There are plenty of risks associated with mortgage loan approvals which are known to the industry participants. These risks are associated with both, the lending institution, and the borrower. If a borrower’s documents are not in order, their application for mortgage will most likely be denied. If for some reason, the lender lands up with a bad loan due to some errors, they end up losing liquidity as they cannot market the loan in the secondary market.
The process of underwriting is largely manual and hence prone to errors. Over the years, the need for an automated QC platform to stand in as anindependent check point post the underwriting process has increased.
In this article, we will look at some of the common errors that lenders are still making during the QC process, and how a comprehensive QC platform can help reduce them.
Common QC Errors that Lenders Make
If a borrower has not furnished documents relevant to the loan or is unable to do soor has challenges repaying the loan in the future, then approving such a loan can lead to a bad debt for the lender in future. Rejecting such a loan can cause them to lose a customer, but maybe it is worth the risk.
Insufficient Analysis of Repayment Sources
An underwriter needs to carefully analyse the primary and secondary sources of repayment that a borrower has. If the application documents are looked over in a hurry, the underwriter can miss certain details which may prove that the borrower is in no position to be able to repay the said amount within the said time at the said rate of interest. Sources of repayment include all assets, liquid and non-liquid, as well as income clubbed together.
Considering Credit Risk
There are different types of credit risks. The underwriter should assess all the different types of risks a borrower might possess. Is he/she working in a volatile industry that’s subject to sudden ups and downs? Has the borrower suffered sudden downfalls in the past? Does the borrower live in a neighbourhood that is well-to-do? Using analytics and predictions, the underwriter must satisfy him/herself that the borrower is not at a huge credit risk.
Not Assessing Actual Value of Collateral
Borrowers often keep something like a property, asset, or land as collateral in case of non-repayment of the loan. This collateral is valued by a valuer before approving the loan application. An underwriter also needs to assess whether the value of the collateral is its true value,or has the market value reduced/increased since the valuation. He/she should verify all the details of the collateral and arrive at a reasonable conclusion. If an underwriter passes the application and the value of the collateral is lesser than what is noted, it can cost the lender.
Not Looking for Possibilities of Fraud
Some common errors that lenders make in the QC process, as underwriters, is approving applications under pressure, getting swayed or oversold on the case, not being an expert on a loan type, or simply ignoring potential red flags if the file looks alright. The biggest possibility here is missing out on key information that could ascertain any likelihood of fraud. It is always pertinent to look for any such red flags and bring these to attention immediately. If the borrower turns out to be fraudulent, it is a loss for the lender.
Not Using Technology
When everything is automated to make life simpler, underwriters should not rely on their manual efforts to conduct analysis of every case. They should instead make use of various tools and technology to make their work faster and more efficient. Similarly, using an automated tool helps reduce possibilities of human error, particularly as they can occur post a long day of looking at applications and documents. Missing something because of fatigue can lead to loss for the lender, loss in liquidity and a bad loan.
How an Integrated QC Checklist Helps
A detailed QC checklist helps you segment and list down everything that a borrower needs to submit, and everything an underwriter or a lender must verify. Here are some ways in which the checklist can be divided:
- Alternative/additional documentation
- Employment income
- Records of self-employment
- Credit history
- Any kind of pension/benefits received from Government
An integrated QC checklist helps to remove or reduce any human error. Things are less likely to be missed if an automated and comprehensive checklist is present. If the QC checklist is customizable, it can help lenders segregate lists according to geographical rules and regulations, if they are catering to clients across the globe. It also helps with regulatory compliance. Hence, a comprehensive, automated QC checklist can help lenders minimize errors, and hence, occurrences of bad loans.
A comprehensive QC platform provides the benefit of automation, reducing human errors significantly. It also helps to verify a variety of risks and use that as a standard mechanism across different users across different locations.
Visionet offers a Digital QC platform, which is completely customizable. It ensures that every analyst can follow the same QC process across the globe. For more information on Digital QC, click here
Alok Bansal is Managing Director of Visionet Systems Inc. and has 21 years of experience in managing strategy and global BPO operations. He excels in optimizing and leading the growth of financial services companies who are looking to take their mortgage operations to the next level.