Evolving QC Risk Demands Agile Response (Sponsored by ACES Quality Management)
By Sharon Reichhardt
The mortgage industry is entering a new phase in quality control (QC) and risk management where vigilance, agility and insight are more critical than ever. As highlighted in the ACES Quality Management Q4/CY 2024 Mortgage QC Industry Trends Report and reinforced by recent Fannie Mae findings shared at the recent ACES ENGAGE event, long-standing defect categories are giving way to new and evolving threats. Lenders who understand these shifts and recalibrate accordingly will be best positioned to mitigate repurchase risk and maintain investor confidence.
ACES’ Q4/CY 2024 Mortgage QC Industry Trends Report showed that the Q4 2024 critical defect rate fell to 1.16%, the second-lowest level recorded since the report’s inception. This improvement reflects meaningful industry-wide progress, particularly in categories that have historically dominated post-close defect rates like Income/Employment and Credit. Income/Employment, in particular, dropped 35.5% quarter-over-quarter and fell from its long-standing position as the top defect category for the first time in more than three years.
While these gains are encouraging, the data reveal a notable shift in risk concentration. Legal/Regulatory/Compliance, a category known for its volatility—especially evident during previous regulatory rollouts such as the implementation of TRID—surged to the top spot in Q4. This increase comes amid growing confusion stemming from the current regulatory environment under the Trump Administration. With shifting agency priorities and unclear timelines for rule changes, lenders are left uncertain about which policies remain in force, which are under revision and how best to align their QC strategies. As such, the industry should anticipate continued volatility in this category as regulatory direction remains fluid.
Insurance-related defects, historically under 1%, have also remained elevated throughout 2024, driven by volatility in hazard insurance markets and tightening affordability in disaster-prone regions. As insurers pull back from high-risk states and premiums climb, more borrowers are struggling to maintain adequate coverage, creating gaps that reverberate into loan eligibility and compliance risk. The unpredictability of the insurance market, combined with increased natural disasters, makes it harder for lenders to anticipate where issues will emerge. This uncertainty highlights the need for lenders to continuously reassess their risk exposure and proactively adjust QC focus as market and environmental conditions evolve.
Perhaps the most pressing concern is the resurgence of fraud-related findings, particularly misrepresentation of occupancy and income. Fannie Mae reports that misrepresentation ranks among the top initial defects in both random and discretionary post-purchase reviews. In many cases, occupancy fraud is easily identifiable through basic online searches, such as when a property is listed for rent before or shortly after closing. Income misrepresentation often stems from unverifiable or fabricated employment or rental income. These types of misrepresentations are not only difficult to detect without enhanced tools but also pose significant repurchase risks.
Further complicating matters, refinance transactions—which saw a 29% increase in QC review share in Q4—accounted for a 53.57% spike in defect share. As lenders ramp up activity in this segment, they must remain vigilant about the unique risk factors associated with refinances, especially as borrower profiles grow more complex and documentation gaps widen. QC strategies must evolve with the product mix.
ACES clients are particularly well-positioned to meet these challenges. The ACES Quality Management & Control® software platform provides dynamic benchmarking, real-time defect trending and customizable taxonomies aligned with agency requirements. These capabilities enable lenders to proactively identify and respond to emerging risk areas, whether it’s a sudden spike in insurance-related issues or a growing incidence of fraud. Furthermore, ACES’ quarterly QC Trends Reports and deep integration with post-closing workflows empower QC teams to maintain audit-readiness while remaining flexible in resource allocation.
Reporting is paramount to my role,” said Thessel Jonas Hyango, director of quality control at The Loan Store. “Before ACES, we were doing a lot of manual reporting. When you mess up one digit, it impacts the entire report, so while there were many factors we considered, the primary reason we chose ACES was its built-in reporting that meets Fannie Mae’s requirements.”
ACES also equips lenders with tools to strengthen operational discipline, including calibration-ready reporting frameworks and the flexibility to align QC reviews with evolving investor and regulatory requirements. The platform’s configurability supports QC functions across all loan types and internal workflows, giving lenders a unified approach to loan quality.
“Because we serve multiple lenders with different needs, there’s a uniqueness that has to happen across clients,” said Stephen Mollot, chief information officer at Quest Advisors. “ACES, as a toolset, enables us to implement whatever we’re trying to do for our clients to ensure their needs are being met. Plus, the information we need in order to serve our clients is all in one place, and with ACES CONNECT, we can quickly and easily exchange that information with our clients.”
As the industry enters the second half of 2025, the message is clear: lenders must evolve their QC strategies to match the shifting risk landscape. It’s not enough to focus on yesterday’s top defect categories. Lenders must monitor real-time changes, evaluate findings across loan types and channels and align their QC programs accordingly. With ACES as a partner, lenders gain the visibility and tools to stay a step ahead in reducing risk, improving performance and protecting profitability in a volatile market.
Sharon Reichhardt is the executive vice president of operations at ACES Quality Management. With decades of industry experience, Sharon helps businesses strategically leverage quality control. Contact her at sreichhardt@acesquality.com.
(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.)
