NOV 19, 2012 12:14pm ET

New Standards are Tough – Not Necessarily Painful

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Permit me to paraphrase William Shakespeare from Twelfth Night, “Some were born to quality control and fraud prevention, some have come to the light and achieved quality control and fraud prevention and some have had quality control and fraud prevention thrust upon them kicking and screaming.”

The point is, finding the optimal solution for ensuring quality control standards are met need not be a daunting one. For many lenders, the best way to approach the newest challenges is to outsource some, if not all quality control functions to an independent, third-party service provider who is qualified to review loans to ensure they have been consistently and fairly underwritten in accordance with your underwriting guidelines and without costly compliance related issues 

A thorough, complete, integrated quality control / risk management program consists of three components: pre-funding quality control/fraud prevention; post funding quality control; and quality control using a targeted sample. However, I would argue this third methodology is fast becoming outdated. Many lenders are moving away from random/targeted sampling of loans to actual reviews of 100% of all loan files pre- and post-funding to ensure loan integrity

The costs of these functions are not insubstantial. However, properly managed, quality control functions can be either revenue neutral or actually generate savings that pay for themselves. Outsourcing these functions aids in cost recovery in several ways including an effective way to deal with one of the most significant QC costs; employee head count. This becomes even more apparent when the need to staff up or down due to market fluctuations rears its ugly head. 

Pre-Funding Reviews

Pre-funding quality control and fraud prevention has a significant return on investment.  Yes, there are fixed costs. But stopping just a handful of non-compliant or potentially fraudulent loans prior to funding each month will more than pay for those costs many times over. Thus, it makes sense to review 100% of your loans pre-funding.

Post-Funding Reviews

There are three values in both the post funding quality control reviews and the post funding targeted reviews. First, the results of these post funding reviews can be utilized to identify patterns and trends which can then be driven back to a pre-funding fraud prevention tool, such as Interthinx FraudGuard. Second, they may help identify internal performance issues–with origination (whether wholesale or retail), production and underwriting functions. These performance issues can then be used to identify training opportunities, whether on the collective or individual level. Third, the post funding reviews reflect compliance with internal policies and procedures and law, and can help identify areas of weakness or opportunities for policy and process improvements. They can also provide tangible evidence that your company is originating high quality, legally compliant loans–something your regulators will surely be interested in knowing!

Any action that helps prevent your organization from being found to be “out of compliance” according to the new CFPB regulations has benefits that far exceed the costs, especially when you factor in the costs of defending yourself from regulatory agency actions, plaintiffs lawyers and resultant bad press. 

Targeted audits (especially on early and first payment defaults) will identify a higher level of fraud and misrepresentation, which may help shut down fraud for profit schemes and limit exposure. Audits will also highlight any substantive compliance issues that may be occurring on a regular basis that need to be addressed, and help you correct these violations before loans fall into foreclosure and these issues can potentially be used against you as an affirmative defense.

So, now more than ever, it may make sense for a lender to outsource some, if not all of their quality control functions. And, if it makes sense to outsource, it makes the most sense to outsource to a proven leader, someone who has multiple years of experience in underwriting, quality control, regulatory compliance and mortgage fraud investigation and prevention. 

The comprehensive suite of Interthinx fraud, compliance and valuation tools, such as FraudGuard, are employed by hundreds of lenders at every point in the origination process, and have been proven reliable over and over again for over a decade. In addition, Interthinx has a qualified team consisting of hundreds of industry-rich experienced underwriters, investigators, quality control specialists and compliance lawyers that can produce high quality results for pre- and post-funding quality control.

Like the Mary Poppins song–“a spoon full of sugar can help the medicine go down.”  Meeting the new mandated quality control and fraud prevention requirements may seem daunting; but remember, it doesn’t have to be a bitter pill to swallow.

Gary W. Carr is a forensic underwriter at Interthinx.

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