978-0324784640 Chapter 15 Solution Manual

CHAPTER 15

CLOSING AND DELIVERY; QUALITY

CONTROL AND FRAUD

OBJECTIVE OF CHAPTER

 Describe the different steps and responsibilities involved in a

mortgage loan closing

 Understand the different closing fees and settlement services

involved

 Understand the different regulatory restrictions and guidelines that

govern federally-related mortgage loan closings

 Explain the various ways that loan closing can be handled and by

whom

 Understand the required documentation and their purpose for the

closing and delivery of a typical mortgage loan

 Understand the dynamics of funding and delivery for portfolio and

for secondary market mortgage loans.

 Describe the different types of mortgage fraud and their source

 Identify different red flags to help identify or prevent mortgage

fraud

 Explain the purpose of quality control and the typical QC program

characteristics

Teaching Tips

What does the term “loan closing” mean?

What is the term “settlement service” mean and

what does it imply?

What different steps are involved in closing a

residential mortgage loan?

How can a mortgage loan officer best prepare

the client for the closing?

Why do lenders choose to schedule a closing at

different points in the application process?

Discuss several of the red flags identified in

Figure 15.10 and why they are listed there.

Do mortgage applications take longer to

approve now because of quality control

requirements?

How can a loan officer be aware of any

fraudulent activity of other parties involved in

the loan process and what should the loan

officer do if he or she detects mortgage fraud?

Should the federal government create specific

federal laws defining mortgage fraud and the

penalties involved as a result?

Create some scenarios of fraud based on what

you have read in this chapter.

I. Introduction

II. Federally Related Mortgage Loans

A. Closing Costs (Settlement Services—GFE)

B. Income Tax Reporting

C. Process of Mortgage Loan Closing

D. Who Handles Mortgage Loan Closings

E. Insured Closings

III. Steps in Closing a Residential Mortgage Loan

A. Commitment Letter

B. Contents of a Commitment Letter

C. Reviewing Title and Title Insurance

D. Ordering Title Insurance

E. Content of the Title Commitment

F. Mortgagor’s Policy

IV. Documents Required for a Properly Closed First-

Mortgage Loan

V. Conforming Documentation

A. First-Mortgage Closing Checklist

B. Final Requirements

VI. Funding and Loan Delivery

VII. Quality Control and Fraud Prevention

A. Mortgage Fraud

B. Mortgage Fraud Types

C. Quality Control Programs Today

SUGGESTED TRUE/FALSE QUIZ

1. The closing of a mortgage loan should not be interpreted to

mean that the end of the mortgage-lending process has been

reached.

2. The purpose of loan closing is to ensure that the loan is closed

according to federal laws and not state law.

3. Most mortgage lenders do not use a commitment letter to

inform an applicant that their application has been accepted.

4. The most common method of reviewing legal title and

providing protection to mortgage lenders is through the

purchase of title insurance.

5. It is important that mortgagors understand that under the

lender’s title insurance policy they are not protected against

any defects in their title to the real estate.

6. The amount of title insurance should be equal to the estimated

value of the real estate.

7. Names of signers must be consistent though all closing

documents and signatures should be the same as the legal name.

8. Signatures do not have to be notarized if the loan is “federally

related”.

9. Providing the borrower a HUD-1 (or HUD-1A) at closing is a

requirement of RESPA.

10. If the mortgage transaction is a purchase money mortgage ,the

IRS requires real estate brokers to file an informational return

showing the gross sales proceeds of the transaction.

MULTIPLE CHOICE QUESTIONS. More than one answer may

be correct – select all correct answers. (Correct answers are

italicized.)

1. Which of the following is NOT a recommended agent to handle

the closing of a residential mortgage loan?

a. Outside attorney

2. Which of the following are considered a part of residential

mortgage loan closing?

a. Taking the application

3. Which of the following people may be guilty of mortgage fraud?

a. the appraiser

4. Which is not an action of mortgage fraud?

d. bribing the appraiser to present a higher value

5. Which document is typically NOT signed at a closing?

a. promissory note

SUGGESTED SHORT ESSAY QUESTIONS

1. The term “loan closing” as used in residential mortgage lending

refers to the process of completing what steps?

ANSWER: A mortgage loan closing includes the following

steps:

Formulating, executing, and delivering all documents required

2. Why is a commitment letter so important to proper mortgage lending?

ANSWER: The commitment letter serves as the lender’s acceptance

of the mortgagor’s application as submitted. If the lender makes a

3. What should be contained in a commitment letter?

ANSWER: The contents of a commitment letter should cover

4. List at least five secondary mortgage market documentation

requirements to identify or prevent mortgage fraud.

ANSWER:

– All blanks on Uniform Documents must be completed

– All corrections on forms must be initialed by the borrowers

– No liquid paper or correction fluid can be used on the

documents

5. After an application is approved, what are the remaining steps in

closing a residential mortgage loan? Who normally handles the

closing?

ANSWER: These steps include the following: (a) advise applicant of

loan acceptance by a commitment letter (and, if applicable, set rate,

6. Describe the different types of mortgage fraud.

ANSWER: Industry experts categorize mortgage fraud into two

types: fraud for profit and fraud for property. Fraud for profit occurs

less frequently but has larger losses on average. The fraudster does not

intend on repaying the mortgage funds to the lender. Common

Fraud for property typically involves the borrower obtaining funding

under false pretenses, but he intends to keep the property and repay

ANSWERS TO ORAL DISCUSSION POINTS

The discussion points at the end of each chapter are intended for

oral discussion in class. Suggested answers/points to emphasize

for the questions are found below.

1. What is the purpose of title insurance? Who is protected by title

insurance?

ANSWER: A mortgage lender must establish with certainty that the

mortgagor has good title to the real estate that will secure the

mortgage debt. The obvious reason is if another person has a superior

2. Why does the Internal Revenue Service need to be informed about a

loan closing?

ANSWER: Agents that close a residential purchase money

mortgage are required to report (IRS form 1099-B) the gross

3. What federal areas investigate mortgage fraud?

ANSWER: There is no specific federal law that covers mortgage

fraud. However, the FBI will typically get involved through other

4. Why is quality control an important aspect of mortgage loan production?

ANSWER: Quality control is important because it can detect fraud in

a file prior to closing. If the underwriter can spot issues with the

5. What recent steps are lenders taking to improve quality control?

ANSWER: GSEs always required lenders to have a distinct quality

control program separate from the mortgage production area. The QC