Common Causes of Loan Ineligibility
last updated on Monday, April 26, 2021 in Member Services
Each year, FHLB Des Moines assesses the causes of loan ineligibility from Member Collateral Verifications (MCVs) in the prior year. From year to year, the primary causes tend to be the same matters, notably:
- Loan Coding - loans secured by property not of the type the loan is reported. (example: 1-4 family first mortgage loans with subprime and/or nontraditional characteristics reported as traditional loans).
- Title Work (e.g. no title work, no final title work, mortgages/deeds of trust not in the requisite lien position).
Together, the above two matters account for over 40 percent of ineligible loans found in MCVs.
Some things to consider for improving eligibility on these two issues:
Loan Coding: Frequently, collateral review analysts find loans secured by one type of collateral are reported in an incorrect type code (for example, multi-family properties reported as commercial real estate; farm real estate loans pledged as 1-4 family mortgage loans; rental 1-4 family mortgage pledged as commercial real estate, etc.). The Bank has endeavored to make collateral reporting align with regulatory call reports as best possible. In fact, many members use internal call reporting codes as the basis for FHLB Des Moines collateral reporting. To this extent, if we see miscoding in the MCV, it's possible that your call report is inaccurate. This can have other downstream implications as well; your regulatory capital calculations and asset/liability modeling may be affected.
In January 2019, members were required to report 1-4 family first mortgage loans with nontraditional or subprime characteristics in separate type codes (1102 and 1103, respectively). Since this reporting implementation, collateral review analysts have noted challenges with reporting such loans properly. The Bank has published information on how to identify and report these loans properly. If an MCV of your institution resulted in reporting issues on this matter, or if your institution has yet to have an MCV since 2019, please take a few moments to review our FAQ guide for self-reporting Residential 1-4 Family First Mortgage Loans. The Bank is ready to help with any questions you have.
Many members have a validation check as part of the process in boarding loans to their loan accounting systems. One employee enters the data; another employee validates the data entry. This approach is highly effective and may prevent future issues on other items down the road.
Title Work: Collateral eligibility is very specific as to lien verification of a mortgage/deed of trust/security agreement. For eligibility, we don’t require a certain form of lien verification for real estate loans (title insurance, attorney's opinions, property reports are all acceptable to meet eligibility). However, we do require that the form meets certain quality standards; the form must properly check public records for all potential liens (mortgage and non-mortgage) as well as cite the proper title holders of record. Of course, the title work needs to cite the subject mortgage/deed of trust/security agreement in the requisite lien position or the file should demonstrate release/satisfaction/subordination of prior liens.
In all cases, lien verification must be post recording (including post recording lien search on Uniform Commercial Code, UCC filings). There are a few exceptions. Final title work is not required for:
- Loans with security agreements executed within the last 6 months (if final title work is required, it can be pending).
- Conventional 1-4 residential loans/lines (not held for sale) <= $250,000 where preliminary title work is within 75 days of security instrument execution and evidence of pay-off of prior liens that reasonably assures the requisite lien position.
- For non-UCC chattel, holder acknowledgement of your lien is required
If you do not use the eligibility checklists on a loan by loans basis, take a few moments to compare your practices with what's required in the eligibility checklist.
Overall, our members do an outstanding job at pledging only eligible loans. Average eligibility on MCVs is about 90%. This high level isn’t surprising; eligibility is rooted in large part by member practice. If your last MCV notes eligibility factors above this level, congrats and well done. If you're below this level, don’t hesitate to reach out. We are always available to help you improve your results and enhance your advance capacity.
This article was originally published on 5/7/2019