Pamela Hamrick of Incenter Diligence Solutions: Elevating QC to a Growth Leader
Just before Labor Day, Fannie Mae instituted new prefunding quality control review requirements, leading to larger discussions of the financial impact of QC processes on mortgage lenders. MBA NewsLink asked Pamela Hamrick, President, Incenter Diligence Solutions, to elaborate.
MBA NewsLink: QC has always been integral to loan origination. What has made Fannie Mae’s latest requirements so noteworthy?
Pamela Hamrick: They’re more stringent than previous requirements. Fannie Mae is asking lenders to conduct monthly prefunding reviews of 10% of their closed loans or 750 loans (whichever is the lesser amount) from the previous month. This is a sea change for many lenders who have been more accustomed to doing most QC reviews at the post-funding stage, especially during periods of heightened transaction activity, such as 2021, when originations exceeded $4 trillion.
However, increased defects in loans sold to Fannie Mae during this active period helped lead to this change. These defects present long-term risks to the industry, and Fannie Mae is trying to help lenders identify those risks and subsequently reduce them.
The GSE’s actions are leading to important discussions among lenders. They’re calling attention to QC as a practice for preventing issues that could have a negative balance sheet impact. The slower market is an opportune time to reconfigure QC operations and emerge stronger for it.
MBA NewsLink: What do you see as the benefits of a more proactive QC strategy?
Pamela Hamrick: I like that you use the word strategy. QC is often seen as a more tactical process of catching every error and ensuring regulatory compliance. It’s actually much more than that. Those who lead mortgage and QC operations help to protect lenders’ financial performance, cashflow, agility, brand integrity and customer/partner relationships. They often surface important trends and insights in time to correct them and improve lenders’ long-term growth as a result.
The purpose of QC is to install important safeguards throughout the lending cycle and ensure the quality that Fannie Mae requires from origination to closing. Sometimes it’s like crawling up and down and across all the threads of a spider web to identify every critical issue. But if a loan gets pushed back because of defects and omissions, and a lender needs to request additional documentation a year after a closing, that’s a recipe for disaster. The market will start to question lenders’ competency and caring and negative word of mouth spreads fast.
Experienced operations and QC leaders, though, do even more to help lenders to flourish. Their insights prompt these organizations to change their policies in order to solidify their marketplace positioning. Targeted loan sampling, for example, could uncover a growing percentage of risky high-LTV loans, or an expanding percentage of borrowers with condominiums in hurricane-prone states—causing lenders to update their underwriting or QC guidelines.
MBA NewsLink: What are some QC best practices to minimize defects and ensure loan quality—whether prefunding or post-funding?
Pamela Hamrick: On the prefunding side, lenders should map out the “journey” for every loan. What requirements will they need to meet by the end of the trip? Lenders should align them with their automated underwriting system (AUS) guidelines and overlays, and make sure they have all the data and documents in place at every juncture.
During post-funding QC review, it’s important to review the loan in totality including all the qualification and closing documents that may not have been present earlier in the loan lifecycle—and reverify everything that they pored over prefunding. This is also a time to be attuned to patterns that can be traced to particular processes, roles or even individuals.
MBA NewsLink: Which segments of the industry could experience “growing pains” as they evolve their QC practices?
Pamela Hamrick: A process realignment could be particularly challenging for smaller, regional IMBs—many of whom are already stretching their staff to the limit. But there is no question that the ROI is worth it. Picture a smaller lender that closes 100 loans per month. Under Fannie Mae’s new requirements, that lender must QC 10% of them at the prefunding stage—or 10 loans—every month. The potential cost of missing defects in all 10 could exceed $1 million should they lead to buybacks. And those buyback requests can be unexpected; the GSEs can initiate them three years after buying a loan—with significant ripple effects.
MBA NewsLink: How should lenders reorganize in order to upgrade their QC operations?
Pamela Hamrick: Whether they hire new people, reassign existing staff, or outsource, they should be aware of two key factors:
First, the people who conduct prefunding and post-funding reviews must be independent of the mortgage origination process. Their objectivity ensures they report findings free from feeling the need to justify or minimize them.
Second, once QC is institutionalized, the number of people required to handle it will ebb and flow with the weekly origination volume. In that case, outsourcing may be helpful in order to keep up with high-intensity weeks, and avoid paying people to effectively be on standby when the pace is slower.
Pamela Hamrick is President of Incenter Diligence Solutions, which provides due diligence, QC, and document management services for lenders and depositors. Contact her at email@example.com or visit incenterdiligence.com.
(Views expressed in this article do not necessarily reflect policies 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 Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)