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© Cengage Learning 1
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
© Cengage Learning 2
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
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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
© Cengage Learning 4
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
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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?
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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
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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,
© Cengage Learning 8
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
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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
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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
© Cengage Learning 12
