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.
Recent posts in Housing Wire’s REwired blog, from reporters attending the Mortgage Bankers Association 100th Annual Convention & Expo in Washington, D.C., discuss two vastly different forecasts of the impact the new qualified mortgage (QM) rules are likely to have on the mortgage market.
Kerri Ann Panchuk reports that CFPB Director Richard Cordray “cited data from Mark Zandi, chief economist for Moody’s Analytics, noting that 95% of the mortgages made today fall within the qualified mortgage standard.” Cordray also said that loans not covered by QM can still be generated as long as lenders use “sound underwriting standards and routinely perform well over time.”
On the other hand, Jacob Gaffney reports that Congressman Paul Ryan of Wisconsin claimed: “In my state, up to 75% of mortgages won’t qualify under QM. Community banks, they all think they’ll get sued.”
According to Gaffney: “Some felt Ryan’s estimation of 75% was way too high and placed for dramatic impact.”
Readers can decide for themselves which figure is more realistic.
Here’s a timely article (registration required) highlighting how the new regulatory environment for lenders is forcing a stark choice: either invest in technology to streamline and automate loan origination and servicing processes – or exit the business.
Some choice excerpts:
“Origination costs are expected to rise 11% this year from a year ago, to nearly $5,900 per loan, as lenders scramble to meet tough new requirements from the Consumer Financial Protection Bureau, the Federal Housing Administration and Fannie Mae and Freddie Mac that take effect in January.”
“Large banks can justify investments in technology and can hire more staff because they spread the costs across more loans. But small banks with fewer than 100 employees may only have a handful of employees doing the work, which means relying even more on technology…”
“…921 compliance changes [have been documented] from various agencies since the housing market crashed in 2008. Particularly challenging for small lenders are new requirements from Fannie and Freddie that require lenders to deliver loans with as few defects as possible.”
“The government-sponsored enterprises are now electronically validating 100% of the loans they purchase as part of a broader initiative to improve loan quality. The Federal Housing Administration has proposed similar changes and may set a maximum threshold for the percent of loans it will allow to have defects.”
“Survival is dependent on improving quality control standards otherwise [lenders] won’t be able to compete or to sell loans that the GSEs will be willing to buy,” says Craig Focardi, CEB TowerGroup’s senior research director.”
“Everybody is extremely nervous because if you don’t dot your i’s and cross your t’s in compliance, you’re going to get a lot of repurchases and will be out of business. Everything in a loan file has to follow the letter of the law.”
“Many lenders don’t want to invest in the labor and technology that it takes for [quality control] and compliance,” says [Annemaria Allen, president and CEO of The Compliance Group in Carlsbad, Calif.], noting that such requirements have never really been enforced to the degree that they are now. “You have to be able to slice the data and we know that business units are screaming about this. But if you’re going to sell to Fannie and Freddie and you do a [lousy] job…they will be in your house nonstop and make sure you have the processes in place and embrace quality.”
Forewarned is forearmed. It’s a very different industry now than it was in 2007.