Compliance & Forensic Loan Review

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As we are all aware underwriting mortgages for compliance is a critical piece of the underwriting process. As underwriters we are all aware of the Real Estate Settlement Procedures Act (RESPA) and requirements under the Truth In Lending Act (TILA).

More often then not, a lot of underwriters simply check the mortgage file to determine that the documents that must be provided to the borrower under this act are included in the file particularly the Good Faith Estimate and Truth in Lending and check to determine if they are dated within 3 business days of loan application. However, there is a much larger piece to these requirements by law that must be addressed by the mortgage lender and it is more critical then ever to determine that the borrower’s rights have not been violated where the laws are concerned.

For instance, TILA requires that the borrower be disclosed all prepaid finance charges in terms of an Annual Percentage Rate or APR. Lenders actually have a very small margin for error where APR errors are concerned. Further, proper disclosure of interest rate, loan amount, loan program are required throughout the processing of the mortgage application when ever a change in terms has taken place. For instance, a borrower that applied for conventional financing at an interest rate of 6.50% at a loan amount of $200,000 must be re-disclosed if they are offered an FHA insured mortgage at 6.75% at a loan amount of $202500.00.

Additionally, lenders need to determine that all fees that might be paid by the borrower be disclosed on the GFE including the funding lenders fees and the brokers YSP. If these fees are not disclosed then charged on the HUD, the borrower’s rights were violated and there could legal ramifications for the lenders.

Now, we as underwriters know that we are responsible for these issues and determining that the borrower was property disclosed, however, it has become extremely important in this new mortgage environment that we pay particular attention to the details. Why you ask, the answer is Forensic Loan Review. As the number of mortgage defaults increase, borrowers are more often then not pursuing new avenues to keep their homes. One of these avenues is loan modification.

Borrowers are employing attorneys and loan modification companies in record numbers to try to modify their current mortgages to more affordable interest rates and perhaps even principal reductions due to declining market values. One piece of the modification process being used to insure a successful modification is performing a forensic loan review in order to determine if a borrower’s rights were violated under RESPA or TILA. If they were a modification attorney can use this information in order to force a lender to modify a loan in the borrowers favor or risk litigation for violations under these two laws.

As part of the forensic loan review, attorneys who are familiar with RESPA and Regulation Z analyze the borrowers original disclosures as well as the final closing documents such as the HUD I and Truth In Lending to determine if they were charged fees that were not disclosed on their original disclosures. So quite simply, if the broker did no disclose their YSP on the initial GFE and a YSP appears on the final HUD I, the borrowers rights were violated and they are entitled to restitution for these violations.

Beginning with the new year, brush up on the compliance issues that are involved in the mortgage underwriting piece and pay particular attention to the details. It is the only way to insure that the company that you are employed by will not face legal ramifications in the future based on disclosure violations that may be found during a forensic audit. Good luck and Happy Underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.