With so much changing in the market, it’s no surprise that the risk of mortgage fraud has increased this year. HousingWire recently spoke to Donna Gibson, COO and president of QC Ally, about fraud prevention and loan quality outlook for the rest of 2022.
HousingWire: In this time of market change and as we head towards the last quarter of 2022, what are the hot topics in risk, fraud prevention and loan quality?
Donna Gibson: QC Ally just returned from the Mortgage Bankers Association Risk Management, QA, Fraud Prevention Forum. Industry experts from across the country met to discuss just this topic, and themes aligned with what we’re seeing at our organization.
On September 12, HousingWire reported on a CoreLogic mortgage fraud report, which said risk of income (27.3% increase) and property (22.6% increase) fraud rose in the second quarter of 2022. We weren’t surprised. These numbers correlate with what we’re monitoring in mortgage fraud.
We also are monitoring the reduction in the pool of potential mortgage borrowers and products available, such as the increase in use of adjustable rate mortgage (ARMs) and others. The housing industry is much more regulated in a post housing crisis era, and ARMs may not be utilized as they were pre-2008. However, every mortgage loan needs to fund, and the pool reduction could lead to rejected loans that would’ve been approved and funded previously.
There’s an opportunity here for risk and QC teams to encourage trust in the lending space through strong processes and review. Ensuring trust in lending opens doors for more creativity, such expansion of the credit box and additional products, ultimately increasing access to homeownership and therefore, expansion of the credit box. That could help increase the number of potential borrowers and more lending.
HW: Why should the C-Suite and leaders of lenders have additional emphasis on weaving in QC, risk and loan quality as part of their strategy and budgets?
DG: We’ve all been keeping up with the headlines. Leadership has had to make some tough decisions with the change in market. Their goal is to continue organization growth while keeping it healthy. This plays into risk reduction to ensure compliance and safety of their borrowers.
QC, risk and loan quality play an important role in helping leadership achieve growth goals by building trust into the system and leading to expansion of the credit box and creative products.
As we indicated, the industry has noticed that fraud is up in business overall given the shift in the market. We can expect GSEs and investors to be looking more closely at loans originated during this time-period.
Last but not least, we’re hearing about potential loan default and buybacks cascading.
We believe this is one of many reasons Fannie Mae is choosing now to roll out the QC Calibrations. With the rapidly changing environment, we recommend partnering with tech-enabled and trained experts that handle QC across many lenders as it means they understand and see the landscape to provide the best enterprise loan quality service.
Fannie Mae introduced the QC Calibrations in their Seller’s Guide on June 22, 2022. The new calibration will be a deep dive into a lender’s quality control process and results. The calibration aims to highlight the strengths, weaknesses, and accuracy of QC process.
Currently, Fannie Mae focused for example on net defect rates and if results were achieved with quality and accuracy. Beginning in the 4th Quarter of 2022, Fannie Mae will add a review of QC results and severity defect ratings.
At the MBA RMQA, Fannie Mae said the calibrations will be conducted on top 50 lenders annually and 51-100 roughly once every 3-5 years. They may also conduct a QC calibration if we have concerns with loan quality performance from a lender. We believe in enterprise loan quality, which includes the lender, technology, and a trained third-party, like QC Ally.
I’ve had conversations with our current client partners about how best to prepare, and while I recommend meeting with a tech-enabled vendor properly trained in loan quality for a thorough plan tied to the lender’s unique needs, there are overarching themes.
First, lenders should ensure they have a robust, compliant QC process from beginning to end.
Second, ensure you are validating your QC audit results whether the results come from an in- house QC team or from a third-party QC vendor.
Third, lenders should review the practices, process, accuracy, and staff and services location of their QC vendor. We recommend a combination of prefunding audits completed in-house with postfunding and servicing audits outsourced to a US-based QC vendor. Lenders should work with vendors with trained audit teams, proper check the checker audits, and accessibility, especially if the lender is chosen for a QC calibration.
Again, we recommend partnering with vendor that has tech-enabled experts and understands the entire lifecycle of the loan across many lenders.
HW: What challenges do lenders face in terms of loan quality and fraud prevention?
DG: In this environment, every lender is looking to reduce costs while generating revenue and managing risk.
We’ve had some strong refi years, but lenders are challenged in this change of cycle and into the purchase market. Lenders and QC departments face additional pressure to get loans to the closing table faster, and again, therefore we encourage a partnership of in-house prefunding with tech-abled services for flexibility and control towards the closing.
An effective QC team can build confidence through accuracy within the mortgage system. When we all trust the system and how it’s working, we can expand risk tolerance to open the credit box and more creative products to increase access to homeownership.
Lenders also continue to explore how to implement more technology and digital elements. A smart lender knows that tech is not a quick fix to cost reduction, but instead reviews processes to see how tech can enable efficiency and cost. In turn, QC teams know a partnership of tech-enabled services along with human expertise and assistance will yield the best results for their organization. Trained experts in this space know what to look for based on the rapidly changing regulatory and investor environment, and technology is a tool in their toolkit to support with efficiency and speed. Both work in concert with checks and balances to protect the lender and consumer.
We find the best solutions allow for in-house tech-enabled prefunding partnered with outsourced postfunding in order to balance efficiency with accuracy for the lifecycle of the loan.
HW: How does QC Ally help lenders maintain loan quality?
DG: We believe a change in the purchase market is an opportunity to look at internal processes, including risk, fraud and loan quality.
We focus on the power of partnership between a lender’s QC team and our 100% U.S.-based staff. We collaborate with our client partners to ensure timely responsiveness while administering the most accurate and high-quality tech-enabled audit services and results.
We monitor the changing regulatory environment and work with our client partners to ensure an understanding of the trends to identify new products and higher-risk types of loans that need to be selected for an audit.
Specifically, this fall and into the upcoming year, we’re working with our client partners now in preparation of a successful calibration with Fannie Mae. We are also using the change in the cycle to review their internal processes to identify opportunities for efficiency, risk reduction, and opportunities to build trust into their systems for the expansion of products and different offerings of loans. Our technology software provides a platform for our trained team members and client partners to communicate and review analysis and benchmarking.