Mortgages through banks or financial institutions have always been the conventional way for individuals for transacting in a real estate purchase transaction. Owing to this universal and age-old practice, lenders have become much more than just financial institutions. They are risk takers and risk managers, because every single loan that a bank lends comes with a list of risks associated with it.
Before a loan is processed, banks undertake careful underwriting procedures and a series of processes to ensure that the borrower is legitimate and having creditworthiness, and the loan is ‘good’. After all they need to re-raise the capital through the secondary market and having a bad loan portfolio will seriously impact their liquidity.
Even after the underwriting process, there are several chances of errors cropping up or small details being overlooked. Most lenders prefer to put in an additional level of Quality check (QC) before funding the loan.
Pre-funding QC and how it can help
Having a dedicated pre-funding QC process can help in eliminating risks of having a bad loan. Every organization can have a different QC process and it makes sense to have these detailed QC checklist embedded into the system/process so that it is not possible for anyone to omit these points. Also, it should be simple to configure an additional set of rules or additional points in the checklist for different locations or offices. Having all this available in the system can have significant advantages in minimizing the risk involved.
Minimize Credit Risk
One of the biggest risks associated with lending is that of borrower being able to pay back the loan. The pre-funding underwriting procedure adjudges the credit risk of the parties involved, the borrowers and their counterparties (guarantors, sponsors, etc.). An automated QC platform can go through the parties’ financial histories to look for any discrepancies in payment or identify red flags in their credit history.
Asset Verification Risk
It is pertinent to verify whether the assets that are being financed for mortgage are good, legitimate, and actually exist. It may so happen that a borrower tries to mortgage a property that doesn’t belong to him, or submit property documents that are forged, or even show a property that does not exist. All these are probable and realistic scenarios, and hence, asset verification is a very important procedure in underwriting. A QC platform can be used to re-verify the documents to make sure that the mortgaged assets are ‘good’.
This involves a fair amount of forecasting and assessment. Calculating future market trends is a common occurrence, and that is a pertinent risk associated with lending. This involves fluctuations in market rates, interest rates, currency risk spread risk, etc. The QC platform can have several of these parameters embedded in them within the checklists, so that users do not override these factors before reaching to a conclusion.
Income Recalculation Risk
Even after a borrower submits his income details, it is important for the bank to verify the documents to ensure that there are no discrepancies, red flags, or doubtful/false information. The QC platform can be used to perform a second round of checks to ensure that the underwriter has not ignored any important details.
The QC platform can be used to analyse whether the borrowing parties possess sufficient liquid assets to pay off the loan when it becomes due. Sometimes, parties are unable to pay back the borrowed amount, which leads to refinancing procedures or seizing of assets by the bank, both of which can prove to be expensive for the bank.
Legal and Compliance Risks
Legal and statutory compliance is an important aspect and pertinent risk to lenders, if the borrower has tried to take an illegal route and the lender fails to notice it, this can land the bank in legal trouble as well as lead to loss of reputation. Hence, banks need to ensure that these compliances are meticulously met. . A QC platform is very important in this regard as it can pick up any missed details or non-compliances even if the underwriter may have missed them.
In a nutshell, here are the risks that are associated with pre-funding, which a QC platform will help with.
- Verification of assets shown for mortgage as well as surety
- Income details – employment, business, other forms of income
- Details of employment or business
- Credit history and the ability to repay the loan
- Any history of loan rejection or bad credit
- Risks related to appraisals
- Risk related to liquidity and ability to pay loan as soon as it becomes due without having to refinance or seize assets
- Risk of market fluctuation
A comprehensive QC platform provides the benefits of automation, reducing human errors to a great extent. 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 universally. 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.