Prioritize QC with Pre-Funding April 19, 2012 Presented By: Brady W. Meadows
Because of the large number of registrants, the lines will be muted. To ask a question, click the plus sign next to Questions on the GoToWebinar box and type your question. The panelists will address questions at the end of each topic. If your question is not addressed, we will email the answer to you. You can find today s slides on our News & Resources page. Instructions 2
We are fortunate to have with us today a panel of experienced mortgage professionals. They will be taking the time to answer your questions and provide insight from hands-on application. Brady W. Meadows Vice President Kristen Smith MCA Training and Quality Manager The information provided by Mortgage Compliance Advisors, LLC has been taken from various public resources and does not constitute legal advice. Our Panelists 3
Agenda What Is Pre-fund? Why It Applies To Me? What Do I Need To Do? Reporting Final Thoughts 4
What Is Pre-fund?
What Is Pre-Funding? Essential piece of any firm s Quality Control (QC) plan Review of a loan prior to funding using same or similar standards used during Post-Close QC review Vital in assessing data quality and mitigating compliance and credit risk Ensures that credit and compliance policy has been followed 6
Pre-Funding Quality Control Pre-funding Reviews Bring Quality Control To The Forefront Of The Loan Manufacturing Process Pre-funding QC Allows Problems To Be Corrected Before Closing Pre-funding QC Can Provide Substantial Return On Your Firm s QC Investment, As It Prevents Closing Loans With Defects 7
What is the Goal of Pre-Fund QC? Catch errors prior to closing Test action plans immediately instead of waiting 60+ days for information Target trouble areas Minimize warehouse time Decrease investor purchase conditions 8
The Quality Control Cycle Observe & Record Monitor & Document Eliminate Defects Measure & Report Identify & Act Continuous Improvement 9
Three C s of Quality Control Credit Collateral Compliance 10
Why Pre-Funding QC Matters Identifies And Addresses The Root Cause Of Each Loan Defect Prioritizes Safe And Successful Lending Aids In Maintaining Profitable Business
Why Pre-Funding QC Matters Leads To Improved Quality And Loss Prevention Assesses Not Only Loan-Level Information, But Ultimately Examines Overall Origination Process Evaluates Loan Data For Continuous Quality Improvement And Reduced Defects
Why Pre-Fund Applies To Me?
Why Pre-Fund QC Applies To Me? Agency Requirement Best Practices Company Betterment 14
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 investors that require Pre-fund reviews 15
Agency Requirement The Agencies goal of pre-closing 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 16
Agency Requirement Agency has defined its pre-closing QC review protocol into 3 categories: 1. Procedures 2. Sample Selection 3. Validation And Re-verification 17
Agency Requirement: Procedures The Seller s Pre-closing Review Process Should Include Procedures For: Sample Selection And Timing That Permits Reviews To Be Completed Prior To Closing Reporting Deficiencies And Taking Appropriate Corrective Measures Documenting The Resolution Of Defects Canceling Or Postponing Settlement When The Pre-closing Review Reveals Deficiencies Or When The Review Cannot Be Completed Prior To The Scheduled Settlement 18
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 Pre-Fund: Best Practices 19
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 Pre-Fund: Best Practices 20
What Do I Need To Do?
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 22
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) 23
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. 24
Agency Requirement: Validation and Re-verification An Effective Pre-closing Quality Control Review Process Should Include Validation Or Re-verification Of: Data Entered Into Loan Prospector 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 25
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 Pre-Fund QC 26
Additional automated compliance tools can be part of your pre-funding QC Plan: ComplianceEase Interthinx Compliance Eagle AVM applications Address all red flags uncovered by the compliance tools, and retain documentation used to resolve them. Pre-Fund QC 27
Reporting
Management Reporting We have our Pre- and Post-Closing 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. 29
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 30
Reporting: Is A Powerful Mechanism For Communicating With Those Directly Involved With Or Overseeing The Origination Process Effectively Analyzes Company Lending Culture By Capturing Critical Data Early In Loan Process Typically Is Unique To Each Lender s Goals And Specific Risks Reporting Pre-Fund Results
Reporting: Provides Invaluable Feedback About The Performance And Practices Within The Organization Allows Lender To Address And Correct Practices Which May Be Leaving Them Open To Risk Exposure Loan-Level Reviews Are Most Effective For Management Action Tools Reporting Pre-Fund Results
Reporting: Should Transform Data Into Meaningful Information Useful In Analysis, Decision-Making, And Remedial Action Should Include Trend Tracking Information As Prevention Resource Reporting Pre-Fund Results
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 34
Final Thoughts
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 36
Pre-Fund Review 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 Post-Close Audit 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 vs. Post-Close 37
Pre-Fund: 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 38
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
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 40
Who s Handling Your Pre-Fund QC? If You ve Outsourced Your Prefunding Requirement, Hopefully Your QC Partner Is Beyond Just Checking The Box If Your Firm Has Yet To Prioritize Its Prefund QC, Start Spending Your QC Dollars Wisely And Make It A Standard
Aside From Just Checking The Box, We Have A Responsibility To Partner With Our Clients In Assisting Them Recognize And Assess Potential Risk Our Business Is Built On The Understanding Of That Role, As Well As The QUALITY Of Our Product MCA & Pre-Fund QC Review 42
MCA s File Review: Satisfies Fannie Mae And Freddie Mac Pre-fund Requirement Commits To Standard Of 48 Hour Turn-Time Provides An Overall Risk Assessment Of The File Detects Potential Fraud And High Cost Violations MCA & Pre-Fund QC Review 43
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 QC Plan Implementation Red Flag Policies Training and Consulting Agency Approval LO Compensation Policies Etc. 44
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. 45
Thank You! The information provided by Mortgage Compliance Advisors, LLC has been taken from various public resources and does not constitute legal advice. 46
Fannie Mae https://www.efanniemae.com HUD/FHA http://www.hud.gov Fannie Mae s LQI Resources HUD s Neighborhood Watch https://www.efanniemae.com/sf/ https://entp.hud.gov/sfnw/public/ lqi/index.jsp Freddie Mac http://www.freddiemac.com Resources 47