Are Lenders Losing Their Grip on Loan Quality?

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Could the gains we made on loan quality and compliance over the past few years be slipping away? I sure hope not. Lenders worked too hard.

This could be the case. According to the First American Loan Application Defect Index, their last reporting period showed its 7^th straight month of defect increases.

The index measures the frequency of defects, fraud, and misrepresentations. It increased by 1.2% in June over May, with an increase of over 16.5% over last year. That’s quite a few more unwanted loan defects and not such a good trend for the industry.

Some consumers and lenders may be stretching the credit envelope a little too far in attempts to increase business and homeownership.

Mark Fleming, First American’s Chief Economist, believes that the market’s shift toward purchases, coupled with rising rates and tight inventory, is generating the upward trend in defects.

Fleming believes that purchase transactions are inherently more at risk of:

• Defects
• Fraud and misrepresentation
• Pressure resulting from the current strong sellers’ market.

He feels that this is compounding the risk of errors in loan applications.

It’s again time for lenders to take charge of the situation at hand. Up until recently, when business started to tighten, lenders had achieved great gains in the creation of good quality loans.

These were loans that were well documented and met legal requirements. They brought back the confidence in mortgage lending and in mortgage loans as a viable investment option.

Now is not the time to let it all slip away for the sake of few more deals. Lenders must find ways to compete in a tight mortgage market to attract qualified borrowers while continuing to manufacture good quality, compliant loans. The industry cannot afford, or tolerate, anything less.

Technology can help to streamline the processes, reducing costs by making staff more efficient and productive. Pre and post-close audit programs with active action plans are needed to monitor and ensure that things get done right.

Defects need to be identified and corrected quickly to minimize time, effort, and potential problems after a loan closes. But, technology alone is not the answer.

Lenders, their originators, and support staff need to have the knowledge, training, integrity, and fortitude to stay the course. Things must be done right, no shortcuts, no workarounds to “get the deal done.”

There’s always a right way and a wrong way to get things done. The wrong way is never the right answer.

About the Author

Michael Vitali

Michael L. Vitali – Independent Consultant to the Mortgage Industry Mike Vitali is an independent consultant to the mortgage industry on matters concerning compliance and mortgage lending. He most recently served as the Senior Vice President and Chief Compliance Officer for LoanLogics, monitoring regulatory developments and their practical implications for the mortgage lending industry. His duties included research, interpretation, and analysis of existing and proposed legislation related to the industry in support of recommendations for policy and/or procedure changes to maintain continued quality and compliance with all applicable laws, rules and regulations, investor requirements, and standard mortgage practices. In his more than 40 years in the mortgage industry, in senior level management, he has gained experience in all areas of mortgage lending, risk management, and compliance. Mike is a past President of the MBA of Greater Philadelphia, is a charter member and was the second Chairman of the MBA of Pennsylvania, and a past board member and Legislative Chair of both associations. He is a recipient of the 1998 Mortgage Banker of the Year Award from the MBA of Greater Philadelphia, and the 2003 Chairman's Award from the MBA of PA, and currently serves on several compliance related task forces for MBA.