The intent of the following article is to provide an overview of mortgage industry loan quality control and demonstrate methods that mortgage industry investors use to track and report seller mortgage loan quality control statistics for the purposes of risk management and performance monitoring.

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Mortgage Loan Quality Control Overview

In an effort to offer more loan products and remain competitive in today's expanded marketplace both the bank and mortgage brokers participate in correspondent or wholesale lending programs. Correspondent and wholesale lenders refer to the banks and mortgage brokers that sell them loans by many names - Originators, Brokers, Lenders, Sellers or Correspondents. For the purpose of this article the banks and mortgage companies that originate the loans are "Sellers" and the correspondent or wholesale lenders that fund or buy the loan from the seller are "Investors".

Sellers, based on investors' guidelines, make a lending decision and fund the mortgage loan using their own money, the investor's money or a warehouse line of credit. As soon as the loan has closed, it is sold to an investor at a previously negotiated price. This dynamic works great for the borrower. The borrower is dealing with the seller who will close the loan, and the seller is able to shop the mortgage around thereby obtaining the borrower a lower interest rate.

Investors typically perform quality control checks on a percentage of the loans that they retain for servicing. The reason that quality control checks are performed is to find mistakes, minimize their occurrence, and correct them when necessary. When the investor securitizes or sells a pool of loans on the secondary market they are required to perform quality control checks and provide reports as required by federal or agency regulations. The less an investor spends on correcting mistakes in the loans they have purchased the more profitable they are. As a result, sellers that correctly process, underwrite and deliver loans are more profitable for an investor because of the lower quality control costs.

In determining a seller's quality control performance, investors will track and report statistics for loans purchased from the seller. Examples of values that an investor might track and report on a quality control report are:
  • Number of loan files reviewed
  • Number of findings
  • Number not investment quality

The "Reporting Seller Mortgage Loan Quality Control Statistics" section of this article details steps for creating a report that an investor might use to track and report quality control statistics for loans that a seller has delivered to the investor. A seller with a high percentage of quality control issues could warrant a caution or corrective action letter from the investor. Serious quality control issues such as fraud determinations might warrant a suspension of seller privileges or legal action. The Sample Mortgage Loan Quality Control Report in this article can be used as a model for stand alone reports or incorporated into a comprehensive Seller Scorecard report.

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