Home Equity loans are becoming popular once again. Interest rates remain relatively low, home values have been appreciating in many parts of the country, college tuition costs continue to rise and credit card debt remains high for many homeowners.
This is a “perfect storm” scenario for the resurgence in the origination of Home Equity loans as a source of needed funds for homeowners.
Since more Home Equity loans are being originated lenders should give consideration to establishing a sound Quality Control program to assess the overall risk of such loans.
It seems that every Home Equity lender has different terms, rates and underwriting criteria for their product. As a result, the components of each lender’s QC Plan may be unique.
In this regard, Home Equity lenders should consider performing post-closing reviews on a random selection of the Home Equity loan transactions originated each month. These reviews should be processed by in-house staff separate from those involved with loan production activities or outsourced to a third-party Quality Control (QC) Vendor.
As part of the QC review process, the field review of the appraisal (on a select percentage of cases) is an important component (since the property’s value establishes how much equity exists in a property).
Back-up credit reports should be ordered to determine if any new trade lines have been opened by the borrower(s) or derogatory credit omitted from the initial credit report.
In addition, the borrower’s income, employment, and assets should be re-verified (if applicable). Occupancy re-verifications should be attempted to determine if the borrower is occupying the subject property. QC reports should then be generated each month and shared with Senior Management that will highlight any potential risk areas.
Finally, any rejected Home Equity loan transactions should be reviewed by an officer or senior staff person on a second tier basis to ensure that no discriminatory practices are evident.
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The surge in Home Equity lending convinces me to highly recommend that lenders implement a substantive Quality Control protocol for the review of such transactions on a post-closing basis. By implementing an effective Risk Management program, Home Equity lenders will be able to effectively mitigate the special risks associated with this type of loan transaction.
The game has changed – you need to play different!