Mortgage QA/QC Tools: Helping Lenders Understand the Borrower’s ‘Story’

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Every great story, fiction or non-fiction, has five key elements: characters, setting, plot, conflict, and resolution. Whether one is reading Snow White and the Seven Dwarfs, a Steven King novel or a recounting of the Battle of Gettysburg, they all contain these essential items.

Today’s mortgage lender, together with its borrowers, tells a story that almost always concludes with a happy ending (homeownership).

However, when the story gets complicated, and the characters start to face trouble or danger – or the ending begins to look murky – that’s when compliance/quality assurance/quality control (QC) teams go to work.

These teams will examine the characters (LO, lender, borrower), setting and plot (documentation, files, credit info/history), as well as the conflict (actions taken by borrower and lender), and work toward finding a resolution (happy ending).

Let’s start by looking at the setting in which the story takes place.

For the past few years, seemingly all the attention and excitement in the mortgage industry has been centered on origination technology. However, perhaps under the radar for the average consumer is the fact that the world of compliance, quality assurance and QC has also undergone a huge technological revolution since the financial crisis of 2008.

In particular, QA/QC teams have seen an amazing revolution in automation, reporting and analysis. It is these new and improved tools, processes and best practices that have enabled lenders to better understand the “story” of the borrower’s journey through the loan process.

Automation: Cutting Costs by Avoiding the Heavy Lifting

Despite the regulatory respite promised (and delivered, to some extent) by the Trump Administration, mortgage compliance costs continue to be a heavy burden for lenders – on top of the fact that they are facing shrinking margins and volume.

To solve this problem, lenders have turned to new technologies to cut down on origination costs, particularly in the acquisition and “front end” of the process.

However, there has also been significant improvements in many “back end” functions, including the introduction of automation into many compliance/QC processes.

Until very recently, the process of taking the many forms of input received throughout a mortgage transaction and extracting/calculating the relevant data was extremely time consuming and labor intensive. Automated compliance systems can now replace much of the hand-written/hand-calculated processes, and cut down on time and human error by taking care of some of this “heavy lifting.”

Additionally, the proliferation of optical character recognition (OCR) systems has allowed lenders to create automated systems and rules that process and check those documents.

In addition to making the process faster and more accurate, technology allows teams to focus on the borrower story, and more efficiently direct underwriters to focus on more critical elements, such as eligibility and regulatory compliance.

Reporting: Technology Helps Tell a Story

If there is one thing that both compliance officers and executive teams appreciate, it is the clarity and utility of a well-written report. As with any financial industry field, mortgage executives must possess fortune-telling skills. They have to be able to look at the company, the market, and the macroeconomic trends and then direct (and adjust) the corporate strategy appropriately.

Building these reports and keeping them up to date can be a time-consuming task. But with modern reporting, trending and forecasting tools, these reports can be created with ease, sometimes at the click of a button.

The speed and ease with which executives can now see this information is crucial in a “normal” market environment. In the low-margin, highly competitive environment of 2019, it is essential.

Having the ability to quickly assemble accurate and data-rich reports isn’t just important for the C-suite executive; it has become a fundamental part of a compliance officer’s toolkit.

QA/QC job duties often bear a resemblance to that of criminal investigators. If there is a question about decision-making or documents in the loan process, having accurate reports is critical.

A well-prepared report does more than just recite facts and figures; it tells a story and provides the necessary information for compliance officers to effectively expedite loan reviews, and spot/anticipate trends before they become a problem.

Mortgage QA/QC: Deeper Analysis

Beyond the raw data, tidy reports and efficient automation lies the deeper analysis (the plot of our story) that is now part and parcel of every mortgage leader’s job.

QA/QC technology has evolved to complete the laborious task of comparison analysis and document presentation. The right technology should provide insights into loan-level production process issues, overall portfolio performance and potential improvement areas for staff training.

Furthermore, a greater focus on eligibility criteria and adherence to compliance requirements are more easily achieved when technology systems assist in separating the production environment issues with loan risk governance.

It should be noted, however, that technology systems alone cannot solve the complex issues of due diligence, completing documentation (gathering missing information, for example), data consistency (loading data into LOS system) and process consistency (cash flow analysis).

The cost of doing business should also be considered. Large lenders that adopt technology as part of their risk program can eventually reduce their spend on both compliance and production. Interpretation of independent data derived from loan level reviews can develop into predictive selections using empirical data, thus reducing the amount of loans reviewed.

Using these systems to efficiently reallocate funds from risk management operations budgets to front end production not only increases revenue for the lender, but also maintains and/or improves the detection of financial risk across the pipeline.

Common Errors and Best Practices

Despite advancements in mortgage QA/QC technology, errors still persist and fraud continues to be a nagging problem. Herein lies the “conflict” in our story. One specific error that we often see, and that our QC review process is designed to catch, is problems with properly documenting borrower gift funds (again, telling the borrower’s story throughout the cycle of loan origination).

While these funds may seem like a silver bullet for would-be homeowners (particularly first-time homeowners with good incomes but little savings), the rules can be extremely strict, and many LOs may not know all of the specifics.

Further, compliance officers – and those on the QA/QC beat – should remember that every lender has an interpretation of the rules and the documentation that is required. As a best practice, compliance teams need to be able to follow the source of funds. 

Fraud is also still a major problem for lenders and their compliance teams. Last year, CoreLogic reported a 12.4% annual increase in mortgage fraud. One of the more persistent issues has been the rising sophistication of occupancy fraud. Lender and compliance teams should be on the lookout for suspicious activity, including keeping up with industry listservs and taking advantage of any other information-sharing services.

Last year, Fannie Mae identified a list of more than 30 California companies that are potentially fraudulent.

Other red flags that could indicate fraud include the following:

  • Real estate listed on application, yet applicant is a renter;
  • Applicant intends to lease current residence;
  • Significant or unrealistic commute distance;
  • Applicant is downgrading from a larger or more expensive house;
  • Sales contract is subject to an existing lease;
  • Occupancy affidavits reflect applicant does not intend to occupy; and
  • New homeowner’s insurance is a rental policy (declarations page).

On the Horizon

Looking ahead, it seems likely that the mortgage industry will not see any major activity at the Consumer Financial Protection Bureau, at least until 2021 – depending on the outcome of the presidential election, of course.

But before lenders breathe a collective sigh of relief, they should remember that many states, including California and New York, have pledged to ramp up their regulatory efforts in the face of a more modest CFPB presence.

Lenders have already invested in maintaining compliance to the standard of the CFPB and will continue to do so as a means to sustain their QM business.

However, as demand for mortgages tightens, many lenders will be tempted to embark on more risky non-QM originations in an effort to generate niche revenue. This could bring them into confrontation with these energized state agencies.

One thing to keep an eye on: The new Uniform Residential Lending Application (URLA) goes into effect on February 1, 2020. While it should not be a major problem for lenders to adapt to, QA/QC teams need to be prepared for the change. Our firm’s analysis suggests that the new form should help keep data consistent and reduce errors. This is definitely a step forward in providing lenders a clear and easy-to-follow guide to the story of the borrower’s journey. 

Mortgage compliance/QA/QC continues to evolve, and while new technologies have made parts of the job easier, the hard task of staying in front of developing trends, catching and remediating errors, and efficiently deploying remains the same. Whether a lender has a large and robust compliance team or relies on outsourcing crucial tasks, it should be able to tell the story behind each of its loans. Making compliance a priority is essential for success in 2019 and beyond.

Michael Crockett is executive vice president of product development at Credit Plus, a third-party verifications firm serving the mortgage industry.

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