About
The following content is intended to emphasize Prefunding QC as a proactive QC process vital to improve loan and credit quality. This White Paper is purposed to define the importance of verifying loan data quality before the loan is delivered to the investor, and to convey Prefunding QC as paramount in actively reducing loan defect risks.
Acknowledgements
This White Paper was drafted with collaborative input and influence from executives involved in financial services regulation and policy. They hold no responsibility for any errors or emissions that may exist herein.
It’s all about the Data: Prefunding QC Audits
A prefunding review is an essential part of any firm’s quality control (QC) plan. It is a review of a loan prior to funding using the same or similar standards that are used during the post closing QC review or audit. Verifications and checks are conducted on a loan to ensure that data in the loan origination system is accurate, credit policy and compliance policy has been followed, and to protect against fraud.
The Consumer Financial Protection Bureau (CFPB) has indicated through their examination manual that a mortgage firm’s data is very important. The CFPB will be collecting data, both from a firm’s HMDA LAR and external sources. The result will be targeted audits based on perceived risk. Thus, data is important to ensure that it accurately reflects your firms perceived consumer risk profile.
Additionally, once an examination is conducted by the CFPB, they will likely focus on loan specific electronic data. A report then of loans out of your firm’s loan origination system, must yield accurate information for the CFPB. A system that yields inaccurate will likely be treated by the CFPB as evidence of inadequate control processes and procedures on the part of the entire firm.
Further, Fannie Mae’s Loan Quality Initiative (LQI) is entirely designed to increase data quality in order for Fannie Mae to better understand its assumed risk when insuring a pool of loans. The Uniform Loan Delivery Dataset (ULDD) is a component of the LQI requiring firms to transmit even more loan specific transaction data to Fannie Mae prior to purchase.
From all the available information in our ever changing industry, it is clear that a failure to assess data quality and implement a process to improve it, is indicative that many firms’ QC and compliance programs are insufficient to address the current regulatory and credit risk environment. A prefunding QC review is an important part of assessing and ensuring data quality and mitigating compliance and credit risk.
Every firm should implement a prefunding QC review based on the firm’s unique business model, product mix, risk factors, defect rate, and goals. A prefunding QC review is required by Fannie Mae, Freddie Mac, and encouraged by FHA[1].
Why should your firm consider prefunding QC reviews?
There is precious little time once a loan is closed and funded to determine if it is the loan you thought you closed and funded. Post funding QC, although vital to improving loan quality, can’t get you there alone. The post QC process is inherently reactionary. When you see a particular defect trending upward, it is time to add that element to your prefunding QC review.
Your loan data should be as accurate as possible. Thus, verifying loan data quality before the loan is delivered to an investor is imperative to decreasing repurchase and loan defect risks.
A prefunding QC review of high-risk loans can ensure that the loan isn’t funded until potential issues are addressed and resolved while problems can still be corrected.
If you want to see ROI on QC dollars, you should be performing prefunding QC. Prefunding QC reviews will reduce problem loans on the backend. Prefunding reviews are the best use of time and QC dollars spent.
Which loans comprise a prefunding QC review?
- All loan origination channels should be reviewed.
- High-risk loans should be reviewed.
- Loans from new branches or brokers.
- The prefunding review should include both discretionary and random loan sampling.
What should be reviewed in a prefunding QC review?
The prefunding QC review should attack known risks with checks such as: asset verifications, income recalculation, review of your firm’s manual processes, as well as auditing of your firm’s remediation plans. The results of your firm’s post QC process should influence the necessity for and items checked in a subsequent prefunding QC review.
The entire loan file should be reviewed and reverifications performed of most data including assets, income, employment, credit, appraisal risk factors, etc., following the same or very similar process employed in the post QC audit.
Who should do a prefunding review?
Ideally, the prefunding QC review should be performed by someone outside the origination process or someone who does not have a direct interest in the loan closing. An independent QC firm can fill this role. Although problems can be found and corrected in the prefunding QC review process, those performing the prefunding QC review should have the authority to stop a loan from closing.
When should a prefunding QC review be performed?
The best time to do the prefunding QC review is post underwriting prior to closing.
Items to consider:
Prefunding QC review will increase the amount of time it takes to get the loan to closing. Expectations should be managed and the necessity of the prefunding QC review should be effectively communicated.
Reporting is key. Your firm’s communication plan should effectively keep everyone in the feedback loop with regard to the results of your prefunding QC findings.
Each firm is different, and consequently each prefunding QC review program will be different. Let Mortgage Compliance Advisors design an effective, efficient process for you.
[1] The FHA approval handbook, Chapter 7 states, “Conduct Pre-funding Reviews. Mortgagees may want to sample cases prior to closing to evaluate the quality of processing and underwriting. Using such reviews, mortgagees may detect problems prior to closing while problems can still be corrected. This would be especially beneficial in cases involving loans with higher risk characteristics. An important part of pre-funding reviews is reverification (by telephone or in writing) of the applicant’s employment, source of funds and residency history. If a written reverification received during a pre-funding Quality Control review is satisfactory, another written reverification is not required if the loan is selected for post-closing review.”
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