Prioritize QC with Pre-funding - Mortgage Compliance … · Prioritize QC with Pre-Funding February...

Prioritize QC with Pre-Funding

February 11, 2015Presented By: Brady W. Meadows

1

Instructions

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You can find today’s slides on our News & Resources page.

2Mortgage Compliance Advisors

Agenda

What Is Pre-fund?

Why It Applies To Me?

What Do I Need To Do?

Reporting

Final Thoughts


What Is Pre-Fund?

Mortgage Compliance Advisors 4

What is the Goal of Pre-Fund QC?

• Catch errors prior to closing or funding

• Prevent and ineligible loan from being closed or purchased

• Test action plans immediately instead of waiting 60+ days for information

• Target trouble areas

• Minimize warehouse time

• Decrease investor purchase conditions


The Quality Control Cycle

Observe & Record

Measure & Report

Identify & Act

Monitor & Document

Eliminate Defects

Continuous Improvement 6Mortgage Compliance Advisors

Pre-Fund: Best Practices

Pre-funding QC Should:

◦ Be a series of defined activities embedded into the loan process

◦ Evaluate all origination channels and specific risk concerns (e.g. Incomplete Asset Documentation, Income Calculation Errors)

◦ Evaluate the entire loan file


Three C’s of Pre-Funding Quality Control

Credit

Collateral

Compliance


Why Pre-Fund Applies To Me?


Agency Requirement

Best Practices

Company Betterment

Is Pre-Funding Required?

Pre-funding QC became required per Fannie Mae and Freddie Mac beginning 2009 and 2010 respectively, and is encouraged by FHA

There are also lenders and warehouse lines, and investors that require pre-fund reviews

FHA has proposed pre-funding QC as a requirement.


Agency Requirement

The agencies’ & investors goal of pre-funding review process is to:

• Monitor The Seller’s Origination Policies

• Ensure Accuracy Of Mortgage Data

• Prevent Closing Of Mortgages With Fraud Deficiencies, Data

Inaccuracy, And Insufficient Documentation


Agency Requirement

The Agency have defined their pre-funding QC review protocol into 4 categories:

1. Procedures & Policy

2. Sample Selection

3. Validation And Re-verification

4. Reporting


Pre-Fund: Best Practices

Pre-funding QC should be performed by a source that does NOT have a vested interest in the loan closing

Independent oversight and separate reporting is vital for transparency and integrity of information

The prefunding review process should mirror Post-Closing, actively sharing information and data between the two functions to drive results for Pre-fund targeting


What Do I Need To Do?


Pre-Fund QC: When do we audit?

Fannie written guidelines –

Prefunding QC reviews must be conducted early enough in the origination process to allow adequate time to make loan selections, complete the reviews, and properly inform the loan production organization so that corrections and/or revisions can be made prior to loan closing. Fannie Mae requires reviews to be done when there is sufficient documentation in the file to perform the required review of data and documents described in Verification of Data and Documents, below.

What Fannie really wants – Perform prefunds after a clear to close has been given.

Fannie also requires lenders who purchased correspondent loans to review a portion of these loans before the purchase these loans. Pre-Purchase QC.

Freddie does not give guidance on timing.


Agency Requirement: Sample Selection

The Seller Sampling Process Should:

◦ Include Mortgages That Are Representative Of The Seller’s Product

Line And Production Process

◦ Be Regularly Assessed To Ensure Its Pre-closing QC Process Is

Effective


Pre-Fund Selection Process

Each lender is required to create their own writtenpre-funding selection policy and process to ensure it meets each company’s needs.

Prefund selections should focus on areas that may pose a elevated risk for errors, misrepresentation and fraud.

There is no minimum volume review requirement.


Fannie Mae : Loan Selection Process

At a minimum, Fannie Mae recommends that the lender’s 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, and

•cash-out refinances.

In addition, the lender’s sampling methodology may include 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.


Freddie Mac: Sample Selection

Sample selection

The Seller's sampling process should include Mortgages that are representative of the full scope of the Seller's product line and production process as defined in Section 48.4(a). The Seller should regularly assess its sampling methodology to ensure that its pre-closing quality control process is effective. Additionally, the Seller should target samples, as needed, in order to:

•Review the work originated by a new branch office, employee or third-party originator

•Validate that a new product or offering is being originated in accordance with the Seller's policies and procedures

•Evaluate the work of a particular employee or Mortgage transaction participant when there is a reason to suspect fraud as required in Section 7.2(c)


Agency Requirement:Validation and Re-Verification

An Effective Pre-closing Quality Control Review Process Should Include Validation Or Re-verification Of:

◦ Data Entered into AUS

◦ Borrower SSN

◦ Income Documentation And Calculation

◦ Employment

◦ Assets Required To Close Or Meet Reserves Requirements

◦ Appraisal Report Or Property Valuation Data

◦ Adequate Mortgage Insurance Coverage

◦ Whether Additional Credit Was Granted And Considered In Qualifying When The Borrower’s Credit Report Reveals Inquiries Within The Previous 120-Day Period


3rd Party Audit Tools

Additional automated compliance tools can be part of your pre-funding QC Plan:

◦ Fraud Guard

◦ Interthinx

◦ Compliance Eagle

◦ AVM applications

Address all red flags uncovered by the compliance tools, and retain documentation used to resolve them.


Effective Pre-Fund Process

A Suggested Sample Of Effective Pre-fund Activities Include:

• Request 4506T Transcript Prior To Underwriting For Review

• Utilize Red Flag Checklists For Appraisal Purposes

• Obtain Verbal Verification Of Employment Day Prior Or Day Of Closing

• Clear Credit Report And Anti-Fraud Alerts Prior To Approval

• Verify Proof Of Assets To Be Source Of Funds For Closing


Pre-funding QC is your last chance to correct any errors before investor purchase.

Reviewing final documents is critical.

Steps should allow for the review of RESPA, MDIA, and state timing rules.

Review GFE and HUD-1 to ensure fees are within tolerance.


Effective Pre-Fund Process

Reporting


The Quality Control Cycle

Observe & Record

Measure & Report

Identify & Act

Monitor & Document

Eliminate Defects

Continuous Improvement 25Mortgage Compliance Advisors

Effective Reporting Should…

Help Firm Understand Significance Of Review Findings

Consider Personnel Involved In Loan Origination Process By Providing Feedback Specific To Role In Quality

Distinguish Between Compliance And Credit Findings

Should Transform Data Into Meaningful Information Useful In Analysis, Decision-Making, And Remedial Action

Should Include Trend Tracking Information As Prevention Resource


Management ReportingWe have our Pre-Funding Audits completed…Now what?

• Report to Management– Deliver to senior management within 30 days of the audits being

completed.

• Management’s Response & Action Plan– Management must respond to the report and make an action plan as to

who should do what to correct the findings.

• Corrective Action Plan and Monitoring– Action report should identify actions taken, timetable for completion,

and planned follow-up.

• Reporting to Investors and Agencies– Report any misrepresentation, breach of your contract agreement, or

detection of fraud within 30 days of uncovering the findings.


Response & Action Plan

After Review Information Is Reported And Communicated, Identify Actionable Items

Evaluate Performance Against Organization Requirements And Goals

• Address Effectiveness Of Processes And Controls

• Outline Compliance With Policies And Procedures

• Include Guidance On How To Prevent QC Issues In Procedure Manuals


Corrective Action & Monitoring

Provide Performance Evaluation To Individuals In Origination Process By Setting Expectations Through Quality Metrics

Actively Test And Report On Effectiveness Of Remedial Actions Taken

Document Management Actions


Report to Management

Providing feedback to individuals and units that have a role in The origination process (i.e. Underwriters, Appraisers, Loan Officers, Processors, Branches)

Implement remediation activities

Set expectation that, depending on results, Pre-fund QC personnel has authority to prevent loan from closing


Create monthly reports to analyze any findings trends discovered in your pre-funding process

Re-evaluate your pre-fund QC on a regular basis to make sure it is up to date with current trends

Investor and lender requirements are constantly changing

Perform periodic re-evaluation to gain the most benefit


Evaluate Trends


Pre-Fund QC Reporting

Classifying Defects


8%

6% 3%

11%

24%

1%

10%

15%

2%

2%

17%

1%

Loan Defect Categories

Assets

Borrower & Mortgage Eligibility

Credit

Liabilities

Income/Employment

Insurance

Legal/Regulatory/Compliance

Loan Package Documentation

Project Eligibility

Property Eligibility

Appraisal

Other

Final Thoughts


Pre-Fund QC: Things To Know

Pre-funding QC may increase amount of time it takes to get loan to closing

Set and manage expectations that additional time to closing is a possibility

Implementing Pre Funding reviews is typically a culture change to the company


Current Hot Button Items

Multiple financed properties

Sources of large deposits

Self Employed income calculations

Appraisals


Pre-Fund vs. Post-Close

Pre-Fund Review Post-Close Audit

Proactive In Assessing Loan Data Quality Prior To Closing

Solutions Curable Defects That Occur During The Closing Process

Limits Items To Be Collected At Closing, Which Reduces Costs And Errors

Accurately Reflects And Predicts Your Risk Exposure

Reactionary Process

Doesn’t Actively Reduce Loan Defect Risks

No Assessment Of Loan Data Quality

Errors Discovered Are Time-Consuming And Costly At This Point


Pre-Fund QC as a Profit Center?

Unlike post-closing, pre-funding allows you to show the dollar amounts that were corrected

Keep track of all the errors you correct and the associated dollar amount. Track this on a regular basis to show the effectiveness of the pre-funding process


We are proud to offer these monthly webinars free of charge, and hope that by doing so we will be

fortunate enough to earn your business.

www.MortgageComplianceAdvisors.com

• Post-Closing QC Audits• Pre-Funding Reviews• Pre Investor Delivery Audits• Broker/Correspondent File

Audits• Appraisal Reviews• Training and Consulting• Customized Solutions• Policies & Procedures


http://www.mortgagecomplianceadvisors.com/

Questions &Answers

You can find today’s slides on our News & Resources page:

To ask a question, click the plus sign next to “Questions” on the GoToWebinar box and type your

question.


Additional Resources

• Fannie Mae

– https://www.efanniemae.com

• Freddie Mac

– http://www.freddiemac.com

• HUD/FHA

– http://www.hud.gov

• HUD’s Neighborhood Watch

– https://entp.hud.gov/sfnw/public/


https://www.efanniemae.com/

http://www.freddiemac.com/

http://www.hud.gov/

https://entp.hud.gov/sfnw/public/

Thank You!

The information provided by Mortgage Compliance Advisors, LLC has been taken from various public resources and does not

constitute legal advice.


Prioritize QC with Pre-funding - Mortgage Compliance … · Prioritize QC with Pre-Funding February...

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