When adopting digital mortgages, don't let quality control lag

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If quality control isn't part of your digital mortgage conversion strategy, it should be.

Most lenders agree, at least in theory, that a full-blown e-mortgage is the ultimate desired outcome of going digital. Fannie Mae defines an e-mortgage as "a mortgage loan where the critical loan documentation, specifically the promissory note (e-note), is created electronically, executed electronically, transferred electronically and ultimately stored electronically."

While QC isn't explicitly included in this definition, it does have a significant role to play in lenders' ability to execute fully digital mortgages. Furthermore, going digital can have a substantial impact on overall loan quality. As such, it is critical for lenders to include QC as part of their larger digital mortgage strategy.

Take prefunding QC, for example. This process usually happens once a loan has been cleared to close. Depending on how quickly the final Closing Disclosure has been issued, the prefunding QC team may only have three days to conduct their review to ensure the loan is error-free and eligible for closing/purchase.

A prefunding QC process, as outlined by Fannie Mae as part of its Loan Quality Initiative, requires lenders to conduct full file reviews of a sample of their loan production and highly encourages them to also conduct targeted sampling on key areas, such as credit, employment, assets, etc. While Fannie Mae's Day 1 Certainty initiative has offered lenders certain buyback assurances in some of these areas, the QC must still conduct a thorough review to ensure there aren't any issues present that would require a redisclosure or expose the lender to repurchase risk.

If the QC department is using manual (think spreadsheet) to conduct this review — or if the QC team must review hard-copy documentation rather than a digital file — this process could take the full three days between CD issuance and closing. Therefore, errors uncovered at the eleventh hour could delay closing by several days while the lender corrects the error and issues a new CD. On the flip side, auditors may feel the pressure to conduct their reviews quickly and, as a result, be less-than-thorough in their reviews, which could potentially allow errors to make their way to the closing table.

In either case, utilizing digital in both origination and QC can help ensure errors are uncovered in a timely manner, thus supporting on-time closings.

On the post-closing side of things, going digital can have a demonstrable effect on loan quality and subsequently improve investor confidence. One of the most frequently occurring loan defects lenders experience is missing documentation. According to Fannie Mae's estimates, 40% to 60% of the repurchase requests it issues are ultimately resolved by submitting missing documentation, and the entity responsible for tracking down those missing documents is usually the post-closing QC department.

When loan documentation is created, executed, transferred and stored digitally, it is nearly impossible to misplace that documentation, thus exponentially increasing the likelihood of delivering a complete loan file. Furthermore, by essentially eliminating this category of defects, the post-closing QC department can spend less time tracking down paperwork and focus more of its effort on ensuring the correct underwriting decision was made and verifying that other errors uncovered in prefunding have been adequately addressed.

However, that refocusing of effort could be all for naught if manual is also in play in post-closing QC. That's because another critical function of this department is reporting. Today, investors expect timely, detailed reporting, with results broken down across multiple categories, and delivered in an easy-to-read format. When manual like spreadsheets are used to track defects, it can be difficult to aggregate audit findings from multiple sources, thus inhibiting lenders from delivering an enterprise-spanning loan quality report that meets investor expectations.

When the QC review process is automated using a platform that supports dynamic, customized reporting, it becomes much easier to build aesthetically pleasing, yet comprehensive, reports that allow investors to gain a complete understanding of loan quality across the entire organization. What's more, better reporting also better prepares lenders to answer investors' questions regarding loan quality, which ultimately bolsters investors' confidence in the lenders' commitment to quality.

It's clear that there are symbiotic benefits to taking both the origination and the QC process digital. As the mortgage industry's long march towards the e-mortgage nears its end, it behooves lenders to incorporate QC in their digital conversion plans to ensure that the benefits of going digital extend beyond origination and that back-office processes like QC can support, rather than inhibit, digital efforts in origination.

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