Cogent QC: Award-Winning Loan Quality Control & Compliance Software
Award-Winning Mortgage Quality Control and Compliance Software
Here’s a good description of the ‘lines of defense’ approach that many financial institutions are taking to quality control, operational risk management and compliance risk management. Without a framework like this, it becomes much more difficult to meet today’s enhanced regulatory scrutiny, increasingly complex regulatory requirements and rapid pace of regulatory change.
Several articles in the last week have provided useful insights into the mortgage industry’s new regulatory environment and its impact on lenders’ and servicers’ business models. In no particular order, we suggest the following:
“The rapid growth and increasing regulatory scrutiny of nonbank mortgage servicers could “severely” affect the whole industry, Mortgage Bankers Association Chairman-Elect Bill Cosgrove said. “…we are keeping a very close eye on ongoing regulatory activities aimed particularly at nonbank servicers,” Cosgrove said in prepared remarks. “Nonbank firms have become an increasing part of the servicing ecosystem, and it is clear that they have captured the attention of regulators and policymakers.”
“Lenders remain reluctant to outsource for control and liability reasons. But with volumes down and compliance expenditures up, more have, particularly among midsized firms with limited resources.”
“According to… panelists, the compliance burden and need to add additional controls and oversight tripled compliance expense over the last couple of years. At the same time, the revenue has been flat and in some cases we have even seen compression in the top line as the bid for MSRs increased.
“But there was general agreement that the current economic model is tough (to put it mildly) for a new servicer, and it might be impossible for a new mono-line single-focused platform in today’s environment.”
“We’ve gone from a default crisis to a compliance one.” How to cope:
This one is from September 2013 but gives a sense of who the new players in servicing are and why the traditional players are scaling back.
“Private-equity firms and hedge funds are increasing their control of the rights to collect America’s monthly mortgage payments, an almost $10 trillion market that banks are retreating from amid looming regulations.”
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 info@cogentqc.com. 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:
https://www.fanniemae.com/content/announcement/sel1305.pdf
https://www.fanniemae.com/content/tool/qc-defect-rate-tutorial.pdf
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.