ARMCO: Loan Package Documentation Defects Down; Legal/Compliance Defects Up
ACES Risk Management, Pompano Beach, Fla., said its study of Fannie Mae loan defect taxonomy showed loan defects, primarily due to increased legal and regulatory compliance requirements, rose for the second consecutive quarter.
The company’s inaugural Mortgage QC Industry Trends Report, noted the overall industry critical defect rate, which trended downward for most of 2015 (falling to 0.77 percent in third quarter), began to climb in the fourth quarter and continued into first quarter 2016, with the critical defect rate increasing to 1.92 percent.
Phil McCall, COO of ARMCO, said the increase in defects corresponds almost entirely to a rise in the number of Legal/Regulatory/Compliance defects. In 2015, Legal/Regulatory/Compliance defects comprised 25.9 percent of all defects reported; in the first quarter, they accounted for 50 percent, a 93 percent increase.
“Implementation of TRID in the fourth quarter of 2015 is directly responsible for both the increase in compliance-related defects and the critical defect rate for the entire industry, as defect rates for all other categories continue to decrease,” McCall said. “Prior to Q4 2015, lenders were doing an excellent job of driving down critical defect rates, and once the industry begins to implement corrective action plans for TRID-related defects, we expect to see the overall and compliance critical defect rates to trend downward once more.”
The report noted the industry has reduced its overall defect rate in both the Loan Package Documentation and Property-Appraisal categories, which represent the second and third most frequently reported defects in the first quarter. Defects in the Loan Package Documentation category, which was the No.1 category for 2015, decreased from 35.3 percent in 2015 to 26.4 percent in the first quarter.
“The significant decrease in Loan Package Documentation defects reflects a concerted effort by lenders to address this point of concern in their loan production strategy,” said ARMCO CEO Avi Naider. “The GSEs have conveyed to the industry that missing documents are a significant loan quality issue that needs to be resolved, and the decrease in defects in this category is evidence that lenders are taking this to heart and implementing corrective action plans to ensure all required docs are included in the final loan package.”
The report analyzes post-closing quality control data from loan files and findings captured by ARMCO’s Analytics benchmarking system. The full report can be accessed at http://www.armco.us/knowledge/mortgage-qc-industry-report-2016-q1.
