The impact of technology on mortgage quality control (QC) is undeniable, and investors are taking note. With Fannie Mae embracing technology as part of its Day 1 Certainty initiative and Freddie Mac adding new capabilities in a similar vein to its Loan Advisor Suite, the two largest mortgage investors have signaled to the industry their belief in the power of technology to improve loan quality, and where Fannie and Freddie go, the rest of the industry will soon follow.
The technology being embraced by the government-sponsored enterprises (GSEs) has focused on select elements of a loan, such as appraisals and the automated verification of income, assets and employment, leaving ample opportunity for defects to occur in other areas. Thus, lenders must still keep their eyes squarely focused on quality to remain in good favor with the GSEs and other investors.
Given the GSEs’ wholehearted acceptance of technology, the wise mortgage lender would look to incorporate technology into its QC process. Not only does this align a lender with the GSEs’ vision, but it also unequivocally demonstrates a commitment to loan quality from the top down, which can go a long way in inspiring investor confidence.
Unfortunately, there are still far too many mortgage QC departments using spreadsheets to track loan defects. Although spreadsheets are a useful tool for general database management, they fall short in managing mortgage QC data because spreadsheets fail to create a unified system of record.
QC isn’t something that just happens once or in one specific area of a lending organization. Most, if not all, lenders are conducting both pre-funding and post-closing QC, and many lenders are also shrewdly deploying QC in additional departments, such as servicing. With multiple departments and multiple auditors conducting QC reviews, it can be next to impossible to create a cohesive, enterprise-wide view of loan quality using the spreadsheet method.
Furthermore, using spreadsheets for QC simply sends the wrong message to investors. It’s not uncommon for the GSEs or other investors to inquire about a lender’s QC procedures and request copies of a lender’s previous QC reviews to gain an understanding of the overall level of loan production quality. In addition, it is certainly standard operating procedure for lenders to supply current QC reports to investors once a relationship has been established.
When compared with the advanced QC technology at the industry’s fingertips today, spreadsheets can seem a bit antiquated. Although loan quality is always going to be paramount when an investor is evaluating a potential lender partner, that lender’s QC methodology is going to be of interest, as well, and investors can’t help but be impressed by a more sophisticated platform designed specifically for mortgage QC.
The bottom line is investment in QC technology says a lot about a company’s commitment to loan quality. Most lenders have made some investment in technology on the front end of the process, whether it’s a point-of-sale solution, a loan origination system or some other origination-focused tool, because they have recognized the ability for technology to deliver much-needed efficiency and enhance the quality of processes being automated.
However, for a lot of lenders, technology investment stops at the closing process, forcing back-end departments like QC to resort to work-around solutions (i.e., spreadsheets). Efficiency and process optimization are equally as important to the evaluation of loan production as they are to the production process itself, and investment in QC technology is a commitment from management to keep the back end of the business equally as technologically driven as the front end.
A lender’s commitment to QC is really a commitment to its investor to limit that investor’s exposure on the loans the lender is packaging and selling to them so that the investor can be confident in the loans it’s purchasing. When investors are confident in a lender’s production, they’ll purchase more loans. Quality breeds success. Therefore, investment in QC technology also conveys to investors that an organization believes so deeply in delivering a quality loan product that it has committed significant resources to ensuring that outcome.
What a QC audit platform really provides is total defect management across the organization, not just simply pre-funding and post-closing QC, by serving as a single system of record for all of a lender’s QC findings. When QC findings are centralized, it makes it easy for lenders to uncover root causes of defects, address those causes through corrective actions and then track the effectiveness of those actions to ensure the issue has been totally resolved – all of which improves the quality of loans being sold to investors.
Because of the labor involved with tracking defects via spreadsheets, most defects aren’t even reported until the end-of-month QC report, which means there is at least a 30-day lag time between when a defect is discovered and when it is addressed. This creates a long tail effect, wherein defects continue to occur even after they have been identified because the current process doesn’t allow for immediate notification and action.
In contrast, a QC audit platform makes it easy to deliver real-time notifications on loan defects so that issues can be addressed immediately. This capability is especially powerful in the pre-funding QC process because it enables lenders to catch what might be systemic defects before loans reach investors.
A truly robust QC audit system will allow lenders to aggregate their QC findings from any source, whether it’s a GSE/investor report, findings from a third-party vendor or the result of internal auditing, and deliver a cohesive report that provides an enterprise-wide overview of loan quality broken down across multiple categories, including investor, loan type, etc.
The importance of reporting cannot be stressed enough. Not only do investors want to see comprehensive QC reports, but they also expect those reports to be simple in their design aesthetic so that they are straightforward and readable while also being highly detailed.
Being able to present QC findings in an easy-to-read, highly visual format ensures that the quality of the reports matches the quality of the loans, and as most QC audit systems include report-building functionality, QC staff no longer have to rebuild and manage reports each month, which delivers significant efficiencies to a department that is often short on time and resources. In addition, having detailed information readily available prepares lenders to immediately respond to investor questions or concerns, thus reaffirming the investor’s confidence in the lender.
Ultimately, improvements to a lender’s QC process translate directly into greater secondary market success for that lender, and the use of technology unequivocally improves the QC process by allowing lenders to address loan defects in real time and track the success of corrective actions.
At the end of the day, what investors want to see when they conduct a QC review on their lenders is an organization that is knowledgeable about the loan origination process and that is committed to loan quality by tracking, reporting and addressing loan defects. Results certainly count for a lot, but perception also plays a role. When investors see that a lender has invested in the tools and technology to optimize its loan quality, that increases their confidence level in that lender significantly.
Investor confidence is the currency on which the mortgage industry operates. If investors have placed their confidence in technology, shouldn’t lenders do the same?
Teri Sundh is CEO of Salt Lake City-based TRK Connection, a provider of mortgage quality control and origination management solutions. She can be reached at firstname.lastname@example.org.