While the new year is here, the effects and fears of 2022 have yet to run their course. The Mortgage Bankers Association (MBA) reported that mortgage applications recently hit their lowest rate since 1996, and Fannie Mae’s most recent estimate shows that origination volume will decline to $1.7 trillion in 2023. As financial institutions weather this shift in the market, every loan opportunity becomes more critical than the last.

Seasoned lenders are going “back to the basics,” focusing on relationship building and outreach to generate business. The survival tactic lenders too often miss is doubling down on loan quality to ensure immediate salability to investors or long-term servicing performance. Findings from our Q2 2022 Mortgage QC Trends Report show the overall critical defect rate increased 6% from the previous quarter, despite a 13% decline in volume over the same period. Ensuring loan integrity and quality will always be essential to lenders’ overall business strategy. Lenders need a robust mortgage quality control (QC) audit and reporting program to do so effectively.

The Consumer Financial Protection Bureau (CFPB) has been active and outspoken over the last few years on its expectations and concerns on compliance issues related to equity and fairness in the lending process, such as redlining, appraisal bias and working with limited English proficiency borrowers, and other regulatory bodies have followed suit. For example, the Federal Housing Finance Agency (FHFA) announced the required use of its Supplemental Consumer Information Form (taking effect March 1, 2023) and clarity around the Equal Credit Opportunity Act (ECOA). 

Of course, regulators are not the only ones concerned with loan quality. Within the last year, Fannie Mae updated its QC reporting guidelines, with additional changes expected to come in 2023. As we get into 2023, it is safe to expect this regulatory and investor focus to intensify, especially as volumes decline and lenders seemingly have more time to devote to ensuring compliance and loan quality. However, time does not always equal resources, and even in today’s financially challenging market, lenders must make investments in quality control and compliance a top priority.

Automation holds the key for lenders to stay informed of relevant regulatory and investor changes and ensure those changes are reflected in their quality control programs.

For example, ACES Quality Management was the first to incorporate Fannie Mae’s updated guidelines into ACES Quality Management & Control software, as well as through our free Compliance NewsHub, to ensure clients could audit to the latest standards and guidelines.

“We’ve had great success with ACES. We successfully went through a Fannie Mae MORA audit with it, which made everyone extremely happy, and it’s definitely helped with outside audit requests,” said Lindsey Hendricks, quality control manager at Bank of England Mortgage. “I would say it also gives certain agencies a little more confidence in the work we’re producing because they know that ACES has our back as far as keeping up with all the regulatory changes and guidelines. We love ACES and are excited to continue expanding our use of the platform.”

“Volume-wise, our reviewers went from struggling to complete one to two mortgage reviews per day to easily completing three or four, and we’ve seen similar results with our consumer lending reviews,” said Jenille Fairbanks, vice president of lending compliance at Mountain America. “It also used to take several hours to pull a report and get through the data. Now, once we have the initial report built in ACES, we can simply run it rather than rebuilding it every month, which is a huge time-saver.”

A robust QC system also enables lenders to do more with less, which is crucial in an environment where labor resources may be constrained due to layoffs or other financial challenges. Furthermore, establishing a more automated QC process helps lenders keep quality at the forefront regardless of market conditions, thus helping to ensure loan salability and/or long-term servicing performance during peak volume and decline.

“Moving to a more robust software system boosted productivity. We were able to get more audits out per auditor, with the ability to focus on specific questions and get more discretionary type audits fulfilled,” continued Hendricks. “We’ve been able to add more defined audits and discretionary targeting beyond just the random 10% pre-funding, so we have a lot more variety. We’ve also started to add other types of audits, such as early payment defaults, which have been helpful. ACES makes it easy to change an audit quickly to address a certain need if we see something arise.”

“The biggest benefit we have with ACES is we’re able to spend half of what we were spending with our previous vendor and doubled our audit workload at the same time,” said Wesley Klepfer, compliance program director at Celink. “With ACES, we have three people working full-time on audits and programmatic testing as well as access to better resources.”

As volumes continue to stagnate and recession fears loom, lenders must protect the integrity of the loans that are making their way through their pipelines. By taking the time now to reduce operational deficiencies and risk and improve fraud prevention through an automated QC program, lenders can not only optimize the profitability of their current loan production but also position themselves for success when the current bust cycle inevitably makes way for the next boom. While any technology purchase seems questionable given current market conditions, investing in QC automation multiplies the impact of loan quality efforts, thereby extending the value of the investment. 

Sharon Reichhardt is executive vice president of operations at ACES Quality Management, and Reichhardt brings over three decades of industry experience to ACES. Reach her at sreichhardt@acesquality.com.