Q/A with Jeffrey Hulett of KPMG

MBA NewsLink recently posed questions to Jeffrey Hulett, managing director with KPMG LLP in Tysons Corner, Va.   

Hulett helps lead KPMG’s Mortgage and Consumer Lending practice. His past experience includes managing banking industry risk management organizations. He recently authored a white paper on quality management in the mortgage industry. To view a copy of the white paper, A Fresh Perspective on Quality in the Mortgage Industry, click http://advisory.kpmg.us/content/dam/kpmg-advisory/PDFs/RiskConsulting/quality-industry-mortgage.pdf.    

MBA NEWSLINK: In your white paper, you focus on mortgage quality management. Why do you think quality has become more of a focus in the mortgage industry?  

JEFFREY HULETT: The mortgage business faces a multitude of regulations today, and mortgage lenders don’t want to run the risk of appearing in a negative headline or facing a steep fine. Yet, it’s not simply regulatory compliance that’s prompting the focus on quality today; most mortgage lenders are seeing that the piecemeal and reactive approach to quality management used in the past was inefficient, costly, and most of all, largely ineffective. As an industry, we are at the stage in the post-crisis world to turn some of our attention from remediation to creating well-governed quality management organizations.   

NEWSLINK: What impact did the crisis have on the way mortgage lenders approach quality management?  

HULETT: The financial crisis had a big impact on the way the mortgage industry approaches quality management. It created the impetus to dramatically change how the industry thinks about quality. Regulators and investors are now looking for banks and other lenders to have comprehensive and detailed quality programs in place. The Consumer Financial Protection Bureau and other regulators want mortgage lenders to not only make policy changes–such as implementing a new integrated disclosure–but to have an adaptable operation that enables changes at the highest quality level.  

Investors are equally focused on quality, though with different motivations.  The government-sponsored enterprises are moving toward requiring seller/ servicers to provide independent quality oversight. The GSE repurchase framework was overhauled over a year ago and it’s clear the agencies put a premium on “getting it right the first time.”  

In 2012, the National Mortgage Settlement (www.nationalmortgagesettlement.com) delivered a huge blow to top banks, which have spent billions of dollars to comply with the terms of the settlement. Yet it’s clear that certain mandates of the settlement are providing real value to these organizations. One example is the Internal Review Group model, which has been working well and will likely continue in some form well past the three-year settlement.   

NEWSLINK: How do you think the industry could improve the way it approaches quality?  

HULETT: While everyone agrees that quality is an overriding concern, the mortgage industry struggles with defining the quality management process. That lack of uniformity is a big part of the problem. Each mortgage company or bank division has a different quality process. In fact, differences can persist even at the division or department level within the same company. 

It would be a big step in the right direction if the industry could work together to come up with standard definitions related to quality management, and in general, implement more uniformity to the process across the industry. KPMG believes that from a scope standpoint, quality management should be a part of the organization’s generalized control infrastructure.   

NEWSLINK: Where does technology fit in?  

HULETT: While some progress has been made in recent years, there is significant room for improvement in the technology being used in overall mortgage quality programs today. We still see considerable manual processes in place, in large part due to the financial crisis and the subsequent increase in regulatory requirements and the emphasis on underwriting quality. The mortgage industry was forced to ramp up quality functions throughout the mortgage lifecycle and used quick fixes that were, more often than not, manual.  

Unfortunately, these manual processes create the potential for increased regulatory scrutiny and repurchase risk. A risk assessment environment enabled by data and analytical techniques can increase effectiveness and drive costs down. The techniques are not dissimilar from traditional credit risk management analytical techniques, but are utilized for identifying quality risk.  

As mortgage quality enters a more mature phase and the regulatory environment begins to stabilize, companies are adapting technology-driven strategies and solutions. Still, the benefits of technology in quality functions have not yet been fully realized.   

NEWSLINK: What about testing?  

HULETT: In some cases, we see too much testing being done. This can be caused by a lack of coordination between control organizations. It can also be caused by not fully using risk identification and data management techniques.

As far as the testing performed, we believe tests should be conducted daily, weekly, monthly, bi-annually or yearly, using test scripts, and any findings should be validated with the lines of business. Revisions to the frequency of tests will be driven by the periodic risk assessments where higher risk areas will be tested more frequently and in greater depth.  

Also, as issues are identified, the root cause of error needs to be determined and data should be analyzed so that all similar items can be examined. For example, if a particular lawyer, mortgage broker, real estate agent or appraiser shows a pattern of causing a loss or is involved with a questionable loan, all loans touched by that individual should be examined.  

NEWSLINK: What are some common mistakes you see mortgage lenders make when implementing their quality management plans?  

HULETT: At KPMG, we’ve observed that when a quality problem arises in the mortgage industry, the initial reaction is to throw scores of human resources into the process to make sure the issue is resolved. The first response is almost purely reactive. Yet in many cases, those reactive quality processes can persist for years.  

That initial reaction probably made sense at the time when quick decisions needed to be made. Rarely does an organization have time to thoroughly analyze the problem when in the midst of a crisis. But from a long term business process stand point, the “throw more bodies and resources at the problem” approach seldom makes sense. Organizations need to work from a framework that rationalizes, connects, and oversees the quality process. The better the quality process, the less likely it is that problems will occur, and if they do, they can be localized and managed quickly.   

NEWSLINK: What are some of the positive steps you see lenders making today in terms of quality management?   

HULETT: We see lenders finding more coordination between control organizations.  This is done carefully, as to not impinge on a control organizations governance needs.  The points of leverage not only have the potential for driving down loan costs, but also improving transparency and communication with all stakeholders. We see a more targeted use of technology, both on the workflow control operations side and on the analytical/risk identification side.   

We see a significant data focus. That is, careful management of the production systems data and metadata so it may be useful to analysis. We do see selective outsourcing. The outsourcing approach is careful in terms of managing third party risk. It is also selective in terms of focusing on partners that provide significant insight to drive quality as a strategic imperative, not just a check the box exercise.  

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)