Outsourcing Residential Due Diligence for Internal Success

Partnering with a Due Diligence Provider Can Mitigate Risk, Encourage Efficiency and Supercharge Growth

By Chris Guidici, Director of Sales | Date: August 2020 Edition Scotsman Guide

When underwriting and reviewing a loan, the due diligence process serves as a safeguard to protect the lender by minimizing risk and verifying information submitted by the borrower. Playing a critical role in the review of loan files, due diligence can drive accurate and actionable results for lenders assessing credit, collateral, market and borrower data.

To ensure efficiency and maximized results through the entirety of the review process, lenders outsource functions for a variety of important reasons. Firstly, outside verification is crucial in determining which loans are a solid investment for a lender. Additionally, because of third-party requirements, such as TRID, in-house due diligence is not an option. Lastly, clients bidding on a batch of loans need to be able to turn around their analyses quickly. However, advancements in technology have had a huge impact on these processes that formerly required experienced professionals to manually review loan files and complete all tasks.

Important Components of Successful Due Diligence

The due diligence process is not a one-and-done ordeal, but instead consists of many moving parts. Lenders must oversee all functions to validate the quality and accuracy of a residential loan. Without proper due diligence, businesses are left to make decisions based on guesswork or “rough reviews,” which increases the risk factors for all parties involved.

Pre- and Post-Funding Quality Control

Between U.S. government agencies, like the FHA, and government-sponsored enterprises (GSE), such as Fannie Mae or Freddie Mac, lenders must adhere to various processes and audits to guarantee that certain loans meet purchasing requirements. Exhaustive evaluation of documents and data ensures accuracy and completeness, while also providing an opportunity to report any inconsistencies or defaulting loans. A stringent quality control review of loans across all facets helps management confidently assess lending processes, avoid future mistakes and greatly reduce recourse risks.


Although extensive and time-consuming, the industry’s residential mortgage-backed security (RMBS) standards give lenders an accurate and reliable depiction of assets to ultimately increase market confidence in sellers and their products. In the case of a default, investor recourse is an option to securing loans. However, due diligence strengthens the credibility of identifying which borrowers could present a substantial credit risk to the lender. A thorough, unbiased underwriting and analysis of data points helps lenders pinpoint underlying issues and potential fraud that can be overlooked when reviewing numbers alone.

Seasoned Assets

In order to make informed decisions and properly manage risk, lenders need detailed information and specialized support for the evaluation and ongoing management of distressed assets. To determine if a borrower’s money is suitably sourced and seasoned, lenders must conduct a comprehensive examination of assets. This includes a review of payment and servicing history, a valuation analysis and an origination compliance audit.

Credit and Compliance

Whether purchasing or selling assets, lenders need to confirm that the underlying collateral is of optimum quality. With the increase of federally mandated rules and regulatory scrutiny, it is imperative that all loan operations abide by standard industry practices. Reviewing credit and analyzing all aspects of the lending process gives an elevated view, confirming that standards are being upheld across all loan transactions. This assures credit quality and minimizes overall portfolio risk for the lender.


To perfect loan collateral, it requires an audit of all documents to guarantee that data is accurate and complete. Every client is different from the next and facilitating a customized review of all loan terms and documentation based on the unique requirements of each borrower ensures protection for the lender should the borrower default on the loan. To mitigate significant risk, it’s important for lenders to intensely appraise all documents before securitization to confirm that the mortgage is valid and free of legal encumbrances.


Mortgage fraud can take shape through minor exaggerations or omissions of information on a loan application, but ultimately cause lenders to suffer financially and operationally. Through a rigorous and in-depth forensic due diligence review, from asset verification to valuation reconciliation, lenders can ensure the highest confidence of success and quality results. This forensic analysis mitigates fraudulent loans while establishing a clear and definite cashflow source.

Due Diligence Without Technology

Although it may be difficult to recall, there was once a time when due diligence and loan reviews were completed without the support of modern technology, including data and analytics. Lenders were tasked with fulfilling all functions of the review process while still guaranteeing accurate and quality loans.

Prior to technological advancements, lenders completed due diligence by manually entering data across all processes, exposing more opportunities for data entry mistakes and careless errors. On top of this, lenders were expected to run compliance rules on their data to adhere to the industry’s complex regulations. This resulted in multiple waves of manually checking and rechecking the data for accuracy. Factor in quality control to examine the data, which may prompt additions to overlooked entry fields, cleaning up mistakes and double checking for errors before sending loan files back to the client.

These manual tasks ultimately deplete resources, run up costs and consume time that lenders could devote to other priorities. Without technology to automate and enhance the due diligence process, lenders are held back by longer deliveries and concerns of inconsistent, non-customized reporting.

AI is Transforming Due Diligence

Artificial intelligence (AI) has vastly improved the processes of loan review, tapping data and analytics to equip lenders with the industry’s top resources to streamline and enhance residential mortgage due diligence. Smart imaging technology transforms the process of receiving files from clients by scanning documents to recognize the most important pieces of information and extracting necessary data to ensure due diligence. This method is not only more productive, but also allows lenders to increase the capacity of loans in review.

Quality control can be automated to take over the responsibility of cleaning up duplicate or incorrect data entries, identifying missing information and scanning for errors. In fact, the evolution of AI technology in due diligence has led to some documents seeing little to no human intervention at all. This alleviates much of the time-consuming and exhausting tasks demanded of lenders, essentially making their jobs easier.

Improved Compliance

Infusing due diligence processes with AI eliminates some of the stressors on lenders, including boosting compliance amid a highly regulated industry. With multiple, ever-changing regulations to keep in mind, lenders can benefit from technology’s ability to streamline and simplify compliance.

TRID, or the Know Before You Owe rule, helps borrowers make informed decisions on mortgage transactions while unleashing more work and worry onto the lender. With an automated TRID check, lenders can quickly and efficiently crosscheck all documents for any violations that lead to non-compliance, fines or defective loans.

Further regtech integrations help lenders enhance regulatory due diligence by using technology to validate and verify that all information is accurate and consistent. Regtech eliminates the possibility of human error by catching any regulatory violations, giving lenders confidence that compliance standards are being met.

Seeking a residential mortgage inevitably brings the occasional credit reporting issue, causing confusion from varying reports. Lenders cannot simply rely on the rules in an automated system to decipher the truth and risk non-compliance. Instead, lenders can use AI technology that is flexible to the rules to accommodate credit reporting issues and steer clear of regulatory breaches. Since there is constant change among the regulations and GSEs, which help facilitate borrowing and drive the flow of credit, lenders must implement technology that is adaptable to remain compliant.

Lenders can take on all the duties to deliver due diligence on residential loans, but between manually inputting data, duplicate entries and potential human errors, this process will certainly take time, money and resources to successfully complete. Or, lenders can partner with a forward thinking, flexible due diligence provider to drive efficiency and ease the workflow. By outsourcing functions and delegating tasks to facilitate residential due diligence, lenders can mitigate risks, increase operational agility and excellence, and fuel future business.

Chris Guidici is the Director of Sales for Wipro Mortgage Digital Operations/Platforms which serves the complete mortgage industry lifecycle and Opus Capital Markets Consultants, a specialized risk management and quality control service provider for a wide range of participants in the mortgage and consumer lending industry. For more information, please visit