Residential Magazine

Due Diligence Is Outsourced for Internal Success

Third-party partnerships can mitigate risk and streamline the lending process

By Chris Guidici

When underwriting and reviewing a home loan, the due-diligence process serves as a safeguard to protect a mortgage lender by minimizing risk and verifying information submitted by the borrower. Due diligence plays a critical role in the review of loan files, and it can drive accurate and actionable results for lenders as they assess credit, collateral, market and borrower data.

To ensure efficiency and maximize results through the entirety of the review process, lenders outsource functions for a variety of important reasons. First, outside verification is crucial in determining which loans are solid investments for a lender. Second, because of third-party requirements such as the integrated-disclosure rule, in-house due diligence may not be an option. Third, investors bidding on a batch of loans need to be able to quickly turn around their analyses. 

The good news is that technological advancements have positively impacted the processes that used to require experienced professionals to manually review loan files and complete tasks. Mortgage originators — independent brokers, in particular — should understand why these steps take time to complete and why they are needed for the benefit of everyone in the mortgage ecosystem.

The due-diligence process is not a simple journey. … Lenders must oversee all functions to validate the quality and accuracy of a residential mortgage.

Avoiding guesswork

The due-diligence process is not a simple journey. It consists of many moving parts. Lenders must oversee all functions to validate the quality and accuracy of a residential mortgage. Without proper due diligence, companies are left to make decisions based on guesswork or rough reviews, which increases the risk factors for all parties involved. 

Across U.S. government agencies — such as the Federal Housing Administration and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac — lenders must adhere to various procedures and audits to guarantee that specific loans meet purchasing requirements. Exhaustive evaluation of documents and data ensures accuracy and completeness while providing an opportunity to report any inconsistencies. A stringent quality-control review across all loan facets helps company management to confidently assess lending processes, avoid future mistakes and greatly reduce the risk of recourse for the borrower. 

Although the residential mortgage-backed securities (RMBS) market has extensive and time-consuming standards, lenders that utilize RMBS receive an accurate and reliable depiction of assets, which ultimately increases market confidence in lenders and their products. In cases of default, investor recourse is an option for securing loans. Due diligence, however, strengthens the ability to identify borrowers who could present a substantial credit risk to the lender. Thorough, unbiased underwriting and data analysis helps lenders pinpoint underlying issues and potential fraud.

Scrutinizing assets

To make informed decisions and properly manage risk, lenders need detailed information and specialized support for the evaluation and ongoing management of distressed assets. To determine if a borrower’s funds are suitably sourced and seasoned, lenders must conduct a comprehensive examination of assets. This includes a review of payment and servicing history, a valuation analysis and an origination compliance audit.

Whether a lender is purchasing or selling assets, they need to confirm that the underlying collateral is of optimum quality. With increases in federally mandated rules and regulatory scrutiny, it is imperative that mortgage lending operations abide by standard industry practices. Credit reviews and analysis of all aspects of the lending process provide an elevated view to confirm that standards are being upheld across all transactions. This assures credit quality and minimizes overall portfolio risk for the lender.

Perfecting loan collateral requires an audit of all documents to guarantee accurate and complete data. Each borrower is different from the next. Facilitating a customized review of all loan terms and documentation based on each borrower’s unique characteristics ensures protection for the lender should the borrower default on the loan. To significantly mitigate risk, it’s important for lenders to examine all documents prior to securitization, and to confirm the mortgage is valid and free of legal encumbrances.

Mortgage fraud can take shape through minor exaggerations or omissions of information on a loan application. Ultimately, this causes lenders to suffer financially and operationally. Through a rigorous due-diligence process — including asset verification and valuation reconciliation — lenders can ensure confidence of quality results. This forensic analysis reduces the odds of fraudulent loans while establishing a clear and definite cash-flow source.

Although it may be difficult to recall, there was a time when loan reviews and in-depth due diligence were completed without the support of modern technology.

Transforming with tech

Although it may be difficult to recall, there was a time when loan reviews and in-depth due diligence were completed without the support of modern technology — including data and analytics. Lenders were tasked with fulfilling all functions of the review process while guaranteeing accurate, quality loans.

Prior to technological advancements, lenders completed due diligence by manually entering data across all processes, creating more opportunities for data-entry errors. Additionally, lenders were expected to run data-compliance checks to adhere to the mortgage industry’s complex regulations. This resulted in multiple waves of manual data checks and rechecks. After examining the data, additions to overlooked entry fields were likely needed, and mistakes had to be cleaned up before sending the loan files back to applicants

These manual tasks ultimately depleted resources, increased costs and consumed time that lenders could have devoted to other priorities. Without technology to automate and enhance the due-diligence process, lenders were held back by longer closing periods and concerns of inconsistent, noncustomized reporting.

Artificial intelligence (AI) has vastly improved loan review processes by tapping data and analytics. This equips lenders with the industry’s top resources to streamline and enhance residential mortgage due diligence. Smart imaging transforms the process of receiving files from borrowers and other parties by scanning documents, recognizing the most important pieces of information and extracting necessary data to ensure due diligence. Not only is this method more productive, it also allows lenders to increase their capacity of loans in review. 

Quality control can be automated to take over responsibilities such as cleaning up duplicate or incorrect data entries, and identifying missing information. In fact, the evolution of AI technology in due diligence has led to some mortgage documents seeing little to no human intervention. This alleviates much of the time-consuming and exhausting tasks previously demanded of lenders.

Improving compliance

Infusing due-diligence processes with AI eliminates some of the stressors on lenders, including a boost in compliance within a highly regulated industry. With an array of ever-changing regulations to keep in mind, lenders can benefit from AI’s ability to simplify compliance. 

TILA-RESPA Integrated Disclosure (TRID) forms, commonly known as “Know Before You Owe” rules, help borrowers make informed decisions about mortgage transactions. They also can unleash more work and worry for lenders. With an automated TRID check, lenders can quickly and efficiently cross-check documents for any violations that lead to noncompliance, fines or defective loans. 

Further tech integrations help lenders enhance regulatory due diligence with tools to verify accurate and consistent information. Often known as “regtech,” these tools are designed to eliminate the possibility of human error by catching any regulatory violations and give lenders confidence that compliance standards are being met.

Seeking a residential mortgage is inevitably accompanied by the occasional credit-reporting issue, such as confusion caused by varying reports. Lenders cannot risk noncompliance by simply relying on the rules in an automated system to decipher the truth. Instead, lenders can use flexible AI technology to accommodate credit-reporting issues and steer clear of regulatory breaches. Since there is constant regulatory change across the GSEs and other agencies — which help to facilitate mortgage lending and drive the flow of credit — lenders must implement adaptable technology to remain compliant.

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Lenders can handle the duties of delivering due diligence on residential mortgages. This process is likely to be burdensome, however, and it will certainly take time, money and resources to successfully complete. 

The other option is for lenders to partner with a flexible and forward-thinking due-diligence provider. In turn, this can drive efficiency and ease workflows for their originators and independent brokers. By outsourcing these functions and tasks, lenders can mitigate risk and increase operational agility while fueling future business opportunities. ●


  • Chris Guidici

    Chris Guidici is the director of sales for Wipro’s digital mortgage operations and platforms, which serves the complete mortgage industry life cycle, and Opus Capital Markets Consultants LLC, a specialized risk-management and quality-control service provider for a wide range of participants in the mortgage and consumer lending industries. For more information, visit or

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