Processing and Documentation

Once the loan application is complete, the file moves to processing. The loan processor plays a critical role in preparing the file for underwriting by collecting, organizing, and verifying all required documentation.

The Role of the Loan Processor

The loan processor is the central coordinator of the loan file. While the MLO focuses on originating loans and maintaining borrower relationships, the processor handles the detailed documentation work.

Processor Responsibilities

Processor vs. MLO Duties

It's important to understand what processors CAN and CANNOT do:

Processors CAN:

• Collect and organize documentation
• Order third-party verifications
• Communicate about document requirements
• Clear conditions with proper documentation

Processors CANNOT:

• Take mortgage applications (unless licensed as MLO)
• Negotiate loan terms with borrowers
• Provide loan recommendations or advice
• Quote interest rates or fees

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Verification Documents

Third-party verifications provide independent confirmation of information the borrower has provided. These verifications are critical for underwriting accuracy.

Verification of Employment (VOE)

The VOE confirms the borrower's employment status and income directly with the employer.

VOE Must Include:

• Employer name and address
• Borrower's job title
• Employment start date
• Current salary/hourly rate
• Year-to-date earnings
• Probability of continued employment

Processing Tips:

• Some employers use third-party verification services (The Work Number, etc.)
• Self-employed borrowers don't have VOEs - use tax returns instead
• Verification must be current (typically within 10 days of closing)

Verification of Deposit (VOD)

The VOD confirms the borrower's account balances directly with financial institutions.

VOD Must Include:

• Account holder name(s)
• Account number
• Account type (checking, savings, etc.)
• Current balance
• Average balance (typically 2-month average)
• Date account opened

Alternative: Many lenders now accept bank statements in lieu of VODs, as they provide similar information along with transaction history.

Verification of Rent (VOR)

The VOR confirms the borrower's rental payment history when the borrower is currently renting.

VOR Must Include:

• Landlord name and contact information
• Monthly rent amount
• Payment history (typically 12 months)
• Any late payments or issues

Why It Matters: Rental payment history is a strong indicator of future mortgage payment behavior. A borrower who pays rent on time is more likely to pay a mortgage on time.

Verification of Mortgage (VOM)

The VOM confirms mortgage payment history on existing properties owned by the borrower.

VOM Must Include:

• Lender name
• Loan number
• Original loan amount
• Current balance
• Monthly payment
• Payment history (12-24 months)
• Any late payments (30, 60, 90+ days)

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Title Search and Title Insurance

The title search is a critical step in the processing phase. It examines public records to identify any issues that could affect the lender's security interest in the property.

What the Title Search Reveals

Title Commitment

After the title search, the title company issues a title commitment (also called a preliminary title report). This document:

• Lists the current owner(s) of record
• Describes the property legally
• Identifies exceptions (items not covered by title insurance)
• Lists requirements that must be met before title insurance is issued
• Shows schedule of proposed coverage amounts

Title Insurance

Title insurance protects against losses due to title defects. There are two types:

1. Lender's Title Insurance (Loan Policy)

   • Protects the lender's interest
   • Required for most mortgage loans
   • Coverage decreases as loan is paid down
   • One-time premium at closing

2. Owner's Title Insurance

   • Protects the buyer's ownership interest
   • Optional but recommended
   • Coverage remains for as long as owner has interest
   • One-time premium at closing

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Subordination

Subordination is the process of changing the priority of liens on a property. This is commonly needed when a borrower with an existing second mortgage (like a HELOC) wants to refinance their first mortgage.

Why Subordination is Needed

When you refinance a first mortgage, the old first mortgage is paid off. Without subordination, the existing second mortgage would automatically become the first lien, and the new mortgage would be in second position.

Example:

• Original first mortgage: $300,000 (paid off in refinance)
• Existing HELOC: $50,000
• New refinance mortgage: $280,000

Without subordination, the HELOC would be first lien. The new lender requires the HELOC holder to subordinate, keeping the new mortgage in first position.

Subordination Agreement

A subordination agreement is a legal document signed by the existing junior lienholder agreeing to remain in a junior position after the new first mortgage is recorded.

Requirements for subordination approval:

• Combined loan-to-value (CLTV) within guidelines
• Borrower's credit still qualifies
• Existing junior lien is in good standing
• Property value supports the combined debt

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Conditions to Close

Underwriters issue conditions - requirements that must be satisfied before or after the loan can close. Understanding condition types is essential for efficient processing.

Condition Categories

Prior-to-Document (PTD) Conditions:

• Must be cleared before final loan documents are prepared
• Examples: Updated pay stub, explanation letter, additional bank statement

Prior-to-Funding (PTF) Conditions:

• Must be cleared before the loan can fund
• Examples: Final VOE, proof of insurance, title cleared

Post-Closing Conditions:

• Must be cleared after closing but before final delivery to investor
• Examples: Recorded documents, final title policy, corrections to documents

Common Conditions

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Appraisal Requirements

The appraisal is ordered during processing to determine the property's market value. The processor must ensure appraisal requirements are met.

Appraisal Independence Requirements (AIR)

Federal regulations require appraisal independence:

• MLOs cannot select or influence appraisers - Must be ordered through approved channels
• No pressure on value - Cannot coerce appraiser to achieve specific value
• Separation of duties - Production staff cannot manage appraisal process

Appraisal Management Companies (AMCs)

Many lenders use Appraisal Management Companies (AMCs) to:

• Maintain appraiser panels
• Assign appraisals randomly
• Ensure independence and quality
• Handle communication between lender and appraiser

Key Appraisal Concepts

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Document Tracking and Compliance

Processors must maintain meticulous records and ensure compliance with all regulatory requirements.

Key Compliance Items

• Initial disclosures sent within 3 business days
• Change of circumstance documentation for Loan Estimate revisions
• HMDA data collected accurately
• ECOA requirements met (no discrimination in processing)
• Privacy notices provided as required

Document Expiration

Many documents have expiration dates:

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Exam Tips for Processing

For the SAFE MLO Test, remember:

• VOE = employment, VOD = deposits/assets, VOR = rent payments
• Title search reveals liens, encumbrances, and ownership issues
• Subordination keeps a junior lien in junior position during refinance
• Conditions are categorized as prior-to-doc, prior-to-funding, or post-closing
• MLOs cannot influence appraiser selection or value conclusions
• Processors cannot take applications unless licensed as MLOs