What’s Your Defect Management Plan of Action?

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Over the past few years, lenders should have realized the importance of the quality of the loans they originate and why these need to be done in compliance with all the rules.

We’ve seen that lenders originating large volumes of poor quality loans are susceptible to huge fines, loan indemnifications, and repurchases. In some cases, such lenders have originated themselves right out of business.

Since the crash, much more emphasis has been placed on loan quality and compliance, with increased requirements for loan reviews and documentation. Lenders would be wise to take their loan audit functions seriously.

Although sometimes viewed as a non-income producing division, the QC operation can more than offset its cost when managed properly and if the results are used as the basis for action plans to mitigate future errors and losses.

You’re wasting your QC dollars if the results are identified and corrected on a per loan basis. If you have problems with one loan, there’s a strong possibility there are others in the pipeline with the same or similar problems.

Trend analysis will help make such a determination. Not just by loan type, but by loan channel, originator, processor and/or underwriter. You just never know where, or when, a problem may pop up. Better if you find it before someone else finds it.

Once defects are identified, you need to have a written action plan outlining exactly what will be done for correction, how and when it will get done, and by whom. Your system/process must also track the plan’s progress to ensure a timely and acceptable conclusion. Take the time; don’t do it half fast.

It all needs to be fully documented to evidence the defects identified and what the company did to correct them. You also need to ensure that the defects don’t happen again.

In some instances, you may need to pull other files from the category on which the defect was identified to perform follow-up discretionary reviews to determine if there are additional or similar defects lurking in the shadows on other loans.

It ain’t easy being compliant and unfortunately too many people are looking for shortcuts. They don’t exist, other than through technology to help you to audit, identify, track, and correct loan defects. There is no substitute for quality and for doing things right to ensure it.

There ain’t no getting around it, no matter what someone might tell you. Quality is downright important. A QC program without a documented, measurable action plan is a waste of money. A complete, compliant audit program, with a documented action plan for defect correction, is a money maker.

Keep the “Quality” in your QC process.

About the Author

Michael Vitali

Michael L. Vitali – Independent Consultant to the Mortgage Industry Mike Vitali is an independent consultant to the mortgage industry on matters concerning compliance and mortgage lending. He most recently served as the Senior Vice President and Chief Compliance Officer for LoanLogics, monitoring regulatory developments and their practical implications for the mortgage lending industry. His duties included research, interpretation, and analysis of existing and proposed legislation related to the industry in support of recommendations for policy and/or procedure changes to maintain continued quality and compliance with all applicable laws, rules and regulations, investor requirements, and standard mortgage practices. In his more than 40 years in the mortgage industry, in senior level management, he has gained experience in all areas of mortgage lending, risk management, and compliance. Mike is a past President of the MBA of Greater Philadelphia, is a charter member and was the second Chairman of the MBA of Pennsylvania, and a past board member and Legislative Chair of both associations. He is a recipient of the 1998 Mortgage Banker of the Year Award from the MBA of Greater Philadelphia, and the 2003 Chairman's Award from the MBA of PA, and currently serves on several compliance related task forces for MBA.