The industry mindset that mortgage quality control is merely a cost center is finally starting to change. Many lenders now aim to reduce their net critical defect rate to less than 1%, a substantially more aggressive target than just a year ago.
Reaching that goal requires efficient quality control procedures. However, mortgage professionals are struggling with the delicate balance of making needed operational improvements, while controlling the costs required to make these enhancements.
An effective QC program helps an organization understand results and trends to identify root issues and causes of loan defects Adopting advanced analytics and technology, using targeted reviews versus random sampling, in mortgage quality control can help lenders strike the balance between operational improvement and cost control.
In efforts to keep costs down, many lenders use a random sample of their entire loan origination pool to assess overall loan quality. This methodology does a fine job of identifying systemic problems that exist within their process, but disregards the nuance required to capture a more detailed look at the risks in specific loans.
Some manufacturing issues might also elude detection in a random sampling because there is no underlying methodology other than reviewing a percentage of the whole.
Using targeted criteria can help spot troublesome concerns before a negative trend emerges. For example, in a search for specific areas of concern by region, perhaps appraisal defects in the Midwest region have escalated, and by drilling down into the data, it's discovered that this rise in defects is tied to an exact office located in Ohio.
Using the random sampling methodology, this issue may have gone undiscovered for far longer. In addition, it would have been extremely difficult to identify a recurring pattern, much less to solve the problem, if only a handful of loans from each state in that territory were selected. A targeted search enables identification of any possible patterns involving appraisal management companies, appraisers, underwriters, loan officers or other participants that are associated with the loan files containing appraisal defects. The ability to get to the root of the problem is key for corrective action to properly take place.
That phrase — corrective action — is especially critical when faced with an audit situation. Regulators want to see not only that the problem has been identified, but that a response has been formulated to address and correct it. Advanced technology and analytics will help to find root causes of issues, spot troublesome patterns, target reviews more effectively and fine-tune QC processes.
Phil McCall is chief operating officer of ACES Risk Management Corp. (ARMCO).