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I had the pleasure of speaking on the 2022 panel discussion, “Improving QC Strategies in Today’s Volatile Lending Market” during the MBA’s Risk Management, QA, and Fraud Prevention (RMQA) last week.
My fellow panelists and I (Stephen W. Spies, CMB, Principal and Founder, at SWS Risk Advisors, Duane Gilkison, Senior Director, Credit Risk Management, for Fannie Mae, and moderator Brian Margulies, VP-Operations-Lending and Quality Control Services, from Indecomm Global Services) had an engaging hour-long discussion.
Together we covered how QC guidelines will serve as lenders’ best line of defense in maintaining high quality loan production, mitigating operational risks, and reducing unintended mistakes. As a recap for those in attendance and as “cliff notes” for those who missed it, below I share my responses to four key questions I addressed during the panel.
What are still the most compelling needs in the mortgage industry?
Even at a time like this, the fact remains that consumers need timely access to credit. Lenders need to reduce the cost of creating and assuring loan quality with the ability to scale accordingly when demand changes. Investors and regulators on the other hand want confidence in loan quality
All of these are highly interconnected in the mortgage loan process. Data services and documents are constantly being added throughout the manufacturing process, feeding downstream systems from the POS and LOS to servicing systems. The components of the loan file must be verified and validated, as the loan file is building, by a lender’s loan quality management processes. Any missing information or errors made early on affect processes downstream. To lessen this chance, the more we can automate processes and replace the human touch with a digital touch throughout the loan life cycle, the better.
What are the challenges that must be overcome to achieve business goals this year and beyond?
Perhaps one of the holy grails is normalizing data across all sources and building the loan file to the exact specifications of the GSEs and investors.
Next, all market participants want to capitalize on profits at the loan level and extract even more margin in bulk through whole loan and/or MSR sales. These profits however can only be maximized through the speed, transparency, and accuracy of the loan process. Time is money and errors erode profits.
Finally, to control for all this, quality needs to be analyzed and processes adjusted through action plans that show a continuous process improvement cycle.
How do you achieve margin certainty across the interconnected mortgage process?
It all starts with the data. However, it appears industry data could be better. Fannie Mae’s recent report on top purchase-related defects in 2022 indicated, missing documentation (debt documents specifically) defects were among the top ten findings through April. Furthermore, the same report found numerous income calculation and documentation omissions prevalent throughout the list.
Thankfully there’s a distinct path to better data. Highly automated, machine learning-trained document processing capabilities are critical to feeding the mortgage process with accurate, actionable data.
In production, it feeds critical mortgage processing systems. In-line during production, feeding critical origination tools and streamlining the risk review process.
In loan commerce, both whole loan acquisition for correspondent lenders and for MSR transfer and loan boarding, purified data facilitates transparency between counterparties.
Enabling loan quality management and compliance checks from TRID to HMDA to MERS shore up the entire process. With good data, lenders should make it best practice to add more surgical discretionary sampling and targeted reviews to sniff out emerging defect trends like the ones identified by Fannie Mae.
How should lenders evaluate technology and how effectively it might help them achieve their goals?
As mentioned, technology is the key to managing the loan file for accuracy and transparency, feeding all the critical downstream processes. There are areas where there has been aggressive progress (i.e. borrower experience, loan closing) but areas where vendor selection is limited and technology not as mature (i.e. processing, underwriting).
Overall, lenders need to understand their process, where the big gaps are, what the expenses are associated with each of these areas, and the cost of technology acquisition.
Exploring how a given vendor uses loan files and data to feed discrete sets of automated rules thatvary based on use case, can provide broader business benefits to market participants in loan origination and loan commerce. The right level of education & training with the ability to measure impact is important to ensure staff is effective in their use of technology. Defect reporting and subsequent action planning & tracking will ensure quality issues are surfaced and resolved in a timely manner.
I must say I was delighted to be among so many familiar faces at the 2022 RMQA conference this year, which was back live for the first time since 2019. The attendance in my session and the underwriting and QA track as a whole was reflective of the growing importance of using loan quality automation to face current 2022 headwinds. I invite you to reach out to LoanLogics to inquire how we can help you with improving loan quality through manufacture, sale, and servicing of loan assets. Additionally, Look out for an upcoming blog where I plan to share a few additional insights from the 2022 RMQA Session on “Improving QC Strategies in Today’s Volatile Lending Market” to further help others on their quality journey.
