Sponsored Content from ACES Quality Management: Profit Retention Strategies for Quality Control Operations

Sharon Reichhardt is Executive Vice President of ACES Quality Management, Denver.

Sharon Reichhardt

Through decades of partnering with the industry’s top lenders, ACES Quality Management has seen ineffective quality control processes compromise long-term organizational success. Whether it’s a manual process using multiple spreadsheets to record and track results or a QC system that is not flexible enough to meet the needs of an organization, the QC department often feels like nothing more than a necessary compliance expense to lenders.

The most tangible effects of such an underperforming QC function are more significant defects and increased repurchases. In addition, there is the hidden cost of not providing actionable information. A QC program’s inability to contribute to lowering the Mortgage Bankers Association’s reported per-loan origination cost of $9,500 for 2021 means lower profit margins for the lender.  

Fortunately, QC is one area where a lender can see immediate returns from easy-to-implement audit and compliance technology built for the modern mortgage lending operation. An effective QC team becomes a business partner to sales, operations, secondary marketing and more by preventing costly defects and providing intel to improve loan manufacturing and the customer experience.

By automating pre-funding and post-closing QC processes, lenders can execute audits more efficiently, increase team productivity, and make better-informed decisions across multiple lines of business. Lenders can also expect a decrease in defects and buybacks, which ultimately helps with revenue retention efforts. 

“A feature within ACES that has really helped us with our clients is in the reporting. When we cite a defect in the system, the clients can click on the regulatory or agency guideline citation, which provides clarity and knowledge that we are citing the correct citation for that defect. The defects are what drive the business that we do for our clients, and it really gives us peace of mind as well as the clients peace of mind that we are citing the right defect for that problem,” said Robyn Holyoak, executive vice president and chief operating officer at Baker Tilly.

ACES has developed models for estimating the cost of both significant and moderate defects. We estimate that every significant defect costs a lender almost 7% of the loan amount; on non-performing loans, that number is even higher. Moderate or manufacturing defects usually don’t result in a repurchase on a specific loan but always involve costly rework, delays and a poor customer experience. Not addressing moderate defects leads to repeated mistakes and/or repurchases on future loans. ACES sees lenders’ QC units reporting up to a 10% moderate defect rate, and our models suggest that each moderate defect subtracts 5% of the loan balance from profit margins.

A practical and profitable QC investment provides returns well beyond the actual file reviews. In fact, it’s an immediate source of actionable business intelligence that improves your bottom line. ACES automated QC is the most accessible technology implementation lenders can experience, thus enabling lenders to realize these returns even sooner.  

“ACES allows our quality control managers some lift to ensure that we’re always hitting the mark with our clients, providing metrics so that we can go in and measure our internal quality when we have internal QA. It also gives us a benchmark where we have quality scores with our clients and allows us to measure that so we always know we’re hitting the mark in a very consistent way,” Holyoak added.

Creating QC Operations that Drive Increased Profitability 

ACES QC technology harnesses file review data that opens a window not only into defects but also into how effectively an entire business operates. An optimized and targeted QC function drives a return on investment that would be the envy of any capital project.  

“Moving to a more robust software system boosted productivity. We were able to get more audits out per auditor, with the ability to focus on specific questions and get more discretionary type audits fulfilled,” said Lindsey Hendricks, quality control manager at Bank of England Mortgage. “We’ve been able to add more defined audits and discretionary targeting, beyond just the random 10% pre-funding, so we have a lot more variety. We’ve also started to add other types of audits, such as early payment defaults, which have been helpful. ACES makes it easy to change an audit quickly to address a certain need if we see something arise.”

ACES QC has two strategic components: 

  1. Ensuring a compliance and control environment that meets regulatory standards and prevents catastrophic loss from excessive repurchases; and 
  1. A one-of-a-kind source of business intelligence into how loans are manufactured, driving continuous improvement across the enterprise. 

Embedding a quality assurance feedback loop into the product delivery process prevents mistakes from impacting customers. Have you analyzed the cost of reworking a loan? The price of a lost customer? Getting it right the first time flows directly to the bottom line and keeps coveted customer surveys and social media ratings high. ACES QC technology has developed robust pre-funding QC modules, reporting and feedback loops, making it possible for a lender to shift 80% of overall loan quality dollars into pre-delivery. 

Historically, repurchase defects are rare; however, seller repurchases of GSE loans spiked in the first quarter of 2022. Fannie Mae and Freddie Mac reported $1.01 billion in seller repurchases, marking the highest quarterly volume in nearly eight years. Quality assurance programs can reduce these hiccups and the manufacturing errors that cost lenders money. Overprocessing, waste and delays unnecessarily incur costs at a higher rate than many lenders realize. Mortgage lenders understand the percentage of “just got lucky” defects are much higher than the approximately 0.5% industry repurchase error rate. When the overall loan credit profile is strong, these impactful defects generally don’t require repurchase. 

“My favorite features are the integrated VOEs, VOIs, tax transcripts, and field reviews. These have saved us probably 15 minutes per file, and if you’re doing 60 files a month, that’s an incredible time saving,” said Don Weaver, quality control assistant manager at MyCUmortgage. “In total, we save at least 40 hours a month, and because of these savings, we brought on a part-time employee to do verifications for us.”

However, the same mistake on loans with marginal credit parameters might require financial remediation, if not outright repurchase. Lenders should have a sense of urgency about this. It’s time to optimize manufacturing quality as the economic effects of COVID surface and agency requirements continue to evolve, continuing the strain on compliance talent. Additionally, as volume slows and lenders tighten operation expenses, maintaining robust compliance staff can be difficult. Regardless of the season, there are efficient ways to maintain a robust QC program without compromising compliance integrity or organizational profitability.  

“The biggest benefit that we have with ACES is we’re able to spend half of what we were spending with our previous vendor and doubled our audit workload at the same time,” said Wesley Klepfer, compliance program director at Celink. “With ACES, we have three people working full-time on audits and programmatic testing as well as access to better resources.”

CLICK HERE to learn more from ACES clients on how they achieve proven, measurable ROI.

(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.)