The latest mortgage QC industry trends report by Aces risk management has pointed to a disturbing trend that should serve as an awakening call for mortgage lenders. It says, that in the 2nd quarter of 2018, the critical defects attributed to mortgage borrower eligibility increased by a whopping 70%. And the reasons for this rise are primarily because of eligibility and underwriting issues.
The report identifies defects across 3 major categories:
employment/income; documentation; and assets.
And the primary reason for defects in loan package documentation, as per the report, was understaffing.
What is Critical Defect in Mortgage Processing?
If a defect is big enough to render a loan ineligible for sale or an insurance then it is called a critical defect. It is calculated in terms of the percentage of loans reviewed for which at least one crippling defect was identified during the mortgage post-closing QC review.
How to Take Care of Critical defects
The secret to managing critical defects lies in having an effective monitoring and acting structure. By establishing such a structure you can:
- Find defect rates and trends
- Identify ways to address the trends
- Set up metrics to ensure they don’t recur
Ideally, a monitoring and acting structure can be leveraged to come up with a temporary fix that can be shaped into a permanent one. It usually consist of:
- Updated process
However, in the transition from a temporary to permanent fix, it’s very important to leverage the QC review option, in order to validate the proposed remedy. If defects stem mostly during the post-closing stages, a random QC of post closed files or QC based on discretionary selections or a combination of the two will help shape the most ideal solution to curtail critical defects.
How We Assisted a Credit Union in Improving Critical Defects During the Post-Closing Quality Reviews?
One of our clients was facing a tough time with compressed business margins at the turn of each quarter. To stay afloat, they adopted a two-pronged strategy, without quite taking into account the possible fallout and ways to deal with it. The strategy comprised downsizing the team to save on expenses, and expanding eligibility guidelines to make up for the declining volume. This led to submission of loans with major defects.
It didn’t take us much time to identify that reliance on a less qualified work force was leading to more number of errors. Also, the lack of an action plan to monitor the increase in defects was making the going all the more difficult. To help the client overcome these shortcomings, we came up with a detailed back office support plan to review the closed files. Our plan comprised:
- Reviewing 20% of residential mortgage loans closed for the first 3 months, followed by a minimum of 10% review.
- The selected loans to be reviewed represented the complete scope of the client’s business and took all loan types into account. Selection were made no later than the month following closing.
- We asked for the list of loans closed in the month to be sent to us no later than five days past the end of the month. We will notified the client on the selections made, and the client sent us the files for re-verification and re-underwriting.
- All reviews were completed and reported within 60 days of the selection.
- The scope of our service included a summary report (a compilation of the individual loans reviewed with risk ratings for compliance, credit and issues other) and an individual loan report (detailed statements on each loan reviewed and loan level detail)
Our well defined process helped the client to reverify identity, income, credit history and employment information of the borrower through online sources. All deficiencies were reported in writing, along with recommended corrective actions. The overall impact of our services was a reduction in loan closing defects by 95% and a drastic turn around in profit margins.