Up until a few years ago, quality control was not necessarily top-of-mind for many financial institutions. Mortgage executives knew it was there and that it was necessary to meet the requirements of the GSEs and other investors. But, many didn’t care too much about it or what it did, and many didn’t really want to know. Rather, it was all about originations, volume and how many loans you could write and send off to securitizers.
There was a virtual separation between originations and the quality control side of the origination business. When QC did find problem issues, they were often put aside or ignored entirely.
Now, the mortgage world is a very different place. We’ve seen enormous changes in perspective and in the financial importance of quality control processes. Everybody in the market, whether the GSEs, the ratings agencies or investors, are aggressively rejecting loans that do not comply with their requirements.
They also are placing a higher priority on an originator’s quality control procedures. If required information in a loan application isn’t verified properly and all eligibility requirements aren’t met, loans will not proceed through the system, no matter how high an applicant’s credit quality. What’s more, there is new scrutiny of a lender’s senior executives to determine whether they fundamentally understand and appreciate the importance of quality control.
As part of its new Loan Quality Initiative, Fannie Mae has substantially revised its quality control requirements for lenders. Originators must now perform QC reviews prior to funding, not just post-closing. Lenders must also establish an audit process to ensure that quality control processes and policies are effective and being followed, and that results are being reported to senior management in a timely way. Moreover, the GSEs are requiring that correspondent lenders selling loans to them take responsibility for the QC processes of their third-party originators.
LQI is intended to mitigate expensive putbacks and generate higher quality loans. The initiative reflects a major philosophical change at the GSEs that has permeated the entire mortgage industry.
Now, the ratings agencies are going to begin evaluating originators’ quality control policies, systems and processes, something they haven’t placed much emphasis on in the past. If your quality control procedures don’t have what it takes, your loans will not get the highest ratings, and they will be more difficult to sell to investors.
In the past, major banks might have looked primarily at loan data tapes in assessing a loan portfolio for purchase.
Now, many banks will not buy loans from originators whose compliance and quality control processes, systems and procedures are not up to snuff. That’s a very big change over the past couple of years.
Lenders with more stringent QC processes, then, differentiate themselves from other lenders in the eyes of the secondary market. As an originator, there’s no doubt your ability to sell to the secondary market will be hurt if you try to cut corners or de-emphasize quality control.
Mortgage executives really need to understand quality control. They need to understand the process, the findings and trending analysis.
The findings of QC are useless unless you use them to make changes and address potential problems quickly.
Quality control people are now much more involved in the origination side of the mortgage business.
First, there’s been an emphasis on quality control on the prefunding side—driven not only by the GSEs but also by the fact that banks have realized that identifying problems prefunding saves the lender from writing a bad loan.
In addition, even for post-closing loans the findings of quality control analysts are now being communicated back to the origination side in real time. In the past those findings were often communicated back 60-120 days later—often too late to be effective.
One of the country’s largest banks asked us to build a module that would allow them to electronically communicate exceptions or deviations to folks on the origination side of the business and ask for immediate responses that are captured within our ACES Web system.
The module allows QC employees to communicate directly with the lender’s origination department to notify them of problems and request an action plan to fix them.
Technology bridges the communication gap that formerly existed between the origination side and the quality control side. This reduces the number of problems and bad loans, a sure improvement from the past.
Even small lenders can use the ACES Web platform to increase the volume and efficiency of their mortgage originations. It is offered on a transaction basis (Software as a Service, or SaaS).
In this way a small institution can take advantage of an enterprise system that’s been in development for years and has millions of dollars invested in it. They don’t have to go through a massive software integration process, and they’re able to take advantage of this system at a relatively low upfront and monthly cost.
One of the ways to make quality control and fraud detection even more effective is for competing or complementary technology vendors to collaborate.
Our software integrates with fraud software from Interthinx and ComplianceEase, which helps automate regulatory compliance and fraud review. As lenders are performing their quality control processes, they can tap into those tools to check for other potential fraud that might be in the loan file.
While consumers have fully integrated online services into their lives, the industry has not yet leveraged the Internet to its fullest extent.
Most mortgage companies are relying on a business model that is proving more difficult and expensive to run. One of the reasons for moving to the Web is that clients may have different entities that need to review loans. Clients can now let other parties access the data from a secure Web browser. It’s a very effective way to show ratings agencies what kind of QC is going on at a lender.
Despite the plethora of new rules, regulations and requirements, there is still a lack of uniformity and standards on how to measure quality in the mortgage industry.
However, it certainly seems like the industry is on the right path and finally understands the future dividends that will be reaped from an elevated focus on quality control.
Avi Naider is chairman and CEO of ACES Risk Management Corp. in Fort Lauderdale, Fla.
