The operational risk that arises from a host of smaller details in today's dynamic loan origination market is outweighing fraud concerns when it comes to identifying potential buybacks, according to one executive.
There is an additional level of detail today as more data in the process increases the operational risk, Dan Cutaia, president of capital markets and risk management for Fairway Independent Mortgage, told this publication, noting that today every little detail is a concern when it comes to potential buyback risk. It doesn’t have to be fraud, he said.
Technology addressing quality control and product and pricing issues can help, but has its limits, said Cutaia, adding that he believes manual reviews are a key part of the process and people really have to be used to review operations.
He expressed frustration with third-party errors that can lead to potential buybacks, such as situations where an attorney or a title company makes an error. Options outside of potentially cost-prohibitive litigation may be few and lenders cannot always control the business relationship with the third parties involved.
Among examples of risks Cutaia said he has seen lead to a buyback include the persistent “authorized user” credit issue, where credit card users are allowed to add an authorized user that to their credit. This practice, also sometimes referred to as piggybacking, is intended for use by a spouse or other relative. But it is sometimes misused as a way to boost the credit standing of someone who might otherwise have a lower one.
While the concern is a longstanding one and plans have been made in the past by some market participants to address it, Cutaia said it continues to crop up. A Federal Reserve Board report from last year indicates it persists because the Fed’s Regulation B, which implements the 1974 Equal Credit Opportunity Act, requires that spouses’ authorized user information be included in credit bureau information used in lenders’ evaluations of credit history. Credit bureaus generally do not distinguish other types of authorized users from those that are spouses in their information, so credit score providers cannot distinguish them, according to the Fed report.
Changing and complex agency guidelines also can pose a buyback risk. New details or regulations that have to be followed to the letter also can create concerns.
While lenders can learn from buyback risks that occur, changes for this reason still require implementation time in order to adjust systems and/or communicate to staff, for example.
All potential buyback risks clearly cannot be identified upfront but lenders can try to estimate the cost of the risk and build it into their budgets.
