You have an obligation to control credit quality, so you perform red-flag reviews periodically. You try to find those things that got past underwriting. And of course, you want to be efficient about it. Here are the most important bits of advice from my perspective.
First, most of your files won’t have any red flags, so learn to identify clean files quickly. For example, here’s a file that should get five minutes of your time: a refinance with no cash out, long tenure at the current job, and a decade or more in the same house. That’s going to be a clean file almost every time, so chop-chop. Don’t waste time in this file.
Second, to be more efficient in weeding out clean files look at just three docs: the 1008, the 1003 and the Closing Disclosure. If you have a red flag, it’s going to be in these docs. The good news is that you don’t need to worry about the 400 pages in your credit file – at least not until a quick look at these three docs tells you there’s a problem. These pages will let you see lots of red flags: common last names between borrower and other parties to the loan; round figures, funny dates (like start dates on January 1), income inconsistent with type of employment. (See more red flags below).
Third, you are not underwriting. This means that red-flag reviewers find the abnormal and ask, “is that likely true?” For example, a big bank balance that does not match the borrower’s profile, or a commute distance that’s unreasonable, or an 80 year old still driving himself to work everyday (as did my dad, the judge). Underwriters can’t consider age. Red-flag reviews must.
Finally, stay current on hot topics. In other words, you are looking for the red-flags of 2022, not ten years ago. So we have CARES Act and forbearance issues, sure. But occupancy and income are going to be the lion’s share of red flags to find. And fake gifts are always in vogue.
Given the above, now watch out for these red flags:
Here is a useful list of employment/income red flags, easily found:
- Relationship (common last names) between borrower and other parties to the loan.
- Round figures.
- Dates that are funny: start dates on January 1, for example.
- Income and employment sketchy in prior years, but suddenly now everything is stable and good.
- Employer’s name and address inconsistent between documents.
- Employer’s address is a private residence or a PO Box location.
- Borrower’s office number is the same as home number, but not self employed.
- Residence is too far from employer (could be field position – so no rush to judgment).
- Income inconsistent with type of employment.
And finally, here are common occupancy red flags that might need google maps, but are easily found:
- Check commute distance – is it believable?
- Purchase contract shows an existing lease.
- Homeowner’s insurance shows as non-owner occupied.
- Other properties owned? How reasonable that this one is the primary residence?
- Is the property in a college town?
If you want to protect your organization’s bottom line, identifying red flags quickly and accurately is essential. If you’d like a more in depth explanation of these red flags or have any questions, contact us today.