Why lenders need to revisit their quality control

Residential lending professionals today are being tasked to weather one storm after another. Between the complications brought on by the COVID-19 pandemic, the recent avalanche of volumes in this refinance market and changing leadership in the White House, lenders should anticipate an increased focus on compliance in 2021.

“One of the unique aspects of the mortgage industry is the cyclical nature of origination volumes and the ebb and flow of process improvements. Typically periods of high volume, such as today, are often followed by periods of relatively lower volumes. Lenders historically have taken advantage of these lulls to revisit quality and compliance along with making other substantive changes to improve the manufacturing process,” said Matt Merlone, Vice President of Procurement Market Intelligence and industry expert at DataVerify.

“The process improvement afforded by lessening origination volumes is felt across the entire mortgage ecosystem and oftentimes will manifest in terms of renewed focus on quality and compliance, and so I expect we’re going to see that coming about in 2021 and 2022.”

He added that the Biden administration and the acting director of the Consumer Financial Protection Bureau, Dave Uejio, have indicated plans for a renewed focus on servicing. It would stand to reason that originators will be paying close attention to ensure quality workmanship during loan production translates into a sound product further downstream.

At the beginning of 2020, industry reporting suggested that lenders were experiencing a decreased number of compliance and quality control issues. However, these problems have ramped up again, due in part to complications related to the pandemic which necessitated social distancing, virtual adoption, remote workforces and stay-at-home orders for many consumers.

According to ACES Quality Control Industry Trends reported for Q3 2020, the overall critical defect rate of 2.34% represents a marked increase from prior quarters and is the highest observed since ACES began publishing the QC Trends Report in 2016. While rates remained low, Q3 also brought newsworthy events that may have impacted performance. Income/Employment defect share fell – a positive sign – but manufacturing-related defects grew.

“The flexibility granted as a response to the pandemic, such as alternative verifications, may have the unintended consequence of increasing the likelihood of loan defects if the originating lender is not diligent,” Merlone said. “Many traditional routine verifications have become more risky, or even impeded, under the pandemic environment, and the concern becomes forestalling a rebound of defects in quality as the year continues.”

The inability to verify identity in person and other obstacles related to the pandemic have left lenders with an increased level of exposure to potential fraud in addition to compliance and quality control issues. Without the opportunity to meet with a consumer face to face ­– in a branch, for example – lenders lack the ability to compare information in their portfolios with information presented in person. Increasingly, lenders need to rely on credit reporting and risk mitigation tools from trusted partners.  

As lenders adjust to evolving risk perspectives and perhaps even enhanced compliance regulations, they need to be able to react in real time and make the necessary changes quickly. Leveraging technology can help.

For example, the ability to automate certain aspects of verification – such as insurance, employment and income – can help streamline a lender’s workflow and free up valuable time and resources for more difficult loans.

“That puts greater flexibility in the hands of the lender, because they have more time for the transactions that do require additional diligence,” Merlone said. “Using automated conditions to guide the review process allows the lender to make smarter decisions on where to best utilize their resources. Which is critically important right now, because we are all experiencing such high volumes.”

With so many lenders struggling to manage the volumes they are experiencing, the opportunity to improve their workflow and efficiency is something all lenders should be seeking out. These enhancements are what allow lenders to focus their time and resources on loans that have a greater likelihood to perform.

“It is reasonable to expect that lenders want to spend money on legitimate transactions that have a greater likelihood of closing and eventually become performing loans,” Merlone said. “The profit margin on loans could be thin, so the name of the game is, ‘How many loans can lenders get through the system with the least amount of cost and exposure to undue risk?’”

Crucially, technology that simplifies and streamlines the verification process also enables lenders to deliver a better borrower experience, helping them stay competitive. Consumer sentiment surveys suggest that the less complicated and time-consuming the process is, the happier the borrower will be.

“Borrower sentiment surveys suggest that consumers closely associate the amount of time and the various hoops and hurdles they may have to jump through or over, as to whether or not they had a favorable lending experience,” Merlone said. “Surprisingly it does not appear to be so much rate or product; it’s the ease in which they were able to do that transaction.”

As John Cabell, Director, Banking and Payments Intelligence at J.D.Power, has stated, “Lenders have not been able to keep up with the demand given their current staffing levels. Mortgage originators have been consistently transforming their businesses by adding self-service technology tools and reducing customer-facing staff, but when put to the test by an unexpected surge in refinancing volume, this approach fell short of customer expectations.”

All of these concerns are exactly what lenders need to bring to their vendors. They can’t rely on plug-and-play solutions anymore because the lending environment is changing at too fast of a pace. When choosing technology partners, lenders should look for partners that are aligned with their digital goals and that continue to invest in their tools long-term.

“Lenders and data providers need to start thinking of themselves as more ‘partners’ rather than merely as a vendor and buyer. We need to be challenging ourselves to look at our solutions critically and make them easier to use and configure for a specific lender,” Merlone said.

“We need to be constantly seeking out new data providers and solutions for our own tools so that we can remain on top of and ahead of shifts in the marketplace. Lenders can’t wait for their vendor to catch up to their needs. We need to be ahead of those needs and have solutions ready to go when a lender reaches the point when they need them.”

A recent report co-authored by Forbes Insights and Freddie Mac stated, “Consequently, all mortgage lenders need to move rapidly. Key steps needed include expanding their technology budgets, hiring new talent, forging closer partnerships with external providers or even embracing agile, lean and DevOps approaches.”

Switching vendors can be costly and time consuming. With so many lenders feeling buried under the current onslaught of loan volumes, it can feel intimidating and even prohibitive to contemplate switching key providers.

Instead of delaying needed upgrades, what lenders need to be doing is looking for solutions that can grow as they grow. The right “partnered” solution is able to loadshare the lender’s burden today, while maintaining that forward thinking which is critical as the industry evolves in both typical and atypical fashion.  

While lenders can benefit from leveraging technology to improve risk management and compliance, Merlone stressed that the human component will always be important in a “people business” like residential mortgage lending.  

There is a danger in these precarious times, especially during times of social distancing, to lose sight of the fact that we are in the business of working with partners, consumers, industry professionals and our co-workers. The ideal perspective is to balance the efficiency and automation of modern technology without losing the personal touch and attention most consumers demand. In an increasingly isolated world full of more and more non-human interaction, the lenders who can find that balance will likely be seen as standout performers.

According to a recent JD Power 2020 U.S. Primary Mortgage Origination Satisfaction Study, mortgage originators’ shortcomings in the areas of self-service tools for application and approvals, frequent communication and long loan processing times could negatively affect customer satisfaction over time.

“As we go through these periods where there are such high volumes and we’re trying to get as much done with as few touches as possible, what we need to keep in mind is that understanding borrowers and understanding digital engagement at the same time makes for a happy story,” Merlone said. “You can’t do one without the other.”


DataVerify offers tech tools that leverage automation to make transactions simpler for both the lender and borrower, improving the verification process for both.

The company’s DRIVE platform is a single-source application that automates the manual underwriting process, applying a rigorous loan review to help users avoid quality control issues and manage risk. The fully automated platform enables users to complete a comprehensive application analysis, including verification of borrower and participant identity, employment, income and other information.

DRIVE can be tailored to meet a lender’s specific risk conditions, as well as changing market requirements and regulations. The platform includes standard alerts for risk and fraud, but lenders can make changes to their alerts in real time to upregulate or downregulate conditions to fit their book of business as well.

For more information reach out to info@dataverify.com
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