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   ARTICLE   |   From Scotsman Guide Residential Edition   |   March 2013

Will Your Loans Stand Up to Scrutiny?

As GSE guidelines become stricter, quality-control technology can help your deals pass the test

Will Your Loans Stand Up to Scrutiny?

Throughout the past few years, the mortgage industry has placed a greater emphasis on loan quality. Not long ago, origination volume was the leading concern on the minds of many mortgage brokers and bankers. Today, however, regulatory scrutiny is top-of-mind for many mortgage professionals.

Ensuring success in the wake of compliance obligations simply isn’t possible without a strong commitment to originating superior loans. Doing that requires a greater commitment to a fundamental aspect of running any business: quality control. Like so many aspects of running a successful business, however, optimizing your company’s quality-control systems and procedures can be a tall task. When faced with scrutiny from government-sponsored enterprises (GSEs) and other governmental bodies, what do you need to do to ensure that your loans make the grade?

For most mortgage banks and brokerages, the drive to improve loan quality comes from the knowledge that improving processes is necessary to meet both new and updated regulatory requirements. This past September, for instance, the Federal Housing Finance Agency (FHFA) announced Fannie Mae and Freddie Mac’s new representation and warranty framework for conventional loans sold or delivered on or after this past Jan. 1.

This framework directs the GSEs to conduct quality-control reviews much earlier in the process than previously required — generally between 30 days and 120 days after a loan is purchased. In addition, it calls for originators to provide borrowers with a greater sense of transparency throughout the process, although the GSEs themselves also are responsible for making tools available to lenders that help them improve loan quality.

The FHFA’s release of this framework follows Fannie Mae’s own Loan Quality Initiative (LQI), which was published in 2010. The LQI was designed to limit poorly underwritten loans and require lenders to re-verify credit profiles before closing to identify possible changes. For instance, in cases when a borrower becomes unemployed following the initial application, this status wasn’t accounted for prior to the LQI requirement, and because of this, loans could be closed using dated, incorrect information. Not surprisingly, a job loss often drastically hinders an individual’s ability to pay, which in turn significantly affects the quality of the loan. 

Additional initiatives

These aren’t the only ways in which the GSEs are placing a greater focus on loan quality — and with that focus, asking mortgage banks and brokerages to do the same.

In 2012, for example, Freddie Mac issued a list of quality-control best practices for mortgage lenders to help them monitor and assess the reliability of their origination processes and to provide feedback about their loan originations. Freddie also now requires mortgage companies to meet the outlined quality-control guidelines as a condition to sell loans to the GSE. This guidance includes tips for pre- and post-closing quality-control reviews, and advises organizations to dedicate a specific employee to quality-control efforts. It also includes instructions for reporting and properly responding to the program’s feedback. 

Although Freddie Mac’s quality-control guidelines focus on establishing an in-house program, the guidelines do mention the role of third-party assistance, as well. The GSE indicates that it’s likely beneficial or even desirable for an originator to leverage an outside organization to implement a quality-control program successfully. In that case, however, the third-party service provider also must comply with Freddie’s standards.

Embracing change

Regardless of the specific guidelines or GSEs that are requiring quality-control measures, it’s safe to say that embracing these practices has become a top priority for many mortgage brokers and originators. And, as more mortgage professionals intensify their focus on loan quality, more organizations are embracing technology as a means to implement strong, cost-effective programs.

More specifically, many banks and brokerages are looking for systems that will give them access to loan-origination status and a comprehensive view of the entire loan process from the point of origination to the closing table. These companies are leveraging technology to capture customer information, as well as help themselves determine what documentation and steps are necessary while simultaneously creating an easy-to-follow audit trail.

"In the past few years, various pieces of legislation have required many originators to make dramatic internal transformations."

In light of the sheer number of regulations present in the industry today, many mortgage organizations have concluded that reliance on technology is a virtual necessity. That’s certainly not surprising, considering the fact that the Dodd-Frank Wall Street Reform and Consumer Protection Act features more than 100 statutes. And that number doesn’t include any additional rules and regulations deemed necessary by the various federal agencies. Further, in accordance with the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) obligates lenders to make the loan process easier to understand for borrowers. In short, in the past few years, various pieces of legislation have required many originators to make dramatic internal transformations.

Technology can allow you to complete these mandated adjustments without hindering your daily processes or core objectives. Automation doesn’t just assist one specific area — its value is multifaceted. Systems that establish a consistent workflow and provide transparency to all involved parties can enable mortgage companies to stay on track with their day-to-day operations and master their compliance and quality-control requirements at the same time. 

Although ensuring a high degree of transparency and communication can be difficult, technology can help facilitate this goal for mortgage professionals. For instance, using a system to automatically track relevant data, documents and communications for all parties to view can allow progressive banks and brokerages to deliver transparency and ensure their compliance with the quality-control measures required of them.

Commitment

All of this raises an important question: What does quality control entail, and how does technology contribute to ensuring that it takes place on a consistent basis? Mortgage brokers and bankers should understand that true quality control doesn’t just occur in the initial stages of a loan, and similarly, it’s not simply a final review before funding. Instead, quality-control tactics and procedures must be integrated into every step of the loan process. 

Technology now provides originators with the ability to evaluate every part of this process, from how many days or hours a certain task requires, to reviewing documents or validating credit information. Relying on technology to measure the quality of each step is a wise use of a company’s limited resources and personnel.

True quality control cannot occur if its endeavors cease after the assessment of procedures. A quality-control program must help mortgage companies extend their initial efforts and use the information garnered to make vital adjustments. In doing so, this will allow a company’s quality-control program to come full circle and have the most significant effects on business by tracking all activities, as well as automating and archiving all documents and communication for a detailed audit trail.

With the right programs and procedures in place, organizations can have all the necessary details at their fingertips to carry out their initiatives. Executives then can have ongoing insight about the program modifications and procedural changes that are necessary to improve their companies’ overall processes.

• • •

A comprehensive quality-control program — one that includes careful evaluation followed by deliberate, essential changes — is undeniably necessary for mortgage organizations to develop and sustain. To comply with the various guidelines set forth by the FHFA, the GSEs and the CFPB, originators must look to technology that enables them to run a customized quality-control program without having to invest additional time and resources that take away from core business objectives.

As the housing market moves toward sustained stability, the mortgage industry has seen the GSEs demonstrate a sharper focus on quality control and responsible lending. As responsibilities and legislation surrounding lending become more intricate, originators must embrace technology as a method of implementing truly successful quality-control programs. Although quality control is a complex objective with many facets, the right systems and technology can help you fulfill this task — no matter how daunting it may seem.


 


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