Certified Mortgage Liability Inspector (CMLI)

Correct: Reconciling the system-generated payment history logs (the source of truth for actual cash movement) against the reported delinquency data is the most effective way to detect data manipulation. This procedure directly compares what actually happened (cash received) with what was reported to the investor, providing empirical evidence of any discrepancies or manual overrides used to mask the true status of the loans.

Incorrect: Reviewing the servicing agreement only clarifies the rules but does not provide evidence of whether those rules were followed or if data was manipulated. Interviewing IT staff identifies who could have made changes but does not provide evidence that changes were actually made or if they were fraudulent. Auditing physical loan files verifies the terms of the loan but does not address the timing of payments or the accuracy of the monthly reporting to the investor.

Takeaway: To ensure the integrity of investor reporting, internal auditors must verify reported delinquency statuses against primary source data such as actual cash receipt logs and system audit trails.

Correct: Title insurance is designed to protect the lender against losses arising from defects in title, including undisclosed prior liens. Since a clean commitment was issued, the underwriter is generally obligated to defend the lender’s lien priority or cure the defect. Filing a claim promptly ensures the lender’s interests are protected under the terms of the insurance contract.

Incorrect: Increasing the interest rate is a violation of the loan agreement and does not address the legal priority of the lien. Listing the prior mortgage as a Permitted Exception would acknowledge the lender’s subordinate position and make the loan ineligible for sale to most secondary market investors like Fannie Mae or Freddie Mac. Suing the borrower is a secondary recourse and ignores the primary protection provided by the title insurance policy which is specifically intended to handle such title defects.

Takeaway: Lenders rely on title insurance to guarantee lien priority, and discovering an undisclosed prior lien requires immediate notification to the title underwriter to trigger policy protections.

Correct: In mortgage banking, the LTV ratio for a purchase transaction must be calculated using the lesser of the appraised value or the purchase price. Using the higher purchase price when the appraisal is lower results in an artificially low LTV. When these loans are sold to investors, such as Fannie Mae or Freddie Mac, the lender provides representations and warranties that the loans meet specific underwriting guidelines. If the LTV is found to be higher than reported due to improper calculation, the investor has the right to demand a repurchase, shifting the credit risk and potential loss back to the lender.

Incorrect: Option B is incorrect because while LTV affects risk weighting, the immediate operational risk in a mortgage banking context is usually investor repurchase rather than a broad Basel III capital breach for a specific portfolio segment. Option C is incorrect because while a revised Loan Estimate might be triggered by changed circumstances, the core issue here is an underwriting eligibility failure and a breach of investor guidelines, not just a disclosure timing issue. Option D is incorrect because the weighted average coupon (WAC) is determined by the interest rates of the underlying loans; while LTV affects pricing through Loan Level Price Adjustments (LLPAs), the primary risk of miscalculation is the validity of the loan sale and the potential for forced buybacks.

Takeaway: Accurate LTV calculation using the lesser of the purchase price or appraised value is critical to maintaining the salability of loans and avoiding costly repurchase obligations.

Correct: The core issue identified is a lack of independence between the sales/production function and the credit/underwriting function. In mortgage banking, sound risk management requires that underwriting decisions be insulated from production pressure. Establishing a functional separation ensures that credit decisions are made based on risk appetite rather than volume targets. A Credit Risk Officer outside the production reporting line provides the necessary objective oversight for exceptions or overrides.

Incorrect: The option involving a cooling-off period and CEO intervention is incorrect because it involves the CEO in individual loan-level decisions, which is inefficient and does not address the structural conflict of interest. The option to tighten credit standards for high-balance loans addresses the risk profile of the loans themselves but fails to correct the governance and procedural failure of the override process. The option requiring written justification and archiving for future audits is a reactive measure that documents the conflict rather than preventing it, failing to meet the regulatory expectation for proactive risk controls.

Takeaway: Effective underwriting policy must ensure structural independence between loan production and credit approval to mitigate conflicts of interest and maintain the integrity of the risk assessment process.

Correct: Performing a reconciliation between the source documents and the servicing system is the critical first step to ensure data integrity and determine the scope of the error. This evidence-based approach allows the auditor to identify the root cause of the mapping failure and ensures that subsequent remediation efforts, such as corrective escrow disclosures under Regulation X, are based on accurate data.

Correct: In manual underwriting, compensating factors must be documented, verified, and relevant to the risk being offset. For cash reserves to serve as a valid compensating factor for a high DTI ratio, the underwriter must verify the liquidity and stability of those funds. This typically requires at least two months of consecutive statements to ensure the funds are not borrowed and are consistently available to the borrower for post-closing contingencies.

Incorrect: Relying solely on a credit score is insufficient because manual underwriting requires a holistic view where specific compensating factors address specific weaknesses; a high credit score is already a standard requirement and may not offset a capacity issue like high DTI. Accepting an affidavit for unverified foreign funds violates the core principle of third-party verification and anti-money laundering standards. Using future property appreciation is speculative and does not mitigate the borrower’s current inability to meet monthly debt obligations.

Takeaway: Manual underwriting requires objective, third-party verification of compensating factors to ensure they provide a tangible offset to identified credit or capacity risks.

Correct: Under both the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA), a policy that is neutral on its face but has a disproportionately adverse effect on a protected class is known as disparate impact. To defend such a policy, a lender must prove that it serves a legitimate, non-discriminatory business necessity and that no less discriminatory alternative (such as a different fee structure) could achieve the same business goal.

Incorrect: The second option is incorrect because disparate impact does not require discriminatory intent; a neutral metric can still be illegal if it unfairly affects protected groups. The third option is incorrect because consistency in application does not shield a lender from disparate impact claims if the outcome is discriminatory. The fourth option is incorrect because while safety and soundness are important, they do not provide a blanket exemption from fair lending laws, and documenting costs for individual denials does not mitigate the systemic discriminatory effect of the threshold policy.

Takeaway: Lenders must evaluate neutral underwriting overlays for disparate impact and ensure any policy with a discriminatory effect is supported by a business necessity that cannot be met by less discriminatory means.

Correct: The absence of a reconciliation process between the borrower’s request timestamp and the actual hedge execution time is a critical control failure. Without this audit trail, the institution cannot verify if locks are being executed timely according to policy or if ‘shadow locking’ is occurring. This lack of oversight allows for the manipulation of lock dates to benefit the lender’s secondary market execution at the expense of the borrower, which violates both internal policy and fair lending expectations.

Incorrect: Managing the lock desk through a centralized team independent of production is a strong internal control that reduces conflicts of interest. Automatically generating a revised Loan Estimate is a standard regulatory compliance requirement under TRID and does not indicate a control failure. Requiring secondary management approval for long-term lock extensions is a sound risk management practice to control costs and exposure, rather than a weakness.

Takeaway: A robust rate lock control environment must include a verifiable audit trail and reconciliation between borrower requests and hedge execution to prevent price manipulation and ensure policy compliance.

Correct: Under Regulation X (RESPA), specifically 12 CFR 1024.17, if a new servicer (transferee) does not receive an initial escrow statement from the previous servicer (transferor), or if the transferor failed to provide one, the transferee servicer must provide an initial escrow account statement within 60 days of the date of transfer. This ensures the borrower is properly informed of the escrow requirements and payment components under the new servicer’s management.

Incorrect: Waiting for the annual cycle is a violation of the specific 60-day post-transfer requirement for the initial statement. Relying solely on the transferor’s data without performing a new analysis or issuing a new statement ignores the transferee’s independent regulatory obligation to verify and disclose escrow details. Issuing a Loan Estimate is incorrect because the Loan Estimate is a pre-consummation disclosure required by TILA-RESPA Integrated Disclosure (TRID) rules during the origination phase, not a servicing transfer disclosure.

Takeaway: Transferee servicers must issue an initial escrow statement within 60 days of a servicing transfer if a compliant statement was not already provided to ensure transparency and regulatory compliance.