How Pre-Closing Audits Reduce Loan Portfolio Risk

In 2011, Freddie Mac updated its quality control requirements covering pre- and post-closing quality control measures. Freddie Mac'sPre-closing Quality Control Reviews Section 48.8 lists best practices and guidance for conducting a pre-closing audit. Not only is it necessary to conform with Freddie Mac's quality control requirements by implementing a pre-closing quality control process that samples a percentage of mortgages before closing, it's also smart. Why? Pre-closing audits reduce loan portfolio risk. Here's how:

  • Pre-closing audits give lenders the opportunity to find and correct potential issues prior to closing a potentially risky loan. For example, validating and reverifying data involves double-checking Social Security numbers, employment, income documentation and calculations, assets, appraisals, mortgage insurance coverage, property valuation data, and so forth. Should the re-verification process reveal discrepancies, corrective measures can be taken before the loan is funded.

  • Pre-closing audits help to ensure that loans are being originated according to the lender's policies and procedures. When loan originations deviate from established policies, the loan portfolio mix could become unbalanced or riskier loans undertaken. By auditing a sample of mortgages, lenders may notice variations in how loans are being originated and then address these issues at the source.  

  • Pre-closing audits can help to identify employee, branch office, or third party originator training issues - or potential fraud. When a given employee, branch office, or third party originator consistently deviates from established procedures, this deviation could indicate that additional training is needed. In cases of suspected fraud, pre-closing audits can serve as an evaluative tool.

  • Pre-closing audits can lead to the cancellation of risky loans. When a pre-closing audit reveals deficiencies that cannot be satisfactorily resolved, the lender may opt to cancel or postpone the settlement.

  • Pre-closing audits identify risk, validate and re-verify data, and provide lenders with the opportunity to correct potential issues before funding a loan. Though Freddie Mac requires a sampling that reflects the lender's product line and production process, each individual loan could benefit from a pre-closing audit.

    Frank Shields is an expert in the mortgage industry. He has collected sources from to write this post. Feel free to connect with him over at Google+.

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