Tuesday, February 26, 2008

query: what happens when a loan goes to quality control

Ahhh, great question. I'm going give you my answer BUT I have to tell you that since I'm no longer in mortgage lending, my exposure to quality control might not be current. If we have any mortgage lending readers out there who would like to add their comments, we would sure appreciate it.

Let's first talk about the selection of a file for quality control. Most mortgage files that are subject to a quality control review are selected at random. A good quality [QC] control manager will attempt to pull a random 10% selection from everybody. This means that QC will try for an overall 10% selection AND also try to mix into that selection a sampling of roughly 10% of the production from each appraiser, each mortgage broker, each mortgage loan originator, etc. By constantly monitoring 10% of what everybody is doing, QC is likely to find repetitive errors or fraud.

The purpose of QC is to aid management by pointing out training deficiencies, procedural and compliance issues, and suspicion of fraud.

The QC staff should be more than auditing clerks. Hopefully management will spend the money to hire highly skilled compliance and underwriting experts. The auditor has to know all the rules and how to interpret what they find.

In addition to random selection, QC will also pull first payment defaults, first year defaults, and any other files that have been red flagged by someone else in production as suspicious.

Once a file has been pulled in for a QC audit, they will do a thorough review and then order reverification of some or all data. This may mean that they will take the 4506 that you signed at closing and send in to the IRS for a copy of your tax return. They may also send an appraiser out to take pictures of the property and perform a drive-by appraisal. They may run another credit report and/or send reverification forms out to your landlord, bank, and employers. They may also send your mortgage application back to you and ask you if anyone has altered the form after you signed it.

One of the most common problems discovered by QC that falls into the category of borrower fraud is occupancy. If you told the mortgage lender that you intend to occupy the property and never actually moved in and your file is selected for QC, expect to get caught.

After the QC audit is complete, findings will be reported to management who then decides on the appropriate follow-up actions.

A final note..... to avoid a conflict of interest, the QC should report directly to top management rather than work inside the regular mortgage department. If a mortgage department has been corrupted by systemic fraud, QC has to be able to communicate this type of matter independently to the level where ultimate responsibility lies.

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