This week I have the opportunity to participate in the largest wine competition in the United States.  The event is being held in Cloverdale, California at the north end of the Sonoma County wine region.  

There are around 5,000 wines from 18 states represented at the 4 day event.  Each judge will taste around 120-150 wines per day.  I act as a facilitator during the event recording the medals for the various classes of wine the judges are tasting.  Below is a shot of 4 judges tasting a group of Chardonnays.  

Ok, enough about wine and on to mortgage lending... 

A key area of our FOICS-plus studies is the prefunding quality process.  Prefunding quality is a review and/or audit of a loan file before loan funding.  The process ensures the veracity of information of a loan file and helps to detect borrower misrepresentation.   

Many mortgage bankers implemented a prefunding review process when wholesale lending became a business channel in the late 1980s.  Over the years, prefunding quality control has become a critical and necessary process mortgage bankers perform on all production channels. 

We recently reviewed a company that had a pretty good prefunding quality control process.  Every loan is audited before funding. Based on what we’ve seen from other companies, their QC review program is relatively advanced.   Here are some of key processes they use to reduce the risk of fraud and misrepresentation:

  1. Obtain a signed 4506 from all borrowers and use it to validate income from tax returns
  2. Run a fraud detection report from a third party vendor
  3. Order MERS to ensure no property flips
  4. AVM and appraisal review
  5. Order and obtain VOE and VOD to validate information on paystubs and bank statements
  6. Verbal verification of employment prior to funding
  7. Check list used to audit file based on previous issues detected

There is a cost to performing prefunding quality control though.  Sometimes when loan production and earnings decline, management will reduce the amount of quality control that is conducted in an effort to cut expenses.  Other times, management may not believe pre-funding quality control is really necessary.  However, the cost to repurchase a fraudulent loan from an investor can wipe out an entire year or quarter of profits. 
Prefunding audits are like dental care. The cost of having a regular dental check up is far cheaper than having a periodontal procedure.

More recently, prefunding review has become even more important as the GSEs are on high alert. READ MORE

You can pay now or pay a lot more later.