Secondary Marketing Executive magazine has just published in its February issue an article penned by Cogent SVP Kaan Etem on “Quality Control and the Bottom Line.” The article summarizes much of Cogent’s thinking about efficient and effective quality control, its potential impact on the bottom line, and related commentary on some of the new rules being introduced by Fannie, Freddie, and HUD. We hope it’s useful. Let us know what you think.
The new mortgage servicing rules that the CFPB finalized in January 2013 became effective January 10, 2014, affecting the Truth in Lending Act (TILA) under Regulation Z and the Real Estate Settlement Procedures Act (RESPA) under Regulation X.
The amendments are intended to provide borrowers with detailed information regarding their loans, ensure that mortgage servicers do not unexpectedly assess borrowers with charges and fees, and ensure that borrowers are informed of alternatives to avoid foreclosure. The final rules should also provide borrowers with more timely and accurate responses to their complaints by requiring servicers to follow certain error resolution procedures.
As a servicing QC and compliance professional, you have already been preparing for the additional information and data tracking requirements, as well as the process changes. With luck, your auditors are trained and ready. And your software has been updated and tested to reflect the changes.
If you’re a Cogent client, this means you have updated your audit questions and implemented the appropriate question trigger rules. Maybe you’ve introduced additional findings options and workflow updates and configuration tweaks. Alternatively, you may be puzzling through how to put the pieces together most efficiently. If so, let us know at firstname.lastname@example.org. We are here to help.
Fannie Mae announced new quality control guidelines on July 30, 2013 that include a requirement for lenders to track defect rates:
Do you know your defect rates? If not, you will have to implement a process to track them in order to sell to Fannie Mae after January 1, 2014.
Surprisingly, Fannie’s new guidelines say that lenders should report both a “gross” defect rate and a “net” defect rate, (meaning “net” of defective loans that can be fixed.) Really? Loans that can be fixed after closing still cost the lender substantially more than loans done right the first time. And what about all the similarly defective loans in the population that weren’t sampled? Consider that an error that can be fixed 30-60 days after close may not be so fixable if the loan goes delinquent 10 months after close and is now a repurchase candidate. This means you can’t reliably extrapolate from a “net” sample defect rate to “net” population defect rate (interval).
Fannie’s new guidelines also say that lenders should track defect rates by severity, such as “moderate defects” vs. “significant defects”. This confuses ‘defects’, which are loan-level ratings, with ‘errors’, which are audit question-level ratings. This is more than just semantics. The final rating on a loan review should be a binary one: acceptable or defective. This is a requirement if statistical sampling is to be used.
Cogent has long asserted that the focus in QC reporting should be on the gross defect rate; this is the rate used to calculate sample sizes in our applications. Ultimately, the objective of quality control is not to fix defective loans in your samples, but to understand where the defects are coming from and fix the process.
Cogent clients are able to track gross defect rates with the standard functionality built into both the ProductionQC and ServicingQC applications. In Cogent’s applications, at the conclusion of each loan review, the QC auditor must assign an overall QC Decision. The descriptions of the available QC Decisions are controlled by the System Administrator, but each will result in a Final Decision of either Acceptable or Defective, as shown in the screen shot.
Assigning this Final Decision enables users to generate the Cogent Management Reports, which show gross defect rate trends and comparisons, and also to calculate and select properly-sized statistical samples based on the recent 3-period average defect rate for each sample type.
Cogent QC Systems ship with numerous standard reports, organized by category. Loan Status reports help managers to track the progress of audit activities; Audit Findings reports show audit findings from various perspectives, from granular detail to summary overview, but always for a particular period; and Feedback and Letter reports are designed to track specific audit activities.
In contrast, most Management reports show quality trends across multiple periods for specific sample groups (such as the Statistical Sample or the Stratified Sample, each of which have specific definitions in Cogent.) In addition, and perhaps most importantly, Cogent’s Quality Trend reports show quality levels for particular sample periods and specify the precision with which these may be inferred to the population.
It’s one thing to report the audit results of a selection of loans sampled from a population of loans (“we found 2 defective loans out of the 30 we audited, for a defect rate of 6.7%”); it’s another thing to make inferences, based on the results of the sample, to the population as a whole (“we are 95% confident that the population from which we sampled has a defect rate of 6.7%, plus or minus 2%.) In order to make valid statements like this, sampling and auditing and reporting must be controlled to eliminate bias and maintain statistical integrity. Cogent QC Systems do this for you automatically (while providing leeway to separately do non-random, non-statistical sampling.) The results are presented in Cogent Quality Trend Reports.
Since most clients do not live the dream of statistical analysis on a daily basis, like we do at Cogent, it’s possible that statistical terminology is not top of mind. So we have created this infographic to help with the interpretation of Cogent’s Quality Trend Reports (click on the image for a larger version). Please pass the link around among users of Cogent in your organization. We welcome insights and feedback at email@example.com.
In the most recent issue of American Banker, the CEO of Cape Cod Savings had this to say about the burden of regulatory compliance:
“…Because of HMDA and RESPA, we have checkers who check the checkers. Then we actually have another third layer of checkers who check the checkers who check the checkers. Then we have two outside consulting firms that check again.”
Sound familiar? All too familiar for some Cogent clients, who have multiple layers of QC and compliance operations – often at the corporate level, at the business unit level, and on an outsourced basis. And they invest so much in quality control and compliance because the alternative is painful. To cite just one instance, the Mortgage Bankers Association (MBA) sent this around last week:
“CFPB Assesses Civil Money Penalties For HDMA Data Errors
The CFPB has announced that it assessed civil money penalties against Mortgage Master, Inc., a non-bank, and Washington Federal, a bank, after examinations identified significant data errors in mortgage loans reported pursuant to the Home Mortgage Disclosure Act (HMDA). CFPB followed the announcement with a bulletin outlining the elements of an effective HMDA compliance management system and the resubmission thresholds, as well as other factors that the Bureau uses to determine if they will pursue a public HMDA enforcement action and associated civil penalties.”
Among other things, that bulletin states that “effective HMDA compliance management systems frequently include … comprehensive and regular internal, pre-submission HMDA audits.”
Aside from under-scoring the sheer scope of today’s regulatory compliance requirements, this reality also highlights the need for efficiency in performing secondary and tertiary audit reviews. This is why Cogent has been introducing more extensive secondary audit review options. The latest Supervisor Override functionality was covered in our recent ‘Version 4 Overview’ webinar (clients may contact firstname.lastname@example.org for a link to the recording.) With that, the possibilities now include:
- Revert a completed loan audit and make changes to the original loan audit.
- Use Supervisor Review to conduct a parallel supervisor audit, while preserving the original auditor’s work as the official audit of record.
- Use Supervisor Override to override individual findings, thereby modifying the official audit of record but preserving a record of the original auditor’s findings.
These different approaches can be combined with appropriate pending and completion of loan reviews to tailor different secondary reviews to different situations. When all eyes are on you, it’s always good to have options.