In-House QC vs. Outsourced QC

This analysis evaluates in-house QC vs. outsourced QC options on several factors, such as fixed costs, variable costs, incentive structures, reporting, sampling, flexibility and so on.  While larger lenders and servicers may outsource some reviews to accommodate volume spikes and small companies may have no choice but to outsource QC reviews, it is clear that the best way to gain control over your QC process and to ensure its efficacy is to do it in-house.

 

Issue

In-House

Outsource

Assessment

Costs (Fixed) Higher fixed costs with an in-house QC department. Fixed cost for in-house administration and second reviews. Outsourcing may lower fixed costs.
Costs (Variable) Some variable cost (for overflow) during times of unusually high volume, otherwise, fixed costs cover everything. Pricing is typically on a per-loan basis.  Outsource costs may increase substantially when volumes increase. As origination and servicing volumes increase, in-house is likely to be less expensive. In-house departments can also improve productivity and efficiency, resulting in lower cost per loan over time.
Incentive structure An in-house staff has, or should have, incentives to accurately report defects and to improve both efficiency and quality over time. Outsource firms are usually paid on a per-loan basis, so they may not have much incentive to reduce sample sizes and error rates. In-house QC is superior.  Incentives are generally in line with the company’s objectives of reducing cost-per-loan and improving quality over time.
Meeting Regulatory Requirements Meets standard regulatory requirements. Meets standard regulatory requirements. Both approaches fulfill minimum requirements.
Process Improvement Over Time In-house QC processes improve over time as auditors become experienced and as reporting of defects, feedback and corrective actions become more efficient. The same outsource auditors may not work on your QC over time, which makes it difficult to improve practices and efficiency, not to mention quality. In-house analysis is likely to become more refined and accurate over time, whereas there is no such guarantee for outsourcing.  Some lenders re-review the results of outsourced audits, because they do not trust the results.
Perception of Regulators, Investors and Rating Agencies An in-house QC process is the mark of a company that is serious about improving loan quality and willing to invest in good business practices. Outsourcing may be the sign of a lender more concerned with reducing fixed costs than with long term quality improvement. In-house analysis is generally perceived as more effective, and can result in more favorable treatment.
Reporting A good in-house system will create meaningful, statistically valid reports.  In addition to standard reports, it will allow you to create custom reports of both detailed and summary results. Most outsource firms produce voluminous detailed reports of individual findings, but sophisticated reports and custom reports will either be unavailable or will cost extra. Creating meaningful reports requires familiarity with a particular lender’s origination and servicing processes and an ability to flexibly deploy sophisticated array of tools for analysis.
Sampling A good in-house system allows you to draw statistical, stratified, and targeted samples.  It ensures that your random reviews are minimized and your discretionary reviews are intelligently targeted, based on actual historical risk. Outsourcing firms typically over-sample for random reviews, resulting in higher costs and slower turnaround. Targeted samples may not reflect the lender’s actual current risk profile, since defect rates are not used to calculate sample sizes. Sampling strategy is a key component of quality control and is best done by those who are closest to and most familiar with the unique historical and ongoing risks of the processes being analyzed.  Advantage: in-house
Flexibility Sampling strategies, risk focus, and review scopes, and reporting packages can be tailored to your practices and needs, and quickly altered, as necessary, to meet changing business requirements. Flexibility in sampling, reporting and reviews is limited and not as timely.  Reviews are designed to meet general industry standards, rather than a particular lender or servicer’s current business risks. In-house analysis provides the possibility of a far more flexible review process as it places control of the process in the hands of QC managers rather than outsource consultants.