What is the best Loan Quality Control System for your organization? This Buyer’s Guide helps you evaluate mortgage or consumer loan quality control systems and decide which solution will help you implement effective and long-lasting quality control and compliance processes in your organization.
The position of Cogent QC Systems is that mortgage quality control and compliance auditing are not simply cost centers. Instead, they provide an opportunity for profit enhancement and competitive advantage.
As you consider which solution is best for you, ask some fundamental questions: Why are you looking for a quality control solution? What is the purpose of quality control in your organization? Is it to satisfy regulatory requirements? Or is it to improve quality over time? Who will use the system? What are your constraints – money, personnel, time? How ironclad are those constraints? In addition, consider the following.
Outsource QC or Do It In-House?
The accompanying table evaluates the in-house vs. outsource options based on several factors, such as fixed costs, variable costs, incentive structures, reporting, sampling, and flexibility. There are a variety of options in each camp, as well as hybrid solutions that try to let you do both.
Realistically, smaller lenders may not be in a position to set up an in-house quality control operation. They often no choice but to outsource QC reviews. But most established lenders ultimately realize that the only way to gain control over your QC process and to ensure its efficacy is to do it in-house.
Build or Buy?
If you have made the decision to do quality control and compliance audits in-house, the next question becomes whether to buy a system from a vendor or to build a system in-house using your own Information Technology department (“IT”) resources. This Build vs. Buy question has been around as long as IT has, but as technology has become more complex, there has been a trend (in the corporate sector, in government, and in the education sector) toward outsourcing everything beyond an organization’s core competencies. Nowadays, in an era of stretched and understaffed IT resources, most organizations would avoid trying to build a complex and robust system of their own. But it is worth highlighting some of the issues:
- When building an in-house system, subject matter experts from QC and IT must work closely together over a period of months to spec out and build a system. So QC staff and IT staff must dedicate time for this.
- If you want to benefit from statistical sampling, you’ll need a statistician to develop your sampling algorithms. He or she will have to work closely with QC/IT to incorporate these algorithms effectively into the workflow of the system.
- Once in place, the system has to be maintained. Will the people who built the system be around for several years to maintain it, and if not, will they have trained their replacements sufficiently?
- Who will upgrade and modify the system as QC identifies new features they would like?
- How long will it take to develop, test and deploy the system? How many software development projects are delivered on time and on budget? Can your business model afford the delay and can you be assured that the solution will work?
In contrast, a dedicated software vendor can constantly improve its systems, incorporate best practices from many clients, educate its clients, troubleshoot problems more quickly (having solved the same problems for others), and spread its costs across a large client base, achieving significant efficiencies. This results in each client getting a better solution at less cost than if they were to attempt it alone.
On-Premises vs. Cloud
There are pros and cons to each approach. There has been a migration to cloud-based software and storage lately, due to its lower initial costs, its ease of deployment, and the infrastructure management it lifts off IT’s shoulders. But these initial savings are temporary and cloud software is not for everyone. On-premise solutions generally have lower costs in the long run, are more customizable and flexible, and are more secure (with no exposure to vulnerabilities in the cloud). For a full discussion of the on-premise vs cloud quandary, please see On-Premise vs Cloud: Pros and Cons.
Cost/Benefit and Return on Investment (ROI) analyses are traditionally numbers-driven perspectives on economic benefit. (There is also another perspective on ‘benefit’, which looks at intangibles that are hard to put numbers on, and that is addressed in the next section, ‘Seeing the Whole Picture’.)
Our cost/benefit analysis illustrates, for a hypothetical lender originating an average of 3,000 loans per month over 5 years, the economic benefits to be gained simply by following Cogent’s proprietary statistical sampling methodology. These gains come from 1) the drastic reduction in number of loans to be audited, and 2) the reduction in the number of full-time employees (FTE) required to audit the lower volumes.
These gains are often enough to convince lenders that a valid statistical sampling methodology can pay for itself in short order. If such a methodology is also integrated into a system that embeds best practices in loan quality control and compliance auditing, then the gains are amplified.
Once people, processes and best practices are woven together, the case for a robust, well-designed QC system becomes even more compelling.
Seeing the Whole Picture
It is one thing to build a better software system and to show people how the system can optimize existing processes. It is quite another thing to build an infrastructure around that system that accommodates the incessant change that characterizes modern business. When evaluating a loan QC and compliance auditing system, it’s a good idea to consider the kinds of intangibles that a numbers-based ROI analysis cannot capture:
- When your processes change, how easily does the system accommodate those changes? For example, when you want to add data fields or change the audit environment or introduce new sampling procedures or modify reporting, how much of the change can you do yourself and how much must be done by the system developer?
- When you have questions about the system or need advice about how to approach a new QC or compliance wrinkle, can you contact an expert who is familiar with the system as well as with industry best practices?
- Is the system designed by software professionals with domain expertise who know how to make your audit staff more productive, your department more efficient, and your senior management more receptive to your findings?
- When you have staff turnover or a reorganization, who can you call on to (re)train your staff? Does the entity proactively offer free training and learning resources?
- As QC and compliance issues get more complex, is there an entity that will ensure that the system is updated and enhanced to keep pace with the changing environment?
- Is there a way to share ideas, solve problems and optimize processes with other mortgage QC and compliance professionals who also use the same system?
- How easily does the system interface and integrate with other systems, both inside and outside the organization?
By not considering such long-term factors, and looking simply at the short-term “numbers”, it is easy to paint your QC or compliance department into a corner. Indeed, it is the organizations that have painted themselves into a corner who most frequently approach Cogent for robust, industrial strength solutions that are guaranteed to keep pace with their needs.
Cogent has been developing and supporting loan quality control and compliance systems for over 20 years. We have faced all the issues above and solved most of the problems, and we’ve done it for the largest lenders in the country as well as for rapidly growing smaller lenders. There is much to gain by tapping into Cogent’s deep expertise.