Sponsored Content from ACES Quality Management: Revenue Retention Requires Rigorous QC, Compliance Adherence
In today’s lending market, where every dollar counts, revenue retention areas such as quality control (QC) and compliance have become more critical than ever. As such, keeping up with regulatory and investor updates and trends is essential to maintaining loan quality and compliance.
Managing Loan Quality
Revenue retention is a primary concern for lenders, and quality control plays a crucial role in this effort. The quarterly ACES Mortgage QC Trends Report indicated that while mid-to-late 2022 saw historically high levels of critical defects due to the market downturn, the situation has since improved. The critical defect rate has declined over the past five quarters, reaching 1.53% in the fourth quarter of 2023 – one of the lowest rates since the report began in 2016.
This improvement reflects the industry’s resilience and adaptability. Lenders have had to navigate a complex and volatile market, marked by fluctuating interest rates, regulatory changes and economic uncertainties. Despite these challenges, they have managed to implement effective QC processes and leverage technological advancements to enhance loan quality.
Duane Gilkison, Senior Director of Loan Quality at Fannie Mae, confirmed this trend in May at the 2024 ACES ENGAGE conference in Tucson. Fannie Mae’s 2023 loan acquisitions from its sellers/servicers show a similar downward trend in both initial and final defect rates. Gilkison highlighted that this consistency in quality is a positive sign for the industry, indicating that lenders are taking the necessary steps to uphold high standards.
Responses to Fannie Mae’s QC Policy Updates
Lenders have had to adapt to Fannie Mae’s QC policy updates issued late last year. The most significant updates to the Fannie Mae Selling Guide include a mandatory 10% pre-funding sample review and a shortened timeline for post-closing selection, review, rebuttal and reporting. These changes aim to help lenders identify and address defects more quickly. With advancements in QC auditing software, Fannie Mae believes lenders now have the necessary tools and automation to meet these requirements.
Many lenders felt that Fannie Mae’s updates were a necessary evolution in the face of changing market dynamics and regulatory expectations. The mandatory 10% pre-funding sample review, in particular, has pushed lenders to be more proactive in their QC efforts, catching potential issues earlier in the loan origination process. This shift not only improves loan quality but also reduces the risk of costly buybacks and reputational damage.
The truncated timeline for post-closing selection, review, rebuttal and reporting has also forced lenders to streamline their processes. By reducing the window for these activities, Fannie Mae aims to ensure that defects are identified and resolved promptly, minimizing the impact on borrowers and the overall loan portfolio. This change has encouraged lenders to invest in more sophisticated QC technologies like ACES and to adopt more agile operational practices.
Current Compliance Issues and Trends
Compliance issues significantly impact loan quality. One critical case to watch is the Consumer Financial Protection Bureau (CFPB) case with Townstone Financial, which questions whether the Equal Credit Opportunity Act (ECOA) applies to redlining and other pre-application activities. This case illustrates the broad interpretations the CFPB is using to cite lenders for non-compliance.
The CFPB is also expanding its view on what constitutes “Abusive” practices under the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) standard, exemplified by a proposed rule against non-sufficient funds (NSF) fees for declined payment transactions at point-of-sale. Although this rule does not directly apply to mortgage lending, it signals the CFPB’s current stance and is worth monitoring.
Additionally, the CFPB has focused on “junk fees” charged by mortgage servicers and lenders, highlighting several compliance issues in its recent Supervisory Highlights. The Bureau’s ongoing Request for Information (RFI) into “Junk Fees in Mortgage Closing Costs” underscores this trend.
These compliance trends indicate a broader shift towards more stringent regulatory oversight and enforcement. Lenders must stay vigilant and ensure their practices align with the latest regulatory expectations. This involves not only keeping abreast of new rules and guidance but also continuously reviewing and updating internal policies and procedures to mitigate compliance risks.
The latest installment of ACES’ QC Now webinar series, featuring EVP of Compliance Amanda Phillips and Ballard Spahr Partner Richard Andreano, provides a deeper dive into these topics and more. This series offers in-depth discussions on the most pressing issues in QC and compliance, providing valuable insights and practical advice for lenders.
Resources for Lenders
Numerous resources are available to support lenders in improving loan quality and ensuring compliance. Fannie Mae offers extensive training and educational materials through its Loan Quality Learning Center, Beyond the Guide and Quality Insider publications. These resources provide valuable insights, best practices and practical guidance on various aspects of loan quality and compliance.
ACES Quality Management also provides a wealth of free resources, including the quarterly Mortgage QC Industry Trends Report, on-demand webinars, and the Compliance NewsHub. These resources are designed to keep lenders informed about the latest developments in QC and compliance and to offer practical solutions for improving loan quality.
In conclusion, as the lending environment continues to evolve, staying informed and utilizing available resources is crucial for lenders to manage loan quality effectively and ensure compliance. By leveraging the expertise and tools available through organizations like Fannie Mae and ACES Quality Management, lenders can navigate the complexities of the market, mitigate risks and maintain high standards of loan quality and compliance.
(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)
