Walzak Is Automating Analysis of Process Risk

Walzak Risk Analysis, a firm founded in 2005 by Rebecca Walzak and Robert Chernin, thinks one element of risk analysis may be overlooked in today's lending environment, process management risk.

Underwriting and due diligence tend to focus on the borrower, with a myriad of automated tools to assess the credit characteristics, collateral value and repayment ability of homeowners. But what about the risk associated with a lender who submits faulty documentation or fraudulent loans? Or loan files with inaccurate information, even if the errors are unintentional?

Walzak has developed an automated tool, already being used by some investors and wholesale lenders, to boost automated quality control as a risk management tool.

Ms. Walzak has developed a patent-pending risk model to identify mistakes in the loan origination process and assess their likely impact on loan performance. The result is a WRAP score. (Walzak Risk Analysis Process score.)

Ms. Walzak said the score can be used to assess the quality of loan products, manage the risk of loan buybacks, create more efficient process flows, improve use of technology and e-mortgages, expand lending opportunities and improve gain-on-sale.

The scoring analysis uses an online platform that allows lenders to upload data to Walzak Risk Analysis, where Walzak re-verifies loan data and identifies possible mistakes. That helps identify the dimension of risk that a loan purchaser faces.

Loans are scored on a scale of zero to 100, with zero representing the greatest risk. The scores can be used in pre-funding analysis or in the post-closing area, where a wholesaler may use the scores to package loans more efficiently for sale into the secondary market, Ms. Walzak said.

Clients can use the WRAP scores to complement other risk measures, she said. Traditional risk measurements like credit scores, loan-to-value data and debt-to-income ratios have tended to take center stage in credit risk analysis.

"That's definitely not the only thing you need to be concerned about. There are ways to manipulate the FICO scores," she told NMN.

In addition, standard ratios might be miscalculated. And the WRAP scores take into consideration loan participants, including not only the borrower but the loan originator. By checking originator names against fraud databases such as HUD's limited denial of participation list, the WRAP score is a tool to uncover potential fraud perpetrators.

The system also checks borrower residences against names and title data to help verify owner occupancy status and make sure the title is accurate.

Ms. Walzak noted that a recent rating agency study estimated that 30% of mortgage defaults are related to operational problems or mistakes in the loan file. Those problems relate to what one investor has called the "dumb lender" risk factor. The WRAP scores are designed to control for that.

"It gives investors more control over what they are buying," she said. "I think there is a lot more potential risk out there than we have realized."

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