with regard to Loans made prior to the effective date of termination or closed and funded
subsequent to said effective date based upon Credit Files for which loan approval was given by (NAME)
prior to such date.
15. Entire Agreement
This Agreement contains the entire understanding between the parties hereto with reference to the subject
matter hereof and supersedes all contemporaneous and prior agreements, understanding and communications, whether written or oral, with respect to the transactions contemplated by this Agreement.
16. Amendments
This Agreement may not be amended or modified orally, and no provisions of this Agreement may be
amended except by a writing signed by duly authorized representatives of the parties hereto which expressly references this Agreement and is denominated as an amendment to this Agreement.
17. Construction of Agreement
Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against
(NAME) or Broker, whether under any rule of construction or otherwise. On the contrary, this Agreement
has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning
of the words used so as to fairly accomplish the purposes and intentions of the parties hereto.
18. Severability
Each provision of this Agreement shall be severable from every other provision hereof for the purpose of
determining the validity or enforceability of any specific provision. The invalidity or unenforceability of
the remaining provisions, all of which shall remain in full force and effect.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
19. Non-Waiver
Failure or delay on the part of (NAME) to exercise any right provided for herein shall not act as a waiver
of any right hereunder, nor shall any single or partial exercise of any right by the credit union preclude
any other or further exercise thereof. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver
constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making
the waiver.
20. Notices
All notices, requests, demands, or other communications given under this Agreement shall be in writing,
and shall be delivered to the parties at the following addresses or such other address or addresses as may
be specified in a notice given in accordance herewith.
To (NAME):
To Broker:
Credit Union
Address
State
Attn:
All such notices may be hand-delivered to the addressee, sent by U.S. mail (certified, with return receipt
requested), sent by overnight courier or sent by facsimile transmission, and shall be deemed received upon actual receipt by the addressee or otherwise within four business days from the date of posting.
21. Successors and Assigns
This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the
parties; provided, however, the Broker may not assign this Agreement or any rights hereunder without
(NAME) prior written consent, and any assignment without such consent shall be absolutely void.
(NAME)’s consent to any assignment by Broker shall not release Broker or any guarantor therefor from
their obligations to (NAME), unless (NAME) otherwise agrees in writing. (NAME) may assign this
Agreement and its rights hereunder. In connection therewith, (NAME) may disclose all documents and
information which (NAME) now or hereafter may have relating to Broker or Broker’s business.
22. Governing Law; Venue
This Agreement shall be governed by and construed and enforced in accordance with the laws of the state
of (STATE). Any legal action or proceeding arising out of this Agreement shall be brought in the United
States District Court, Southern District of (STATE) or in the state courts located in the county of
(NAME), (STATE).
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above
written.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Credit Union:
Address:
State:
By:
Its:
BROKER:
Address:
By:
Its:
ACKNOWLEDGEMENT OF BROKER
The undersigned is Broker’s designated broker (i.e., broker of record) under (STATE) Business and Professions Code Section (NUMBER). The undersigned hereby acknowledges and certifies to (NAME) that
they (a) have read, understand and unconditionally accept Broker’s duties and obligations as enumerated
in the foregoing Agreement, and (b) will perform such Agreement in accordance with (STATE) law governing real estate brokers and all regulations of the (STATE) Department of Real Estate issued thereunder.
(Signature of Designated Broker)
(Print Name)
(License Number)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
CREDIT UNION
ADDENDUM “A” TO INDEPENDENT LOAN BROKER AGREEMENT
LIMITED AGENT DESIGNATION AND AGREEMENT
1. APPRAISAL STANDARDS
The undersigned understands and acknowledges that:
(a) ___________________________ is hereby designated to act as a limited agent for (NAME) Credit
Union for the sole purpose of requesting and obtaining real property appraisals which are to be used in
federally related transactions (the “Appraisals”) subject to the requirements of Title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), 12 USC Section 3310 et seq.;
(b) (NAME) is a federal credit union regulated by National Credit Union Administration (“NCUA”);
(c) The NCUA has promulgated regulations implementing FIRREA (the “NCUA Regulations”);
(d) All Appraisals must comply with the NCUA Regulations; and
(e) As (NAME) agent, the directors, officers, employees, and volunteers of the undersigned are each an
“institution-affiliated party” for purpose of the enforcement provisions of the (NAME) Regulations and
FIRREA.
2. APPRAISER COMPETENCY
(a) The undersigned hereby warrants that each Appraisal submitted to (NAME) shall:
(i) Contain a certification duly executed by the appraiser that conforms with the Uniform Standards of
Professional Appraisal Practice (“USPAP”), as amended from time to time; and
(ii) Be completed by an appraiser(s) who is fully qualified and competent by the educational background,
knowledge, and experience to perform that Appraisal.
(b) If an appraiser notifies the undersigned that they are not fully competent to perform an Appraisal, the
appraiser may complete that assignment only after the appraiser has taken all steps necessary to comply
with the Competency Provision of USPAP. If the appraiser(s) selected by the undersigned is not competent, the undersigned will engage a qualified appraiser(s) to complete the assignment.
(c) The undersigned hereby warrants and agrees that the undersigned shall, in each and every instance,
verify appraiser competency by reviewing the appraiser’s education, experience, and knowledge. The undersigned understands and agrees that the undersigned will be required to promptly provide copies of appraiser’s work samples, education summary, and experience detail to the credit union for view upon
(NAME) request. The undersigned further agrees to forward copies of any updates to an appraiser’s education or experience to (NAME), as applicable.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
3. APPRAISER INDEPENDENCE
The undersigned understands that NCUA Regulations require that Appraisals are to be completed without
influence from someone who desires a specific value or specific outcome. The undersigned represents and
warrants that:
(a) No assignment for an Appraisal shall be based upon a requested minimum valuation, a specific valuation, or the approval of a loan;
(b) Employment of an appraiser shall not be conditioned upon an Appraisal producing a specific value or
a value within a given range;
(c) Future employment of any appraiser shall not be dependent upon an Appraisal producing a specific
value;
(d) No appraiser’s employment, compensation, and future employment shall be based upon whether any
loan application is approved; and
(e) With respect to each Appraisal submitted to (NAME) hereunder, the undersigned shall make diligent
investigation and inquiry and thereupon warrant to (NAME) that neither the appraiser nor any person with
an ownership interest in the company employing the appraiser, is related to, or has any ownership or other
financial interest in, either the builder/developer, seller, buyer, mortgage broker, or real estate broker/salesperson (or any person related to any of them) involved in the transaction for which the Appraisal
has been requested, or with the most recent sale or refinancing of any property used as a comparable
property in that Appraisal.
4. OTHER REQUIREMENTS AND AGREEMENTS
The undersigned acknowledges and agrees that all Appraisals submitted hereunder must conform to
(NAME)’s current standards, requirements, policies, and procedures for Appraisals. The undersigned expressly agrees that (NAME) has, and shall have, an absolute right to refuse to accept any Appraisal without incurring any cost, expense, or liability of any kind or nature, which fails to conform to the then current standards, requirements, policies, and procedures of (NAME). The undersigned expressly undertakes
as an affirmative duty and obligation under the Addendum, and at the sole cost and expense of the undersigned, to obtain and review the written policies and procedures of (NAME) concerning appraisals, as
amended and modified from time to time.
(NAME) shall make available to the undersigned upon request a current list of appraisers approved by
(NAME); provided, however, that use of an appraiser on such list shall not modify, amend, or diminish the
obligations of the undersigned under this Agreement. In the event that the undersigned elects to utilize the
services of an appraiser who has not been approved by (NAME), at (NAME)’s option, either a review appraisal or a new appraisal will be required and additional fees will be charged.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
By signing below, the undersigned agrees to the foregoing terms and conditions of this Addendum, and at
the time of each submission of an Appraisal to (NAME), the undersigned shall be deemed to have reaffirmed, re-acknowledged, and certified each representation, warranty, agreement, term and, condition set
forth hereinabove.
Broker:
By:
Its:
Date:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
SECTION 4: QUALITY CONTROL/AUDIT — LENDING SECURITY
Loan Approval and Disbursement of Funds Security Checklist
□
Determine that there are procedures to prevent or detect the omission of actual loan and significant commitments from the records.
What are the institution’s procedures:
 Preventing significant commitments from being made without commitment documents being
prepared and recorded?
 Ensuring that all collateral is appropriately secured and recorded?
□
Determine that there are procedures to prevent the inclusion of fictitious loans in the records.
What are the institution’s procedures preventing:
 Loan documents from being prepared for nonexistent borrowers?
 Loan disbursements from being made without receipt of complete authentic, and legally
binding notes, security agreements, disclosure forms, and credit data?
□
Verify that there are procedures to prevent incorrect amounts from being assigned to loan disbursements.
What are the institution’s procedures:
 Ensuring the correct calculation of monthly loan payments and unearned discounts?
 Ensuring that correct interest rate adjustments on adjustable-rate mortgages are calculated
correctly?
 Ensuring that the correct (contractual) interest rate is recorded in the subsidiary ledgers?
 Preventing loan disbursements from being made for amounts different from those approved?
□
Determine that there are procedures to prevent loans and commitments from being recorded in the
wrong accounting period.
What are the institution’s procedures:
 Ensuring that all significant commitments are recorded timely?
 Ensuring that the accounting department is notified promptly when loans are disbursed?
 Ensure that loan disbursements are recorded in the period in which they are made?
 Preventing back dated transactions?
□
Ascertain that there are procedures throughout processing to ensure that loan disbursements and
initial fees are charged and credited to the correct general and subsidiary ledger accounts.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
What are the institution’s procedures ensuring:
 The borrower’s name and number, loan amount, payment terms, initial fees, and maturities
are properly coded for entry into the books of entry and the subsidiary ledger?
 The determination of the loan type is consistent with internal policy, statutory reporting requirements, and generally accepted accounting principles?
□
Verify that there are procedures to ensure that loan disbursements and commitments are correctly
accumulated.
What the institution’s procedures:
 Ensuring all loan disbursements and significant commitments are correctly included in management reports?
 Preventing errors in footing the loan registers and other books of original entry?
□
Ascertain that there are procedures to ensure that loan disbursements and commitments are entered correctly in the general and subsidiary ledgers and related transaction journals.
What are the institution’s procedures:
 Preventing errors in posting transactions in books of original entry to the general ledger?
 Preventing errors in posting the totals from the books of original entry to the general ledger?
 Preventing duplicate postings to the books of original entry, or the general or subsidiary
ledger?
 Ensuring that payments that are incorrect or unidentifiable amounts are controlled, researched, and identified?
Criminal Activity/Loss Reporting
Whenever a loan file is referred to the security officer, and it is evident that a crime has been committed, a
suspicious activity report (Form 2362) must be completed.
The security officer will be guided by the criminal activity loss reporting procedures, the NCUA suspicious activity report (SAR) procedures regarding Form 2362, and internal and external crimes policy.
The board of directors, supervisory committee, and senior management will be made aware of the fraud
and any subsequent action taken at the next board meeting after the filing of the Form 2362.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Criminal Activity/Loss Reporting

Type of Loss
 Robbery
 Forgery
 Defalcation
 Cash Shortage
 Miscellaneous
The miscellaneous category is a catch-all that covers all other types not specifically described. Some examples of these types of losses are:

Matured savings account loans in excess of account balance where funds cannot be immediately
recovered.

Returned items against closed accounts or accounts with insufficient funds to cover the item.

Legal judgments against the credit union.
Criminal Activity Reporting
The audience for whom you are drafting the criminal report is composed of law enforcement personnel.
Therefore, draft the report with clarity and precision. Describe in sufficient detail the circumstances surrounding the criminal act(s) so that law enforcement personnel know how critical the particular case is.
The report is the document that must persuade law enforcement personnel to actively investigate a particular case.
In drafting the criminal report, ensure that:

The report presents a clear and complete chronological account of the suspected violation.

Key events are related clearly to support documentation.

The total dollar transaction amount, in addition to known dollar loss of the suspected violation, is
clearly stated.

The date(s) or period of time over which the act(s) occurred is clearly indicated.

There is clear identification of who benefited, financially or otherwise, to what extent, and in
what manner through the suspected criminal violation.

That reporting requirements are adhered to, namely the forwarding of the referral to the appropriate law enforcement agency.
Other issues that should be addressed, as appropriate, when drafting a criminal report:
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)

Is the full name(s), birth date, place of birth, social security number, current/past address(es),
a.k.a., dba, of those suspected of criminal activity provided?

Is there an explanation of the transaction provided by the suspect? If so, clearly identify this element within the report and indicate to whom, when, and where such an explanation was given. If
the suspect’s statement was recorded by an employee, indicate whether contemporaneous notes
were drafted, dated, and signed and whether another employee was present during the interview.

Is there an explanation of the transaction provided by any party other than the suspect? If so,
identify this element within the report and indicate to whom, when, and where such an explanation was given. If the party’s statement was recorded by an employee, indicate whether contemporaneous notes were drafted, dated, and signed and whether another employee was present during the interview.

Is there evidence of an attempted cover-up or of an attempt to deceive federal or state examiners
by the suspect? If so, highlight this element within the report.

Is the location(s) where the suspected violation(s) took place clearly indicated?

Has consideration been given to recommending further avenues of investigation that might assist
law enforcement authorities in their examination of the suspected violation(s)?
In order to facilitate the review of criminal reports, it is requested that the report contain the following
information:

Summary — provide an overview of the transaction(s) within the suspected criminal act(s) occurred.

Chronology of events — develop a chronological account of the criminal act(s).

Explanation of criminal act(s) — provide a detailed explanation of the circumstances surrounding
each individual criminal act. Relate each criminal act to the applicable federal/state criminal
codes. Identify and explain the relevance of the document(s) that substantiate the suspected violation of the cited criminal codes. In addition, provide the physical location of the original document(s), including the name of the individual having the authority to release the document(s) to
law enforcement.

Actual documents should not be transmitted until a subpoena has been received.

Exhibits — provide copies of necessary documentation.

Suspect list — provide a list of suspects; identify the suspect using the above mentioned identifiers and indicate the criminal code which the individual is suspected of violating.

Witness list — provide a list of witnesses; identify each witness using the above mentioned identifiers and indicate the relationship of the witness to the credit union.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Recovery Action
When management becomes aware of a loss, they must take whatever action is necessary to effect recovery. Various courses of action are available, such as:

Small claims court

Collection agencies

Civil suits

Criminal complaints
Loss Reporting
Losses will be classified in one of three accounts:

Cash short — Teller shortages XXX.XX

Cash short — Robbery, forgery, defalcation XXX.XX

Account receivable XXX.XX
Criminal Referrals and Other Reports or Statements
□
False or Misleading Statements or Omissions
This credit union, or director, officer, volunteer, employee, affiliated person, or other person participating in the conduct of the affairs of this credit union nor any person filing or seeking approval of any application shall not knowingly:
 Make any written or oral statement to the regulators or an agent, representative, or employee
of the regulator that is false or misleading with respect to any material fact or omit to state a
material fact concerning any matter within the jurisdiction of their regulator; or
 Make any such statement or omission to a person or organization auditing this credit union or
otherwise preparing or reviewing its financial statements concerning the accounts, assets,
management condition, safety, or soundness, or other affairs of the credit union.
□
Notification of Loan and Reports of Increase in Deductible Amount of Bond
This credit union shall maintain bond coverage as required, and shall promptly notify its bond
company and file a proof of loss under the procedures provided by its bond, concerning any covered losses greater than the deductible amount.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Reports of Crimes, Suspected Crimes, and Unexplained Losses
This credit union is required to promptly notify the appropriate law enforcement authorities and its regulatory office after discovery of known or suspected criminal acts:

If those acts involved affiliated persons.

If those acts involve actual or anticipated losses of more than $5,000 and the credit union has
known factual basis for identifying a suspect.

If those acts result in a loss of $25,000 or more, regardless of whether a suspect is identified.

If money laundering, engaging in monetary transactions known to have been derived from unlawful activities, or structuring a transaction to evade the reporting requirements of the Bank Secrecy
Act is known or suspected.
This section applies to known or suspected crimes involving this credit union, committed either by their
employees or others and to crimes or suspected crimes against another financial institution believed to be
committed by a person associated with the reporting credit union. As used in this section, the phrase “suspected crimes” refers to all matters, including explained losses, for which there is a known factual basis
for a belief that a crime has been or may have been committed.
Filing of Reports
This section provides for the maintenance of a record documenting any robberies, burglaries, and nonemployee larcenies. This credit union shall notify the appropriate law enforcement authorities and the
regulators by filing Form 2362 within 14 business days after discovery of any crime, suspected crime, or
unexplained loss suffered by this credit union, including:

Embezzlement, non-employee larceny, check kiting operation, fraud or attempted fraud, unexplained loss, or other known or suspected misapplication of funds or other things of value belonging to this credit union or entrusted in its care.

Bribery, the corrupt offering, solicitation, or acceptance of things of value in connection with any
transaction or business of a financial institution.

False statements or reports of overvaluation of land, property or security, or omission to state or
attempt to conceal information for the purpose of influencing the actions of this credit union or
the regulators.

Other violations of statutes, as described in Form 2362.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Oral Reports
Required reports may be made orally in emergency cases, such as when it is likely that evidence or witnesses will become unavailable before a written report can be made; or where other circumstances dictate
an immediate referral. In such cases, the report shall be documented by a later completion of the Form
2362.
Notification of the Board of Directors and Supervisory Committee
The CEO of this credit union or designee shall notify the board and the supervisory committee concerning
any report filed by this credit union no later than its next regularly scheduled meeting following the filing
of the report. If the CEO is suspected of being involved in the violation, the next ranking officer shall notify the board and the supervisory committee.
Maintenance of Records
Reports made under this section and related records of all crimes or suspected crimes shall be maintained
for 10 years.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Prosecutive Summary
Narrative of Offense:
Statute of Limitations:
Other Data Helpful to D.D.A.
A. Threats.
B. Relationships, e.g., witness to suspect.
C. Miscellaneous
Preliminary Prosecutive Action:
A. Arrested.
Names and Addresses of All Witnesses
A. Summary of testimony.
B. Exhibits.
Identification of Suspect(s)
Identification of Other Pertinent Persons.
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
Appendix 6.2
Sample Lending Quality Control/Audit (cont.)
SECTION 5: QUALITY CONTROL/AUDIT — SPECIAL SERVICES (COLLECTIONS)
The function and responsibility of special services is to eliminate or minimize the risk of loss within the
limits of the original transaction.
One such function is the verification of the accuracy of certain documents by utilizing a post funding
checklist. Special services is alert for:

Returned payment coupons or statements in the first six months of the loan.

Conventional firsts and seconds in foreclosure, which are less than one year old.

First payment defaults.

Name change on hazard insurance policy, which may indicate an informal assumption.

Request for beneficiary statement on loans under three months old.
Another function of special services is the audit of adjustable-rate mortgages rate change notices, in order
to ensure their accuracy.
Appendix 6.3
An Introduction to Fannie Mae’s Loan Quality Initiative
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