Quality Control Programs 'Not Working'
Deerfield Beach, FL-An expert on operational risk management states that what the government-sponsored enterprises and the Federal Housing Administration require of their approved originators in terms of quality control programs is not working.
Rebecca Walzak, the founder of Walzak Consulting Inc., said, "If we had effective QC, we wouldn't be where we are today." While the issues were found in the process, company management did not pay attention, and the reason they did not pay any attention to the process is because of the way the GSEs and FHA required originators to do quality control, she continued.
The standards for quality control programs were written in the mid-1980s and they haven't changed since then. "They don't take into account any of the technology changes that have taken place, they are very much an inspection process," Ms. Walzak said. Furthermore, there is no standard approach for lenders to review their production. Each company has its own questionnaire and areas of emphasis. There are some general requirements, but when she works with lenders, she has seen some whose questionnaire is only 30 questions long, while others have 300 questions.
"There is absolutely no standard of what we're looking for and why we are looking at certain things," Ms. Walzak said.
There some disputes between QC and production. QC's job should not be about second-guessing the underwriting decision, but rather did the underwriter follow the process in reaching a decision.
She also noted there is no standard way to collect the data, and sometimes how thoroughly the file is looked at depends on how the examiner views one or more of the participants involved.
Training of QC personnel is another problem area. Very rarely has Ms. Walzak found an underwriter who has moved into this area. More often than not it is someone whose prior experience is in processing. She even has seen a company where the receptionist did QC on files when she wasn't answering the phones. All that person did was go over a checklist of items.
As part of the process, the lender is supposed to do reverifications, "but in reality, these reverifications don't work. We can get a new credit report and we can get a field review. But a field review is just one appraiser's opinion of another appraiser's work," Ms. Walzak said. She was doing QC on a file and needed to get a field review and the person she spoke with said to her that he had to take the job because he was the only other appraiser in that town.
The secondary market, she said, won't let the QC process use the technology that is out there for property valuations like using an automated underwriting model or a broker price opinion. "They want written reverifications," but she cited studies conducted by the Mortgage Bankers Association as well as her own studies that found that 20% to 25% of the reverifications sent out actually come back. There are banks that are refusing to do verification of deposits and she doesn't know when anyone ever did a reverification of the private investments of loan applicants.
"But they keep tell us we have to do it," Ms. Walzak said.
The Department of Housing and Urban Development wants originators to send the application back to the borrower and ask them: "Is this the one you signed? Is this accurate?"