Sharon Reichhardt of ACES Quality Management: For a Successful 2022, The Season of Giving Must Include an Enhanced QC/QA Process
Sharon Reichhardt is Executive Vice President with ACES Quality Management, Jacksonville, Fla.
While the last two months of the year typically denote the kickoff to the holiday season, this is also the time of year when lenders turn their attention to developing their strategic and operational plans for the coming year.
As the market shifts from refinances to purchases, lenders are understandably concerned about declining volumes and tightening margins. However, these are not the only concerns, as a purchase-driven market also increases the potential for both fraud and loan defects. With regulators also tightening their expectations and requirements around compliance, there is no time better than the present for lenders to get ahead and shore up their quality control and quality assurance efforts to ensure a successful 2022.
With a primary purchase market comes more complexity for loan originators, creating greater opportunities for fraud inside and outside of the organization. CoreLogic found mortgage fraud increased 37.2% in the second quarter. Among the six fraud risk categories, transaction fraud risk was the largest by far, ballooning to 34.2%. CoreLogic has identified remote worker trends and affordable housing policies as the primary areas of concern. The freedom to work remotely has sparked borrowers to relocate to more rural and suburban areas or out of their ‘home’ states. These destination and departure communities could be subject to more fraud schemes. Changes in affordable housing policies also tend to increase risk, as history has shown opportunists attempt to maneuver policy changes with the use of straw buyers, greater financing options or falsified qualifications. Luckily, QC reporting allows lenders to identify fraudulent activities sooner than later.
Additionally, Freddie Mac and the Mortgage Bankers Association expect 2022 to bring an increase in rates (4.0% by Q4 2022) and a 33% decrease in origination volume ($3.78 trillion). Coming off the record high volume from 2020 and into a more intricate purchase market may be a tough change in seas for loan originators. Coupled with growing fraud, changing regulatory requirements and opened scrutiny, a robust QC/QA process provides lenders with the best defense against these challenges to loan quality.
FHFA, Fannie Mae, Freddie Mac, HUD, VA, USDA and FHLB all require quality control for mortgage origination policies. At a minimum, lenders’ existing reporting structures should have identified values for gross, net and targeted defect rates. Each of these identified defect rates is critical in helping lenders enhance their QC reporting and their understanding of findings, essentially acting as key performance indicators in QC and QA reporting.
For organizations wanting to amplify their QC for the upcoming year, there are several reporting methods to enhance existing data. Through comparison and analysis, lenders can stay on par with regulatory and compliance while maintaining a healthy business.
One method is to calibrate QC reports with investor results. Lenders can compare the requested files from the investor with in-house reports to decipher if both parties found the same defects and if the values assigned are the same. Another key consideration is what mitigating factors could cause a difference in results? After this side-by-side audit, lenders can analyze the reason for selecting this loan and adjust QC discretionary sampling accordingly.
Existing trend reports can also be enhanced to perform a root cause analysis. For instance, by comparing historic reports with current reports, lenders can detect trends and identify where they begin. By cross-comparing the current month’s report with year-to-date reports and three-month interval reports, pinpointing when and where trends begin quickly becomes apparent. This provides lenders the opportunity to identify and resolve defects before a regulatory body steps in and does so. Additionally, lenders can make astute business decisions by implementing this same methodology across branches. By comparing regional areas and product mixes across branches and locations, decision-makers have a more in-depth view of areas for improvement in each branch/location.
With the defect identified and traced back to where it began, lenders can harness this information to create an action plan that tracks collaboration efforts across the company to address the root cause. Lenders should also test these resolution efforts to ensure the desired result is achieved. This not only improves operations but also helps build a strong compliance culture internally.
Once defects are identified and resolved, lenders can utilize their findings by sharing the defect and solution internally. Sharing defect findings across teams not only encourages participation from staff but also aids in maintaining success percentages. This is a simple, yet effective way lenders can leverage competitive spirit. Sharing results with QC and reporting teams provides better visibility into weak areas and reduces the chance of a repeated mistake, as this puts results into context for employees to help them better understand the intent behind any process changes resulting from findings.
Ultimately, the GSEs want to see lenders taking action to find and resolve defects. Enhancing reporting and department procedures is an effective way to improve credibility and organizational reputation with the GSEs and investors. Key stakeholders want to know lenders care and are taking the necessary measures to ensure quality lending. QC and QA reporting is a tangible way to show the integrity of a lender’s portfolio. Thus, with the planning season underway, lenders would be well advised to give themselves the gift of a robust QC/QA process to ensure a safe and happy 2022.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)