Identify Loan Defect Procedures - Nationwide Multistate Licensing System NMLS
- Which corrective action is appropriate if income was overstated and affected approval?
- Recalculate income and re-underwrite; deny or reprice if necessary. Overstated income requires recalculation to ensure the loan approval aligns with true borrower qualifications and program eligibility criteria.
- What is the most appropriate first corrective action when a required document is missing?
- Obtain the missing document and re-underwrite if needed. Addressing missing documents ensures complete files and verifies that underwriting decisions remain valid upon inclusion of required information.
- Which defect type concerns appraisal errors or unsupported property value conclusions?
- Collateral (appraisal) defect. Collateral defects stem from flaws in property valuation processes, ensuring the appraised value accurately reflects the asset's worth for loan security.
- Which defect type concerns errors in APR, finance charge, or payment terms disclosed to the borrower?
- Disclosure/Truth-in-Lending defect. Disclosure defects violate Truth-in-Lending Act requirements by providing inaccurate financial details, which must transparently inform borrowers of costs.
- Identify the defect: The borrower signed a disclosure, but the date is blank.
- Documentation defect (missing/incorrect date). Blank dates on signed disclosures constitute documentation defects as they fail to establish the timing of borrower acknowledgments required by policy.
- Identify the defect: The file shows two different Social Security numbers for the borrower.
- Data integrity/identity defect. Inconsistent Social Security numbers indicate potential identity fraud or errors, necessitating verification to maintain data accuracy in loan processing.
- What corrective action is appropriate when disclosed terms do not match final loan terms?
- Issue corrected disclosures and follow applicable redisclosure rules. Inaccurate disclosures must be corrected to comply with federal regulations, potentially triggering waiting periods or tolerance cures.
- What is a material defect in a mortgage loan file?
- A defect that could affect loan eligibility, salability, or borrower terms. Material defects significantly impact the loan's core aspects, requiring identification to prevent risks to lenders, investors, or borrowers.
- What corrective action is appropriate when legal documents contain borrower name errors?
- Execute a corrective instrument or re-record per title/attorney guidance. Errors in legal documents necessitate formal corrections to align with title requirements and ensure the validity of the borrower's obligations.
- Which defect type concerns missing or incorrect hazard/flood insurance coverage documentation?
- Collateral/insurance defect. Insurance defects involve inadequate protection against property risks, which is essential for safeguarding the collateral's value in lending.
- What is a post-closing defect in mortgage operations?
- A deficiency discovered after closing during audit, shipping, or QC review. Post-closing defects are identified in reviews after funding, allowing for timely corrections to maintain loan salability and compliance.
- Which defect type concerns inaccurate income, assets, or employment used to qualify?
- Underwriting defect. Underwriting defects involve miscalculations or inaccuracies in borrower qualifications, which can lead to improper loan approvals or denials.
- Identify the defect: The closing disclosure does not match the final note interest rate.
- Disclosure defect (inconsistent loan terms). Mismatches in disclosures and final terms violate accuracy requirements under TRID rules, ensuring borrowers receive consistent information.
- Which defect exists when the loan amount exceeds the program's maximum LTV/CLTV limits?
- Eligibility/underwriting defect. Exceeding LTV/CLTV limits violates program guidelines, classifying it as an underwriting issue that affects loan eligibility and risk exposure.
- Which defect exists when the loan file lacks evidence that required waiting periods were met?
- Compliance defect (timing/waiting-period failure). Failure to document waiting periods breaches regulatory timelines designed to protect borrowers during the loan process.
- What corrective action is appropriate if required flood insurance is missing at closing?
- Obtain coverage meeting requirements or suspend/fund only after cure. Missing flood insurance requires immediate procurement to meet federal mandates and protect against location-specific hazards before proceeding.
- Which defect type concerns violations of federal or state lending laws?
- Compliance defect. Compliance defects arise from failures to adhere to legal requirements, ensuring loans meet all regulatory standards for fair lending practices.
- Which defect type concerns missing signatures, dates, or required disclosures in the file?
- Documentation defect. Documentation defects occur when essential elements like signatures or dates are absent, invalidating the completeness and enforceability of loan files.
- Identify the defect: The borrower's name differs between the note and the deed of trust.
- Documentation/title defect (name inconsistency). Name inconsistencies between key documents create title issues, potentially affecting the enforceability and transferability of the loan security.
- What is a loan file defect in mortgage lending quality control?
- Any error, omission, or inconsistency that violates policy or law. In mortgage quality control, defects include any deviations from required standards that compromise compliance or accuracy under lending policies and regulations.
- What is a non-material defect in a mortgage loan file?
- A defect that does not affect qualification, pricing, or legal compliance. Non-material defects are minor issues that do not alter the loan's fundamental validity or terms, allowing for simpler resolutions without re-evaluation.
- Identify the defect: The credit report used is expired under the lender's policy timeframe.
- Underwriting defect (stale credit documentation). Using expired credit reports violates underwriting guidelines that mandate current financial data for accurate borrower risk assessment.
- What corrective action is appropriate when a required appraisal condition is unmet at closing?
- Obtain required certification/inspection or cure per investor guidelines. Unmet conditions require proof of resolution to comply with investor standards, ensuring the collateral meets all valuation and safety criteria.
- Identify the defect: The appraisal indicates repairs required, but no repair completion proof exists.
- Collateral defect (unmet appraisal conditions). Unresolved appraisal conditions represent collateral defects by leaving property risks unmitigated, which must be addressed for loan security.
- Which corrective action is appropriate for a minor clerical error that does not affect terms?
- Correct the record and document the cure in the file. Minor clerical errors can be rectified without impacting loan terms, with documentation ensuring audit trails for quality control purposes.