The Practical Guide to

Loan Processing

Copyright 2013

By Thomas A. Morgan
 The Practical Guide to Processing © 2013 QuickStart™ Publications

9th Printing

ISBN 9780971820531
"The Practical Guide to Loan Processing"

© 2013 – Thomas Morgan, QuickStart Publications

ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of the publisher and the
copyright holder.

This publication is designed to present, as simply and accurately as possible, general

information on the subject. It should be noted that the information presented is not all-
inclusive. Products, programs and guidelines change due to rapid changes in the industry.
This publication should not be used as a substitute for referring to appropriate experts and is
sold with the understanding that the publisher is not engaged in rendering legal, accounting,
or other personalized professional service. If legal or other expert assistance is required, the
services of a competent professional should be sought.
 The Practical Guide to Processing © 2013 QuickStart™ Publications

Table of Contents

INTRODUCTION ........................................................................................................................................... 1

CHAPTER 1 – THE PROCESSORS DUTIES & RESPONSIBILITIES........................................................ 3

Job Description - Mortgage Loan Processor................................................................................................. 3
CHAPTER 2 - MORTGAGE INDUSTRY OVERVIEW ................................................................................. 7
Basic Mortgage Math .................................................................................................................................. 12
Loan Products ............................................................................................................................................. 15
Understanding ARMs .................................................................................................................................. 16
Understanding Loan Plan Specifications and Guidelines ........................................................................... 19
CHAPTER 3 - NEW LOAN SETUP, VENDORS AND DISCLOSURES .................................................... 29
The Importance of a Thorough Loan File Setup ......................................................................................... 29
Sources of Applications and Treatment ...................................................................................................... 30
Assigned Files ............................................................................................................................................. 35
Sending Out Disclosures............................................................................................................................. 39
RESPA – The Real Estate Settlement Procedures Act .............................................................................. 39
The Truth-in-Lending Act (TILA) ................................................................................................................. 43
Section 32 of Truth-in-Lending Act – HOEPA ............................................................................................. 49
The Equal Credit Opportunity Act (“ECOA”) ............................................................................................... 51
Handling Missing Documentation ............................................................................................................... 56
The Welcome Package - Borrower Introduction ......................................................................................... 57
Direct Verifications ...................................................................................................................................... 59
File Order .................................................................................................................................................... 59
CHAPTER 4 - DOCUMENTATION REVIEW – REVIEWING CREDIT AND PAYMENT HISTORY ......... 61
Credit Bureaus vs. Credit Repositories ....................................................................................................... 61
Components of the Housing and Expense Ratios ...................................................................................... 62
Credit History .............................................................................................................................................. 70
Sub-Prime Lending ..................................................................................................................................... 75
CHAPTER 5 - DOCUMENTATION REVIEW - INCOME DOCUMENTATION .......................................... 81
Income Computation ................................................................................................................................... 81
Self-Employment ......................................................................................................................................... 89
Self Employment Analysis Tools ................................................................................................................. 95
CHAPTER 6 - DOCUMENTATION REVIEW - ASSETS ........................................................................... 99
Verifying Assets .......................................................................................................................................... 99
Seller Contributions ................................................................................................................................... 102
Assets for Down Payment, Closing Costs and Reserves ......................................................................... 103
The Earnest Money Deposit...................................................................................................................... 107
CHAPTER 7 – DOCUMENTATION REVIEW – PROPERTY, APPRAISALS, PROJECTS, NEW
CONSTRUCTION ..................................................................................................................................... 109
Understanding Property Types ................................................................................................................. 109
Investment Property .................................................................................................................................. 117
Appraisals.................................................................................................................................................. 118
CHAPTER 8 – UNDERWRITING SUBMISSION AND APPROVAL ....................................................... 121
Basic Underwriting Preparations ............................................................................................................... 121
Detailed Credit Package Order ................................................................................................................. 123
Basic Loan Submission Checklist ............................................................................................................. 127

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Base Processing Checklist........................................................................................................................ 128

Reviewing the Application ......................................................................................................................... 133
Sections 1 & 2 of Application .................................................................................................................... 134
Section 3 – Personal Information .............................................................................................................. 135
The Approval Process ............................................................................................................................... 139
Understanding FHLMC Loan Prospector Results ..................................................................................... 141
CHAPTER 9 - THE CLOSING AND REQUIREMENTS ........................................................................... 146
Brokered Transactions vs. Funded Transactions ..................................................................................... 146
Settlement Agent – Document Requirements........................................................................................... 149
Required Closing Conditions .................................................................................................................... 150
CHAPTER 10 - TIME MANAGEMENT STRATEGIES FOR PROCESSORS ......................................... 156
Pipeline Management - Loan Tracking Reports ....................................................................................... 156
Processor Time Management Techniques ............................................................................................... 159
System 1 - Pipeline Review ...................................................................................................................... 160
Loan Status Procedure ............................................................................................................................. 160
System 2 - The Complete Application System.......................................................................................... 163
System 3 – Time Blocking......................................................................................................................... 164
System 4 – Forms Management ............................................................................................................... 164
Software Introduction ................................................................................................................................ 165
Status Reports .......................................................................................................................................... 167
In Conclusion ............................................................................................................................................ 169

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 The Practical Guide to Processing © 2013 QuickStart™ Publications

Introduction
Beginning in 2006, the mortgage industry began to experience an upheaval that would ultimately
bring the financial system to that point to its knees. What this is meant is that many mortgage
lenders, who previously were able to casually package loan applications, must now diligently
meet the most stringent guidelines and documentation requirements imposed since the late
sixties. The processor is critical in meeting these requirements. Most mortgage companies and
referral sources correctly believe that they live and die based on customer service and service
delivery. The loan officer is a big part of this, in that he or she is responsible for taking a good
application to start with. While the loan officer is the customer’s representative, it is the
processor who ultimately has his or her hands on the loan file and can assess what the status of a
loan is.

Despite 60 years of automation improvements, the biggest problem mortgage companies report
with respect to their operations is incomplete or problematic loan documentation. This is where
the human factor in the application process impacts us, because we are relying on people –
borrowers, real estate agents, closing agents and loan officers – to provide what we need to
complete the loan.

Even if the loan application is perfect, processing is where the home loan sequence can begin to
reveal its nightmarish realities. Under normal circumstances, it is the processor’s duty to
complete the verification process, assure regulatory compliance and prepare the case for
presentation to the underwriter, loan committee or other decision maker. It seems simple
enough, but here is where the effect known as "I am not sure if this is completely clear" kicks in.

Application Order Credit

Data Entry
Received Report &
Appraisal

When File is
Complete, Pre-Underwrites Loan
Submit to – Identifies
Underwriting Deficiencies

It seems like a simple process. But what seemed apparent to the loan officer isn't so apparent to
the processor. If it isn't apparent to the processor, it isn't going to be apparent to the underwriter
either. In an ideal situation, the processor and loan officer work together to identify "critical"
items which could cause the loan to be denied and ascertain whether they can be fixed. Working
together and with the borrower it is unlikely that any adverse information can't be refuted.

Then there are non-critical items - things that the loan can be approved "subject to" or as a
condition of the approval - "nickel & dime" conditions. The problem comes when a processor
doesn't segregate the level of importance of various documents and mails a simple list of
outstanding documents to a borrower. Suddenly an inconsequential bank statement or other
innocuous pieces of information are as important to the borrower as a critical document, such as
proof that a delinquent account is incorrectly attributed, or the current years' tax return. The

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borrower receives the list and puts everything together, except for the critical document, sends it
in. The mail gets reviewed a week later and suddenly - nearly 1 month into the loan process -
there is a huge problem. Welcome to mortgage banking. This is why a complete application is
so important.

Instead of simply acting as a checker of files and a sender of forms, the processor can be much
more useful to the customer by taking their expertise and guiding the borrower through the
process. This is the role of the processor.

How this position functions is different from company to company. In larger companies the
processing role is often segmented into its different parts – file intake, data entry, and file review,
pre-underwriting and pre-closing functions – all broken apart. In some companies the processor
owns the file from “cradle to grave” and may even generate closing documentation. Whichever
role the processor fills, he or she must know all the functions to anticipate issues and to be able
to identify what still needs to be done.

In the past mortgage processing training has been passed down from generation to generation
and person to person. This has resulted in many different approaches, emphasis on skills that
may not apply to all situations, and general misinformation. There are also many “processing
guides” whose pages are filled with sample forms and other industry exhibits. We believe you
can find these on your own, and have tried to stay away from that in this guide. We tried to
include only those things that actually affect the processors job. While it is impossible to
describe all facets of a job that touches every phase of the retail mortgage business, we hope that
this book will give the reader a strong foundation in understanding the processor’s job.

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Chapter 1 – The Processors Duties & Responsibilities

Chapter 1 -
The Duties of the Loan Processor

Job Description - Mortgage Loan Processor

A generic description of the processor’s duties might read like this; Assist Customer in obtaining
approval by working with loan officer, underwriter and closing; Review Application for
completeness at the time of receipt and prior to underwriting; Initiate requests for all
documentation needed to support approval.

Specific Duties

 Receive loan application after registration

 Review against loan plan specifications for accuracy
 Enter into computer assisted processing program
 Generate Loan Application (1003, 2900), Transmittal Summary (1008, 2900 WS, 1802),
Appraisal Request (2800)
 Generate Disclosure Documents Appropriate to Registered Loan Program
 Order and review credit report
 Order and review appraisal
 Compile case in Stack Order
 Enter Loan into Logs
 Initiate contact with customer requesting additional documentation
 Track outstanding documents and follow up with customer, loan officer, referral source
 Update Status daily as to incoming and outgoing documents
 Ascertain readiness for loan underwriting
 Pre-Underwrite case against checklist to identify problem areas prior to submission to
underwriting
 Evaluate deficiencies and notify customer, loan officer and referral source of critical issues.

General Description of Duties

The loan officer, if there is one, performs the role of “field underwriter". However he or she
should work with the processor to determine what information is needed prior to submitting a
loan to an underwriter. The loan officer should not burden the processor with the duty of trying

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to qualify a borrower. Items which are generally “critical” in the determination of approval are
those which materially impact the borrower’s income, assets or credit history. Specifically, the
file should not be submitted with critical information missing, unless it is done as a referral for
judgment as to whether they missing information can be resolved. Information, which is required
in order to satisfy compliance or to complete standard documentation requirements, is not critical
and should not arrest the loan submission.

The Career Path of the Processor

Loan processors normally follow one of two paths as they progress in their careers. The natural
graduation of credit skills, documentation review and process management leads to a career in
underwriting, operations and operations management. A smaller percentage of processors
extend their careers into sales and sales management. In this capacity, they use their ability to
review documentation, anticipate problems and work with support staff to deliver excellent
customer service. Many processors who transition into origination quickly outperform their non-
processing skilled counterparts.

The Division of Duties between Processor and Loan Officer

While there is overlap between the loan officer and processor, there should be a clearly defined
separation of what a processor should do and what a loan officer should do. The duties that are
specifically assigned to a processor are listed in the job description. There are times that a loan
officer may perform some of these functions in order to expedite the file’s process. However,
there are duties that the loan officer is supposed to perform that a competent processor may be
able to execute. A processor should not be expected to perform these, but may concede to the
loan officer and assist with guidance.

Task Description
Interest Rate Lock-in The loan officer will generally lock-in a borrower’s interest rate when he
or she gives the borrower an interest rate guarantee. When the file is in
process, however, the loan officer may ask that the processor submit an
interest rate lock-in request.
The risk for the processor is that pricing mistakes can be extremely
expensive. The processor may be blamed, or used as a scapegoat, for
errors in pricing that the loan officer should have been aware of. If the
processor can complete the lock-in request by simply making a phone
call, on-line, or by faxing a request, this may be done under the loan
officer’s direct supervision. Confirmation should be immediately
communicated back to the loan officer, particularly if there is any
deviation in price at all.
Loan Registration Program Selection and Registration should be performed by the loan
officer. If the loan officer requests that the processor change the
program, and this can be done easily, then the processor can
accommodate that change. Again, the program change may affect
pricing, and the processor needs to immediately send notification of
program change to the borrower and the loan officer.

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Task Description
Qualification, Pre-and If the borrower has not initially been qualified – that is, there is no
Re-Qualifying evidence that the loan officer provided evidence that the borrower is
eligible for the loan, the processor should return the loan file to the loan
officer once the initial loan set up is completed. If, upon reviewing the
loan file, there are substantial differences in the information that was
used to qualify the borrower, the file should be returned to the loan
officer to resolve the issue.

It is not the processor’s responsibility to “fix-up”, or otherwise repair poor

quality loan submissions. This can take an inordinate amount of time
and the processor is not qualified or compensated enough to perform
these duties.

The processor may assist in the process by suggesting solutions to

problems, or by consulting with an underwriter or other source of
knowledge as to potential solutions. The loan officer is paid incentive to
have qualified borrowers – the processor is not.
Customer Status Many referral sources and borrowers prefer to call the processor in order
Updates to obtain status updates. There are reasons for this.

 The processor is in the office and easy to reach with one phone call
 The processor has the file in his or her possession and can easily
reference the answer to a question
 The processor is perceived as being more likely to give a candid
answer as to problems

To the extent possible, the processor should avoid being involved with
substantive conversations with outside parties. These are extremely
time consuming, and often worried borrowers and referral sources will
call far more frequently than necessary

Unless the processor has agreed to speak with referral sources, the real
estate agent or other inquirer should speak with the loan officer.

General Time Frames for Application Process

While the loan application process can be executed in a very short period of time, normal data
collection periods, or the period of time that the processor has the loan, is the longest part of the
mortgage process. In an average 45 to 60 day process, the processor is in possession of the loan
file for 80 to 90% of the process.

Day 1 Day 5 Day 10 Day 15 Day 20 Day 25 Day 30 Day 35 Day 40 Day 45 Day 50

Application
Underwriting
File Opening
Closing
Processing

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Process Flow

The Loan Process

Loan
Application
Loan Reviewed by
Manager/Processor
Field Application Loan Entered using base
Pre-Application into Computer checklist

Loan Set up Completed

registration/lock Appraisal/Credit
completed Verifications

Origination
Welcome Package Sent

Processing
Week 4 Week 3 Week 2
Notice of Incomplete “Drop Dead Date” Appraisal Due In
Application Letter Credit In
ECOA Deadline Appraisal/Credit Deficiencies from
Letter Borrower Due

Information Received

Loan Submission
Verbal Verifications, Certify True,
Cover Memorandum
Loan Suspended
Base Checklist

Underwriting
Registration

Loan Denied Loan Approved

Approval Notification
Closing

Closing Department Checklist

Lock-in/Fee Sheet
Closing Notification Letter

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Chapter 2 - Mortgage Industry Overview

Chapter 2 –
Mortgage Industry Overview

The Mortgage Business

The mortgage business today is the product of 70 years of evolution in process, technology and
products. Despite this evolution, the roles personnel play in the process remain relatively
unchanged. The loan originator, loan officer, or other advisor still is the primary interface
between the customer and the company. This is true even though there are many business
models that alter the way in which the customer deals with the loan officer. The functions of the
loan process – processing, underwriting, and closing – have all been affected by automation, but
still exist to support the completion of the loan process.

Types of Lenders/Primary Originators

The way different types of mortgage businesses operate is a function of the funding mechanism,
or the way that loans are sold.

Entity Description Features

Mortgage Traditional mortgage banking firms use funds borrowed Strengths – able to control
Bankers – on “warehouse” lines of credit to make loans. These funding process and some
including loans are sold to investors as 1.) “whole loans” – which approval issues. Can also
banks, means that the individual loan is sold, along with the broker loans if needed for
savings right to collect and remit payments (referred to as competitive purposes.
banks, “servicing”) or 2.) “mortgage backed securities” where a Weaknesses – on retained loans
credit number of similar loans are “pooled” together. The pricing is less optimal at
unions securities are sold, but the mortgage banker keeps the origination.
right to collect the monthly payments (“servicing
retained”).
Mortgage Mortgage brokers do not make loans. They work with Strengths – able to be price
Brokers other lenders – wholesale mortgage bankers and banks competitive with small margins,
(sometimes referred to as “investors”) – who offer their able to place many different
products at “wholesale pricing”. The mortgage broker types of loans giving borrower
fulfills the origination and processing functions and more choices and better chance
submits individual loan requests to the wholesaler. The of approval. Disadvantage – no
wholesaler, who is often a mortgage banker or bank, control over approval and
approves and closes the loan. funding.

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Mortgages are made by different types of lending entities. Referred to as primary originators
they are small and mid-size traditional mortgage bankers and finance companies who fund loans
by borrowing money from a temporary credit facility (warehouse line of credit) and resell the
loans to secondary market “investors.” They may also be large, generally bank owned national
mortgage bankers performing mortgage banking functions but funding loans from their own
cash. Mortgage brokers are also primary originators. They are almost exclusively small,
privately owned companies who “sell” or broker individual borrower’s loan packages prior to
closing. This is known as wholesaling, brokering or table funding. Brokers do not lend money.
Other primary originators include smaller local banks or savings banks (known as “thrifts”); and
Credit Unions who originate loans either for resale or for their own portfolio.

The Mortgage Broker Business

Mortgage brokers are individuals or companies that do not underwrite, approve or fund loans.
Mortgage brokers contract with wholesale lenders who approve, fund and prepare closing
documentation. Mortgage brokers usually work with at least several, but often hundreds of
different wholesalers. This business model allows the loan officer of a mortgage broker to seek
out the best rates and terms – and can pass the most competitive rate on to the borrower. In
addition, the mortgage broker has the ability to seek through the hundreds of products available
to find specialty products that help borrowers with unusual circumstances or special needs. A
borrower working with a broker may find a competitive advantage if the broker passes these
benefits through to the consumer. The broker will select a lender and then work with the
borrower to obtain all the necessary documentation to consummate the loan – referred to as
processing.

Since the broker doesn’t actually approve loans, prepare closing documentation, or provide
funding, a potential disadvantage facing a borrower is that the wholesaler’s service may not be as
responsive as a direct lender’s. Since the broker is the intermediary between the wholesale
lender and the public, the public may never learn the identity of the final lender until closing.
Since the wholesaler is insulated from the public in this way, the borrower has no recourse for
service with that wholesaler. In addition, until the loan is funded, the wholesaler may continue
to add loan contingencies creating delays.

Brokers earn money by adding fees to the wholesale cost of loans. The net cost to a borrower
would be competitive with the price of a retail lender, depending on the margin that the broker is
trying to achieve.

Broker Pricing Model Based on 1.5 Point Margin

Rate Wholesale Cost Broker's Margin Net Price Borrower Cost
6.750 102.00 1.50 100.500 -0.500
6.625 101.50 1.50 100.000 0.000
6.500 101.00 1.50 99.500 0.500
6.375 100.50 1.50 99.000 1.000
6.250 100.00 1.50 98.500 1.500
6.125 99.50 1.50 98.000 2.000
6.000 99.00 1.50 97.500 2.500

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Retail Lending

In retail lending, the lender approves, closes and funds the loan, in addition to the functions that a
mortgage broker conducts – taking the application, collecting borrower documentation, preparing
the file for underwriting (referred to as processing). The advantage for a borrower in working
with a direct retail lender is that the lender controls the entire process, so issues with service
delivery, problems with contingencies, and pricing can be dealt with directly. One potential
disadvantage of working with a direct retail lender is that some lenders only offer the loan
products offered by the mortgage company, bank, credit union, or thrift with whom the loan
officer is employed. However, many direct lenders do make selected specialty products
available to meet their customer’s needs on a brokered basis.

Servicing (collecting payments from borrowers and forwarding the interest to the investor) can
be retained on many loans. This is a long term income source fundamental to the business plan
of mortgage bankers.

The Secondary Market

Loans are packaged into “pools” or groups of loans and sold in the financial markets – known as
the secondary mortgage market – in the form of mortgage backed securities. The issuers of these
securities become the vehicle through which financial investors receive their money – names like
FHLMC (Federal Home Loan Mortgage Corporation or “Freddie Mac”), FNMA (Federal
National Mortgage Association or “Fannie Mae”), and GNMA (Government National Mortgage
Association or “Ginnie Mae”) are all examples institutions that bundle loans for re-sale.

A loan is referred to as “conforming” if it is eligible for sale to FNMA or FHLMC.

Conventional loans are loans that are not related in any way to the government. Conventional
non-conforming loans are loans that are ineligible for sale to FNMA/FHLMC. These loans may
be “jumbo”, or larger than the maximum conforming loan amount. They may not meet
FNMA/FHLMC standard underwriting guidelines. The future of FNMA and FHLMC is

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uncertain with respect to Federal oversight. Because of the government’s involvement they are
more readily saleable and command a better price in the secondary market. As a result, rates for
non-conforming loans may be higher. FHA, FmHA, RHD and VA loans are included in GNMA
securities, and also command a better price than conventional loans because of the government
insurance.

Understanding Rates, Points and Lock-ins

Lock Description Protects

Option Against
Lock-in A lock in fixes a borrower’s interest rate and point options for a Rates rising
specific period of time. If a lock in expires prior to the dramatically
borrower’s closing the borrower receives the market interest
rate or the original interest rate, whichever is HIGHER. If a
borrower decides to guarantee the rate and point option, the
loan officer must assure there is sufficient time to process and
close the loan under that lock term. The benefit of locking in is
that there is certainty in the final interest rate.
Float A float is a deferral of the decision to fix the interest rate. Rates falling or
Regardless of whether interest rates increase or decrease, the staying the same
borrower can lock in at those rates in the future. The benefit of
floating is that the loan application can be processed and
approved prior to locking in – the borrower can then execute an
“immediate delivery lock” for 5, 7 or 15 days, which can be
substantially better pricing than the 60 day lock-in
Float Down The borrower can cap or lock in their interest rate at a current Rates Rising or
Lock rate. If rates decline within a specific period of time prior to Falling
closing, the borrower can “re-lock” at a lower interest rate. The Dramatically
benefit of the Float Down Lock In is that the borrower is
protected against dramatic fluctuation in rates.

Pricing for mortgages, as well of the types of loans offered, is derived from the secondary
market. Rates are dynamic and lenders often change their pricing more than once a day. To
protect borrowers from changing interest rates lenders offer interest rate protection. This is
referred to as a “lock-in”. The lock-in is set forth to the customer in a rate agreement that
specifies the interest rate, fees and points and the expiration date. Rate lock-ins are offered for as
few as 5 days to as long as 270 days. Borrowers may choose to defer the lock-in option which is
referred to as a “float”. Floating rates are not guaranteed. Customers should be informed that a
loan rate is not guaranteed until the Interest Rate Lock-In Agreement is completed.

In this example, see that the price increases as the lock in period extends. This is because there
is more risk to the lender for longer interest rate lock periods.

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