Sponsored Content from ACES Quality Management: How QC Drives Profit Preservation

By Sharon Reichhardt, EVP of Operations at ACES Quality Management, Denver.

Maintaining loan quality and mitigating risk are perpetual mainstays in the ever-evolving mortgage industry, where economic dynamics and technological advancements continually reshape the lending landscape. As the mortgage industry grapples with the challenges of low origination volume and tight margins, it’s imperative for lenders to recognize the pivotal role quality control (QC) plays in sustaining not only their operations but the bottom line.

Historically speaking, quality control tends not to be an area lenders view as a profitability driver. With the ramp-up in changes and requirements in the last few years, however, it’s nearly impossible for lenders to keep up without support, especially now when QC departments may be much leaner than they were the year before. Thus, adhering to compliance mandates might require investing in automation, even amid declining profitability.

For example, the Fannie Mae selling guide changes announced in March 2022 took effect on September 1, 2023. The changes now require lenders to conduct pre-funding QC reviews with at least a 10% sample size and condense the post-funding QC cycle time from 120 days to 90 days. While Fannie has always “encouraged” pre-funding QC reviews, moving from “optional” to “mandated” means lenders must ask more of their existing QC teams. Shortening the turn times for post-closing QC reviews only increases the burden lenders must now place on their QC departments.

What’s more, repurchase risk is on the rise. Most lenders do not possess the financial capacity to hold a defective loan on their balance sheet for 30 years. Therefore, they almost always sell the loan into the scratch-and-dent market. Before the rapid increase in interest rates, a lender could expect to sell a performing loan with defects for around a 5-10% loss, translating into approximately $5,000 to $10,000 per $100,000 in origination balance. A non-performing scratch-and-dent loan would sell for a 10-20% loss.

With current interest rates more than double what they were in 2021, lenders can expect up to a 20% loss, or $20,000 per $100,000 in originated balance, on a fully performing loan just for the interest rate pair-off, which does not take into account further discounts for the severity of the defects. This translates into much steeper losses on each repurchase, which creates a financial burden most lenders cannot bear in the current market.

Implementing a well-structured QC process not only bolsters mortgage origination by improving loan production quality but also reduces operational deficiencies, mitigates risks, enhances fraud prevention and ultimately safeguards borrowers. Embracing QC automation extends these benefits across the entire lending enterprise, contributing to higher quality across all aspects of the business. With new mandates always on the horizon and the inherent risk of outsourcing, it becomes imperative for organizations to ensure compliance and maintain loan quality through proactive and technology-driven strategies.

ACES delivers automation, reporting and analytics capabilities that help lenders improve operational efficiency, reduce errors and ultimately offer a higher standard of service to borrowers. Through decades of partnering with the industry’s top lenders, ACES has seen automation’s impact on lenders’ QC teams and their organization’s long-term success.

“By partnering with ACES, we have witnessed an overall improvement in the quality of our reviews. The platform has enabled us to focus on pre-funding reviews and allocate our resources to other areas where defects need correction. As a result, we have experienced a remarkable 50% increase in audit output for both pre-funding and post-close loan reviews. Previously, we would handle only two to three loans per day, but now we consistently handle at least four, and sometimes five, post-close loans, including pre-funds,” said Hilda Melendez, Quality Control Systems Director at Lennar Mortgage.

Knowing the importance that the GSEs place on reporting, ACES has not only based the reporting structure within ACES Quality Management & Control® software on Fannie Mae’s loan defect taxonomy, but it has also updated its reporting library to align with Fannie Mae’s QC reporting recommendations. Norcom Mortgage’s Quality Control Manager Julie Baril notes that this kind of reporting support is invaluable to their organization’s ability to meet Fannie Mae’s new requirements.

“We’re now able to close audits as quickly as 45 days after the closing month, which is much faster than the 90-day Fannie Mae post-close requirement. We are already ahead of the game and without having to add additional FTEs,” she explained. “With all of the high demands from the industry, if you had an audit from Fannie or Freddie or even FHA, I simply can’t imagine how I would be able to present to them and show them we’re doing what we’re supposed to be doing without ACES.”

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.

“ACES affords me the ability to employ experts in their fields because I don’t have to employ additional people to get the volume done. Our QC servicing can handle 1,200 loans in 36 audits with just three auditors in a span of 18 days, with reporting completed within 60 days. We consistently achieve this level of performance month over month for both departments, a total of six auditors for both teams for the last several years thanks to ACES,” said Heather Morris, Vice President of Quality Control and Document Custody Manager of Zions Bancorporation.

Implementing a well-structured QC process not only bolsters mortgage origination by improving the quality of loan production but also reduces operational deficiencies, mitigates risks, enhances fraud prevention, and ultimately safeguards borrowers. Embracing QC automation extends these benefits across the entire lending enterprise, contributing to higher quality across all aspects of the business. Regardless of the season, there are efficient ways to maintain a robust QC program without compromising the integrity of compliance or the bottom line.

ACES Quality Management, formerly known as ACES Risk Management (ARMCO), is the leading provider of enterprise quality management and control software for the financial services industry.

(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.)