Ellie Mae Inc., Pleasanton, California, a provider of enterprise level, on-demand automated solutions for the residential mortgage industry, has added a loan buyback insurance option to its Total Quality Loan(TM) (TQL) program.

TQL is an initiative designed to further enhance the loan quality, compliance and salability of loans that are originated through Ellie Mae's Encompass36o® mortgage management software system. TQL offers a suite of fraud-detection, valuation, validation and risk-analysis services, tailored to individual aggregator/investor requirements. Ellie Mae's secure, tamper-proof technology enables correspondent lenders to share the findings and data from those services with investors and other stakeholders in the industry supply chain.

Correspondent lenders participating in TQL can now choose to insure and be covered for losses of up to $100,000 per loan. Underwritten by affiliates of Lloyd's of London and Liberty Mutual Group, the insurance policy protects lenders from losses due to borrower and appraisal fraud and regulatory non-compliance.

For example, the policy covers a seller against claims based on misstatement of income or assets, employment and occupancy fraud, as well as collateral and valuation fraud. Similarly, it protects against loss if a loan is found to be non-compliant with various regulations, such as federal Truth in Lending Act tolerance tests (Home Ownership and Equity Protection Act |HOEPA|); federal, state and local high-cost thresholds review; Fannie Mae points and fees, and Department of Housing and Urban Development (HUD)-HOEPA mortgage thresholds reviews.

The coverage begins at the date of origination and lasts for three years. The policy's coverage automatically transfers with ownership of the loan so that any party who owns the loan at the time a fraud or compliance error is discovered may file a claim under the policy directly rather than force the loss back to the original lender. While there is a modest cost to the lender for this coverage, this can be offset by lower loan reserves that are available to lenders with insured loans. Ellie Mae receives an administrative fee for each closed loan covered under a policy.

The program is designed to offer enhancements to traditional programs available in the marketplace. If a fraud or compliance error is discovered, the party suffering a loss can file a proof of loss and determine whether or not it is covered before the amount of the loss has been determined. This allows efficient repurchase, scratch-and-dent sale or foreclosure options to be assessed with the knowledge that coverage exists. Often, insurance providers' practices have prevented policyholders from learning whether or not coverage exists until other options for recourse have been completed (or lapsed).

Arthur J. Gallagher Risk Management Services, Inc., a subsidiary of Arthur J. Gallagher & Co., one of the world's largest insurance brokerage and risk-management services firms, is the broker for the program. Justin Vedder, area senior vice president at Arthur J. Gallagher Risk Management Services in San Francisco, explained, "This program is a validation of Ellie Mae's TQL process. TQL customers adhere to rigorous origination standards and follow best practices and as a result automatically qualify for this exceptional coverage."

"Over the past several years, the GSEs and investors have put back approximately $100 billion worth of loans to originators," said Richard Roof, Ellie Mae's senior vice president of business development. "Our TQL program is a direct response to the industry's demand for increased quality assurance. It is designed to give investors and sellers greater confidence in the assets that are being originated. Adding optional buyback protection is simply a cost-effective extension of this concept and further mitigates risk."