If your town cut back on the number of police officers who patrol your streets, would people suddenly start speeding and ignoring the traffic laws? Probably some people would, but most prudent citizens would continue to obey the rules, whether or not someone was watching. Why? Because it’s the safe thing to do. Maybe avoiding a ticket isn’t the primary reason for driving carefully, but avoiding an accident surely is.
The same goes for financial regulations. There’s been a lot of talk in Washington lately about rolling back, if not eliminating, many parts of the Dodd-Frank law, particularly those that involve mortgage lending. While many of those proposals are welcome, especially if they mean modifying regulations that have stifled or limited consumers’ ability to borrow, originators still need to keep their eyes squarely on producing quality loans.
If we’ve learned nothing else since the financial crisis, we’ve learned that producing error-free loans is the key to creating – and keeping – satisfied customers and clients, be they borrowers, Realtors, builders or investors. And that, after all, is what drives business growth and profitability. The huge investments many lenders have made in technology and automation to make their loans compliant will hold them in good stead going forward, even in a more relaxed and more reasonable regulatory environment.
The fact is that loan compliance is here to stay, and not simply to avoid a visit and a monetary penalty from the Consumer Financial Protection Bureau. It’s the right thing to do, and it just makes good business sense. Your customers and clients expect it of you and will walk away in a heartbeat if you don’t deliver. We’ve seen lenders who originated large volumes of poor quality loans pay the price with loan repurchases, investor reluctance to buy their loans and damage to their reputations. In the worst cases, some lenders originated themselves right out of business.
Moreover, an effective quality control function improves productivity through better loan processing, leading to faster closing turn times, fewer loan delivery suspensions, quicker loan funding and reduced requests for loan repurchases and indemnifications. All of that results in better customer service and bigger profits. Lenders would be wise, then, to continue to take their loan audit functions and the benefits they produce seriously.
While most lenders probably know all this, they don’t all agree on the best way to get there. Some still try to identify and correct defects manually on a loan-by-loan basis. Not only is that simply not efficient, but if there are problems with one loan, there’s a strong likelihood there are others in the pipeline with the same or similar problems.
Technology can provide a cost-effective way to automate the process and help you audit, identify, track and correct loan defects across your pipeline.
Technology can also produce trend analysis to spot problems not just by loan type and marketing channel – retail, direct, broker or correspondent – but also by the individual originator, processor and/or underwriter who handled the loan. Problems can pop up anywhere along the line. Better that you find them before they leave your control.
Once you identify the defects and where they are coming from, have a written action plan outlining exactly what you will do - how, when and by whom - to correct the defects. A QC program without a documented, measurable action plan is a waste of money. Your system/process must track the plan’s progress to ensure a timely and acceptable resolution. But make your deadlines reasonable – don’t rush the process, otherwise you may find yourself starting back at square one.
You also need to fully document your QC process: how defects will be identified and what you will do to correct them. This is both for regulatory and legal purposes, but perhaps more importantly to ensure these errors don’t happen again. Having a schematic showing how you detected and dealt with defects will enable you to perform follow-up discretionary reviews on your portfolio to determine if that defect, or something similar, is lurking in the shadows on other loans. And even if CFPB regulation is reduced or eliminated, there will always be oversight of some sort, either from private investors, HUD or the GSEs. Documenting the QC process and having a solid plan in place, aided by technology, will greatly improve audit results when they happen.
If your mortgage lending operation is going to prosper, having a quality control culture at its core is critical – regardless of whether it’s “required” or not. After all, even if the police force has been trimmed, you still want to avoid accidents.