“Loan origination” is a term that refers to the process in which a borrower applies for a loan. It also includes the response from the lender, who reviews, processes, and approves or denies the application. Loan origination refers to applications for home mortgage loans, car loans, business loans, student loans, and other types of loans. Steps after loan approval until the loan is paid in full come within the process known as “loan servicing.”
A number of state and federal laws, such as the federal Equal Credit Opportunity Act (ECOA) apply to the loan origination process. Lenders may not discriminate in their lending activities. Lenders may not discriminate in any aspect of a decision about making a loan on the basis of race, color, religion, national origin, gender, marital status, disability, age, receipt of income from a public assistance program, or sexual orientation.
Lenders are also forbidden to discriminate against couples who are in registered domestic partnerships or civil unions. Lenders are legally obligated to make lending decisions on the basis of good professional business practices.
What Does Loan Origination Cover?
Loan origination processes are different for each type of application, the loan type, how much risk the loan represents, whether regulations apply to the type of loan and other factors as well. For example, complete documentation of a person’s full income and assets is now required from lenders for most mortgage loans backed by Fannie Mae and Freddie Mac.
The process typically covers steps such as the following:
- Seeking out different loan options on offer from different lenders, i.e., “loan shopping” for the borrower among the choices offered by banks, credit unions, car dealers, online lenders; and others;
- Filling out application forms;
- Submitting requested documents, such as W-2s, income tax returns, bank statements, proof of assets, information about current debt obligations and the like;
- Undergoing background checks and credit checks;
- If the loan sought is a home mortgage loan, then the property that secures the loan must be appraised by a real estate appraiser;
- Reviewing an application by the lender;
- Negotiating loan terms if allowed;
- Finalizing the loan application process;
- Approval of the loan application;
- Disbursal of the loan funds to the borrower.
There may be other steps or requirements involved, which, again, differ depending on the loan type, the lender and any applicable regulations. Loan origination involves establishing a new account for a first-time loan with the company that is doing the lending. The process is essentially one of looking at the whole picture of a borrower’s financial status and deciding if they are likely to pay back the loan.
Generally, of course, the lender must be paid a fee for this “service”, certainly if the loan sought is a mortgage loan. The origination fee may be paid as part of the closing costs when a real property transaction is completed at the closing. It might be referred to as an “application fee,” “mortgage points,” “processing fee,” “document preparation fee,” or an “underwriting fee.”
For mortgage loans, the fee is generally 1% of the total loan amount. Some mortgage lenders may claim that they do not charge a fee for loan origination, but they may charge a higher interest rate instead. Of course, a lender who offers low interest rates may be charging the borrower a much higher origination fee than do lenders with higher interest rates.
What Is Fraudulent Loan Origination?
Any type of loan activity, including loan origination, can invite fraud and fraud-based activities on the part of any of the people involved. Fraudulent loan origination involves actions that aimed at obtaining loan funds for a person who is not, in fact, qualified to get a loan. This can happen in any of following ways:
- Fraud by the Borrower: A borrower can submit false information on an application;
- Fraud by the Lender: A lender can knowingly approve a loan that does not qualify per the lenders own standards; this would probably involve falsifying some information;
- Fraud by Both the Lender and the Borrower: The lender and borrower can collude together to obtain loan money fraudulently. In fact, all of the parties to a large loan transaction can conspire together in fraudulent loan origination.
Some of the methods used to perpetrate mortgage loan origination fraud are the following:
- Inflated Appraisals: Inflated appraisals have historically been a common means of perpetrating fraud in mortgage lending transactions. Appraisal fraud occurs when an appraiser assigns a much higher value to a property than can be justified by standard appraisal methods. One strategy is to use comparables that are inappropriate and not true comparables to justify a higher value than is warranted for a property. An appraiser usually engages in this type of fraud in collusion with a seller, buyer, mortgage lender or even all three at the same time;
- Straw Buyers: A straw buyer is a person who accepts some type of compensation in return for the use of the straw buyer’s name, social security number, and other personal information on a mortgage application. It looks like the straw buyer is the person applying for a mortgage loan and that the straw buyer is the person who intends to reside in the home.
- In fact, the straw buyer does not intend to own or possess the property used to secure the loan. The straw buyer may walk away from the transaction, possibly not even aware that they are liable for fraud. The parties to the fraudulent scheme may pocket most of the money obtained through the loan, while the property used to secure the loan may go into foreclosure;
- Straw Sellers: A straw seller is a person who accepts some kind of compensation in order to falsely claim that they own a property that is being sold. Co-conspirators of the straw seller may falsify title documents, including fake warranty deeds, in support of their
fraudulent claim that the straw seller owns and occupies the property that is to serve as security for the loan. Straw sellers may appear at closings where the property is transferred to straw buyers. The parties to the fraud make off with the loan funds;
- Air Loans: When every part of the loan transaction is fictitious, the property, the buyer and the seller, it is known as an air loan. Fraudsters may even use fictitious employers, appraisals, and credit reports as the verifications needed for the loan application process;
- Identity Theft: Identity theft occurs when a perpetrator gets access to another person’s name, social security number, driver’s license number, and other personal information to get credit, i.e. obtains loans, or make purchases. The person whose information has been stolen does not know that another person has stolen their identity and is using it to get credit in their name. Some perpetrators who are truly expert at identity theft can falsify pay stubs, tax returns and bank statements and even false driver’s licenses and Social Security cards.
One of the most common types of fraudulent loan origination is where a lender helps a borrower get approved for certain types of federal loans, housing, or benefits.
All of these activities violate criminal laws, both state and federal. Any person involved can end up with a criminal conviction and may have to serve time in jail or prison and pay hefty fines. They may also be sued in civil court by victims who want to recover their losses. Any kind of fraud in connection with a loan application is a criminal act. So when a person applies for credit of any kind, especially a mortgage loan, they want to be scrupulously honest in their application.
Do I Need a Lawyer for Help with Loan Origination Issues?
Loan origination can be complicated, especially if a person is applying for a mortgage loan. It can take a surprising amount of time and require production of numerous documents. You may need to hire a mortgage lawyer if you need help with any issues related to loan origination. For example, your attorney can help when it comes to reviewing and negotiating loan terms.
Or, if you believe that a lender is not treating you fairly and on the same basis as all other potential borrowers, you may need the assistance of a mortgage lawyer. If you should come across any legal disputes, your lawyer can help represent you if you need to file a lawsuit in court.