This analysis evaluates in-house QC vs. outsourced QC options on several factors, including cost, control, flexibility, sampling, reporting, vendor management and incentive structures. Smaller companies often have no choice but to outsource QC reviews, given their lower volume levels. And larger lenders and servicers may outsource some reviews to accommodate volume spikes. But the best way to gain control over your QC process and to ensure its effectiveness is to do it in-house. In the long run, it is also the lowest cost option with the best return on investment.
| Issue | In-House | Outsourced | Assessment |
| Incentive structure | In-house QC staff have incentives to accurately report defects and to improve both efficiency and quality over time. | Outsourced firms are usually paid on a per-loan basis. They do not have an incentive to reduce sample sizes, reduce error rates or lower the cost of quality. | In-house QC incentives are generally in line with the company’s objectives of reducing cost-per-loan and improving quality over time. |
| Vendor Management | No vendor oversight required. | QC vendor management usually requires second reviews of vendor results and other oversight (e.g., Fannie Mae guidance) | Outsourcing adds complexity and vulnerability to QC, reducing control over the process. Issues commonly encountered include reliability, timeliness and responsiveness to changing requirements. |
| Incentive structure | An in-house staff usually has incentives to accurately report defects and to improve both efficiency and quality over time. | Outsourced firms are usually paid on a per-loan basis. They do not have an incentive to reduce sample sizes, reduce error rates and lower the cost of quality. | 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. |
| Costs (Fixed) | Higher fixed costs (including staffing, IT, office space.) | Lower fixed costs (including vendor management, second reviews.) | Outsourcing has lower upfront fixed costs. |
| Costs (Variable) | Minimal variable costs. Over time, gains in productivity lower variable costs per loan. | Variable costs per loan review are higher. Pricing is usually on a per-loan basis, with additional charges for extra services. | Variable costs are significantly higher for outsourced QC. The longer the time horizon and the higher the origination and servicing volume, the more expensive outsourcing becomes.. |
| Process Improvement Over Time | In-house QC processes improve over time as auditors become experienced and as reporting of defects, feedback and corrective actions becomes more efficient. | Outsourced vendors provide a standardized service and are not structured to improve best practices, efficiency, and quality. | In-house QC analysis is likely to become more refined and accurate over time. No such expectation exists for outsourcing. Especially as volumes increase, vendors get stretched, and reliability and timeliness issues emerge.. |
| Perception of Regulators, Investors and Rating Agencies | In-house QC 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 outsourcing firms produce standardized reports of detailed individual findings, but sophisticated reports or custom reports are often unavailable or cost extra. | Creating meaningful and actionable reports requires familiarity with a particular lender’s origination and servicing processes and an ability to flexibly deploy sophisticated 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 most familiar with the unique risks of a lender’s or servicer’s unique situation. Advantage: in-house. |
| Flexibility | Sampling strategies, risk focus, review scopes, and reporting packages can be tailored to your practices and needs, and quickly altered 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. |