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Sponsored Content


WHEN VOLUMES DECLINE, LOAN QUALITY MUST REIGN SUPREME

Jan 19, 2023 8:00 am By Sharon Reichhardt LoanSponsored Content

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While the new year is here, the effects and fears of 2022 have yet to run their
course. The Mortgage Bankers Association (MBA) reported that mortgage
applications recently hit their lowest rate since 1996, and Fannie Mae’s most
recent estimate shows that origination volume will decline to $1.7 trillion in
2023. As financial institutions weather this shift in the market, every loan
opportunity becomes more critical than the last.

Seasoned lenders are going “back to the basics,” focusing on relationship
building and outreach to generate business. The survival tactic lenders too
often miss is doubling down on loan quality to ensure immediate salability to
investors or long-term servicing performance. Findings from our Q2 2022 Mortgage
QC Trends Report show the overall critical defect rate increased 6% from the
previous quarter, despite a 13% decline in volume over the same period. Ensuring
loan integrity and quality will always be essential to lenders’ overall business
strategy. Lenders need a robust mortgage quality control (QC) audit and
reporting program to do so effectively.

The Consumer Financial Protection Bureau (CFPB) has been active and outspoken
over the last few years on its expectations and concerns on compliance issues
related to equity and fairness in the lending process, such as redlining,
appraisal bias and working with limited English proficiency borrowers, and other
regulatory bodies have followed suit. For example, the Federal Housing Finance
Agency (FHFA) announced the required use of its Supplemental Consumer
Information Form (taking effect March 1, 2023) and clarity around the Equal
Credit Opportunity Act (ECOA). 

Of course, regulators are not the only ones concerned with loan quality. Within
the last year, Fannie Mae updated its QC reporting guidelines, with additional
changes expected to come in 2023. As we get into 2023, it is safe to expect this
regulatory and investor focus to intensify, especially as volumes decline and
lenders seemingly have more time to devote to ensuring compliance and loan
quality. However, time does not always equal resources, and even in today’s
financially challenging market, lenders must make investments in quality control
and compliance a top priority.

Automation holds the key for lenders to stay informed of relevant regulatory and
investor changes and ensure those changes are reflected in their quality control
programs.

For example, ACES Quality Management was the first to incorporate Fannie Mae’s
updated guidelines into ACES Quality Management & Control software, as well as
through our free Compliance NewsHub, to ensure clients could audit to the latest
standards and guidelines.

“We’ve had great success with ACES. We successfully went through a Fannie Mae
MORA audit with it, which made everyone extremely happy, and it’s definitely
helped with outside audit requests,” said Lindsey Hendricks, quality control
manager at Bank of England Mortgage. “I would say it also gives certain agencies
a little more confidence in the work we’re producing because they know that ACES
has our back as far as keeping up with all the regulatory changes and
guidelines. We love ACES and are excited to continue expanding our use of the
platform.”

“Volume-wise, our reviewers went from struggling to complete one to two mortgage
reviews per day to easily completing three or four, and we’ve seen similar
results with our consumer lending reviews,” said Jenille Fairbanks, vice
president of lending compliance at Mountain America. “It also used to take
several hours to pull a report and get through the data. Now, once we have the
initial report built in ACES, we can simply run it rather than rebuilding it
every month, which is a huge time-saver.”

A robust QC system also enables lenders to do more with less, which is crucial
in an environment where labor resources may be constrained due to layoffs or
other financial challenges. Furthermore, establishing a more automated QC
process helps lenders keep quality at the forefront regardless of market
conditions, thus helping to ensure loan salability and/or long-term servicing
performance during peak volume and decline.

“Moving to a more robust software system boosted productivity. We were able to
get more audits out per auditor, with the ability to focus on specific questions
and get more discretionary type audits fulfilled,” continued Hendricks. “We’ve
been able to add more defined audits and discretionary targeting beyond just the
random 10% pre-funding, so we have a lot more variety. We’ve also started to add
other types of audits, such as early payment defaults, which have been helpful.
ACES makes it easy to change an audit quickly to address a certain need if we
see something arise.”

“The biggest benefit we have with ACES is we’re able to spend half of what we
were spending with our previous vendor and doubled our audit workload at the
same time,” said Wesley Klepfer, compliance program director at Celink. “With
ACES, we have three people working full-time on audits and programmatic testing
as well as access to better resources.”

As volumes continue to stagnate and recession fears loom, lenders must protect
the integrity of the loans that are making their way through their pipelines. By
taking the time now to reduce operational deficiencies and risk and improve
fraud prevention through an automated QC program, lenders can not only optimize
the profitability of their current loan production but also position themselves
for success when the current bust cycle inevitably makes way for the next boom.
While any technology purchase seems questionable given current market
conditions, investing in QC automation multiplies the impact of loan quality
efforts, thereby extending the value of the investment. 

Sharon Reichhardt is executive vice president of operations at ACES Quality
Management, and Reichhardt brings over three decades of industry experience to
ACES. Reach her at sreichhardt@acesquality.com. 






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