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In the interests of time, expense and competition, FHA and Private MI companies offered lenders a delegated process for loan insuring. This was great for everyone until the spit hit the fan in 2007.
All of a sudden, these loan insurers were carefully reviewing every detail of each defaulted loan to identify any possibility of a lender’s failure to strictly comply with all requirements for the loan’s insurance.
The battle lines were drawn. Lenders and insurers fought it out on every front. The result of this war was fines, penalties, rejected coverages and a host of new rules. We all know the story.
Now, we’re looking for more ways to sure up the process to provide better guarantees to lenders. (Defect Reviews) Is this the answer? There will always be some risks involved in lending.
Lenders are clamoring for more defect clarity. What is acceptable and what might get them into trouble? The current guidelines are clear. Make a loan determination that is validated, by specific documentation showing that a consumer can afford to own the home.
Reviews by FHA and MI companies may indicate that a loan is defective but these are only helpful if completed before the loan closes. Otherwise, done after loan closing, the lender is still stuck with a defective loan.
For lenders to submit their loans to these insurers prior to closing would only increase processing times and expenses for everybody involved. A backward step in the process, not forward.
So, lenders need to ensure their loans are in compliance to ensure coverage before they close. The process is already in place. Lenders are required to perform pre and post-close reviews. This is where lenders should focus their attention on identifying areas that create potential problems and defects.
Unfortunately, many lenders spend more time trying to explain away the problems to make these reports “look good,’ instead of concentrating on the actual results of these reviews. The answers are already there. Lenders need to objectively pay attention to these results.
Defects found in a random or discretionary sampling of loans will identify defects existing in other loans in the pipeline. Trending reports should lead to action plans to identify and correct these defects. Action plans which in the end will result in better quality loans with fewer defects and less potential for rejected insurance coverage.
More defect clarification from the agencies and insurers would be great, but dealing with what we already know will go a long way toward avoiding rejections, fines, and penalties.
Why wait? Utilize the information gleaned from currently required audits to identify weaknesses in processes and documentation, as well as areas for needed training.
If you do, you’ll stay ahead of those waiting for an insurer’s pre-review of their loans, while reducing your defects, costs, and time to originate your loans.
Take control. The game has changed. Play different.
