Quality Control is Critical to Success

When Mortgage Loan Volumes Go Low, Credit Union QC Must Go High

By Sharon Reichhardt ACES Quality Management

It’s no secret that credit union mortgage lenders are feeling the effects of an economy in contraction. The Mortgage Bankers Association (MBA) predicts a continued decline of total mortgage origination volume in 2023 to $2.05 trillion with no immediate end in sight. These are difficult times.

With this in mind, each and every loan that comes through the door becomes even more valuable in terms of credit union movement’s ability to remain in the mortgage business. This increased importance-per-loan means credit unions must double-down on loan quality to ensure either immediate salability to investors or long-term servicing performance. To meet the demands of a changing market, credit unions need a robust mortgage quality control (QC) audit and reporting program to protect the integrity of the loans they are originating.

Over the last few years, regulators have telegraphed renewed focus on several areas of compliance. For example, the Consumer Financial Protection Bureau (CFPB) has been actively investigating and announcing its interest in areas such as appraisal bias, redlining, and serving borrowers with limited English proficiency. The Federal Housing Finance Agency (FHFA) has also announced the required use of its Supplemental Consumer Information Form (taking effect March 1, 2023) and the need for greater clarity around the Equal Credit Opportunity Act (ECOA).

These are clear signals for credit unions to stay informed on regulatory issues. While this interest has yet to result in a specific action and/or legislation, the CFPB has been active and outspoken over the past few years on its expectations and concerns from lenders. Heading into 2023, it’s reasonable to expect some of these suggestions to become requirements. Staying current on the news and circulating information is one way credit unions can ensure their mortgage quality control programs meet the minimum standards.

CAPTURING THE RIGHT DATA

Next, credit unions should take a hard look at the data being collected by their QC programs. Is loan data being captured and categorized in a manageable and understandable way? If the data cannot tell a story about loan production quality, collection and categorization then those efforts are all for naught. This is where automation can deliver tremendous benefits. Industry veterans likely remember the tedious days of conducting QC using spreadsheets and manual calculations. Spreadsheets cannot flag issues, communicate trends or uncover the root cause of defects. Furthermore, email is often the default method for communicating spreadsheet-driven results, making it difficult to bring the proper sense of context and urgency to addressing loan quality issues. By leveraging automation, credit unions can eliminate these issues and significantly improve QC reporting by ensuring audit findings:

Contain data accuracy and consistency;

Offer communication and feedback; and

Use graphics to outline the story and convey the message.

Data integrity is key to successful reporting. Credit unions should perform periodic reviews of the data in the QC system to preserve and protect reporting. As the saying goes, “Bad data in, bad data out.’ If data fields change in the source system or a new data point needs to be captured, this information must be shared with the QC team to ensure the consistency and ac- curacy of QC reporting. Along these same lines, the QC team should establish consistent terminology, naming conventions, formatting, and formulas so that they can be applied across the organization — not just the mortgage lending division — so that everyone is speaking the same language and interpreting results the same way. This “common language” must be documented and used throughout the credit union to ensure consistency.

WORKING TOWARD A COMMON GOAL

The importance of data integrity and consistency cannot be overstated, since it enables reports to truly have an impact. A successful QC department’s reports should include target defect rates, gross and net defect rates, root cause analysis and trending, reporting by regulation and action plans. While governmentsponsored entities (GSEs) like Fannie Mae and Freddie Mac require approved sellerservicers to report gross and net defect rates, investors and other regulators also have a vested interest in these data points. Thus, credit unions need clear and accurately defined targets that reflect their quality standards to ensure everyone is working toward a common goal, whether that be longterm servicing performance or salability on the secondary market.

When it comes to the importance of gross versus net defects, many lenders tend to emphasize the latter rather than the former, as the net defect rate reflects the number of “uncurable” errors committed. However, the gross defect rate is the better ba-

rometer for determining the degree to which origination processes support loan quality. As such, credit unions should closely monitor their gross defects and be thorough in creating and implementing action plans to mitigate errors. Monetizing QC defects, especially gross defects, can help emphasize the importance of the QC process in identifying the root cause of these errors and rectifying them before they come to a regulator’s or investor’s attention. Connecting QC results to fraud investigations and investor-related audits is another way to show the connection between QC and revenue retention.

With mortgage borrowers in short supply, credit unions cannot afford to sacrifice current mortgage originations to poor quality. A well-managed QC process not only enhances origination activity by supporting high-quality, high-performing mortgage production but also reduces operational deficiencies and risk, improves fraud prevention and ultimately protects borrowers. While a low-volume market seems like a poor time to make any technology purchase, investing in QC automation multiplies the impact of QC efforts enterprise-wide by enhancing quality in both lending and non-lending lines of business, thereby extending the value of the investment.

Sharon Reichhardt, executive vice president of operations at ACES Quality Management, brings more than 3 decades of industry experience to ACES. Her previous experience spans auditing for mortgage originations and servicing, consumer banking and lending, and commercial lending. Reach her at sreichhardt@acesquality.com.