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In an October blog post summarizing insights learned at the 2021 RMQA forum, we covered the latest industry defect trends. According to Freddie Mac, 4% of the QC reviews the performed in 2019 resulted in repurchase. That number grew to 6% in 2020 and through August of 2021 that number was already at 8%. They also reported that multiple deficiencies were found in each loan.
One tool lenders can use to head off some of this alarming trend is to amp up their discretionary review sample size to help assess inherent risks in their loan production and product mix. LoanLogics, in our own audit practice, saw many of our clients buckle down on their QC focus last year and in fact increase risk-based sampling to do just that.
New business sources and more complex products may require extra focus to ensure the controls and processes for these originations are working. For example, as the Non-QM market is expected to be hot in 2022, taking a proactive approach to analyzing loans to self-employed borrowers can ensure this complex, non-traditional underwrite is consistently checking all the right boxes to minimize risk.
Below are some additional examples of different ways lenders can tweak their sampling strategies to adjust their selections and size for elevated areas of risk.
- Loans reviewed by your outsourcing provider – by performing your own reviews of these files, lenders can see if the defects found by their third-party provider are consistent with their own findings
- Compliance reviews – because compliance is a number one priority and there is a lot riding on underwriting accuracy, a specialized compliance team can be leveraged to verify quality in discretionary reviews
- Loans originated or processed by new staff – In the last two years, the industry has hired a lot! This sample provides a good spot check of these new, less seasoned processors or underwriters.
- Loans with complex income calculations – income defects are certainly high on the list of reasons that loans result in a GSE repurchase request, therefore it is prudent to include in discretionary reviews that can identify defects prior to sale.
- Loan characteristics with pre and post close defect findings – the beauty of pre and post close audit findings is they can identify the sources and causes of defects, discretionary reviews targeting those loan characteristics can confirm the success of actions taken.
Automated QC platforms, like LoanHD®, make the loan selection process extremely flexible. Within the sampling module, users can either make their targeted stratifications against their required set of GSE loans or set up a separate pool of loans to test in discretionary reviews. Attributes are selected from easy to use drop down menu.
Once the reviews are complete, dynamic, real-time reporting can help discern trends, issues and understand the root cause. LoanHD reporting even allows you to combine both your required and discretionary results into a single report or keep them separate. For more detail on ways reporting can help you drill down on your data, check out this blog post.
