We all know that a purchase market brings more fraud than a refinance market. So, as the pendulum swings back to purchase and overall mortgage volume abates due to rising interest rates, don’t overlook the importance of loan quality control (QC). Lower production volumes mean a greater probability of loan officer and borrower misrepresentation, as well as increased repurchase risk. This year has already served up greater loan level pricing adjustments, a keener oversight focus on fair lending, and all indications point towards an impact on loan quality as it becomes progressively more difficult for borrowers to qualify. Before we become more entrenched in the year, and certainly as resource deployment is reevaluated, consideration of these market conditions is crucial. It also becomes increasingly more important that your quality control efforts not wane under pressure and loan reviews must encompass industry risk factors. Pursuant to oversight of the Federal Housing Finance Agency (FHFA) risk management and controls are regularly assessed to ensure minimal risk exposure in an ever evolving and volatile mortgage market. Fannie Mae details pertinent risk factors impacting loan quality and eligibility in terms of Desktop Underwriter® (DU®) submission under section B3-2-03 (02/01/2023). Do your QC efforts consider these attributes?
What are the risk factors?
Non-credit related risk factors – In addition to a borrower’s credit profile, it’s important to look at the non-credit risk factors that are considered when evaluating delivered loans. This includes “the borrower’s equity and LTV ratio, liquid reserves, loan purpose, loan term, loan amortization type, occupancy type, debt-to-income ratio, housing expense ratio, property type, co-borrowers, and variable income.”
Credit risk factors – Credit risk has taken on a new face, or should we say an additional score, under the FHFA’s directive, highlighted in our blog “A tale of two credit scores – Are you ready to QC bi-merge credit reporting.” This change will certainly put more focus on credit as a component of your loan decisioning. The full list of risk factors impacting credit includes borrowers equity, co-borrowers, credit history, credit inquiries, credit utilization, debt-to-income ratio, delinquent accounts, derogatory credit (including public records foreclosures and collection accounts), housing expense ratio, installment loans, liquid reserves, loan amortization, loan purpose, loan term, loan-to-value ratio, occupancy, property type, rent payment history, revolving credit, and variable income.
What if there isn’t a credit score?
If there’s not an available credit score for borrowers on the loan, then overall credit risk is determined based on borrower’s equity, debt-to-income ratio, liquid reserves, loan-to-value ratio, and property type. In these situations, a cash flow assessment can be completed in DU with the provision of a 12-month asset verification report prepared by a third-party.
Additionally, specific loan transaction criteria must be met in order to deliver loans without a borrower credit score. This includes receipt of the 12-month third-party asset verification as well as the following requirements:
1. The property must be a one-to four-unit principal residence and all borrowers must occupy the property.
2. The transaction must be a purchase or limited cash-out refinance.
3. The loan must be a fixed-rate loan and meet conforming loan limit requirements.
4. The loan may be subject to reserve requirements.
How can a third-party help?
Our industry continues to grapple with recessionary pressures, escalating interest rates, vanishing refinance volume, constrained homebuyer access to credit, fair lending concerns, and more. Mortgage originators can address market condition and associated risks, and still remain focused on production by partnering with an experienced mortgage quality control provider. This essential success factor is more important than ever in supporting lenders as they focus on what they do best, achieving excellence in origination. It’s time to deploy your valuable resources in the place where it makes the biggest impact, originating and closing loans. Place the detailed tasks associated with QC with a valued partner such as QC Verify.
At QC Verify we understand how important it is for originators to concentrate on staying ahead of loan quality risks, as well as changing regulation and agency guidance. We also recognize that risk can be nuanced, that misrepresentation requires checks and balances, and that attempts to perpetrate fraud can mask risk. In short, loan quality requires a keen experienced eye for detail in addition to sophisticated automation. With QC Verify you gain access to decades of mortgage audit and QC expertise, our proven Mortgage Analysis Review Software (MARS) system, and our innovative, modern verification solution that led Quality Mortgage Services to evolve into QC Verify. We specialize in loan quality audit and reporting, meeting today’s organizational risk needs through sophisticated technology with a human touch.
Visit QC Verify at QCVerify.com to find out how our team of dedicated quality control and audit specialists can help you minimize loan quality risk.