REQUIRED READING: According to the Chinese calendar, the 2012 new year fell on Jan. 23 and commences the Year of the Dragon. To be specific, it is the Water Dragon, a dominant symbol with circumspect overtones.
Knowing that, it makes sense for people within our industry to ask a most circumspect question: What does quality really mean to our company and to our industry as a whole? Furthermore, how – in the context of mortgage lending, securitization and servicing – do we achieve true quality and its companion, risk mitigation? And last, but certainly not least, how do we identify and measure that quality?
At its core, quality assurance (QA) is systemic failure prevention, whereas quality control (QC) is a failure-detection system. Emphasizing QA does not eliminate the need for QC. In fact, the two must work in tandem to ensure that processes are working as intended. Since the terms are currently being used interchangeably, identifying effective resources in the market presents lenders and investors a twofold challenge of using the appropriate terminology and understanding how these twins impact the process as a whole.
Clearly, our industry must now shift toward building a QA culture, relegating QC to its intended purpose of detecting exceptions rather than analyzing loan production. Relying solely on post-production QC to identify holes in the loan production process is like putting a filling in a pulled tooth or putting a cast on an amputated leg. The damage is done, and the lender is left to sort out the cost.Â
Regardless of how you slice it, the mortgage industry as a whole needs to understand the fundamental differences in how to appropriately apply QA and QC. To that end, here is a primer for differentiating between the two.
QA is a lender's front line of defense. Lenders do not always recognize the importance of building such a culture. For example, brokers making the transition to banker are often in such a hurry to build their business and add more investors that they fail to understand the importance of an impeccable track record.Â
A history of bad loans is like a DUI – it doesn't go away. By not taking the time to establish strict QA procedures to ensure loan quality, companies most likely waste at least six months producing effluvia and will never be able to rid themselves of the stench.
QC is most often what's required for regulation or investor approval. It is never going to go away, nor should it. Performing QC is part of maintaining your relationship with the industry.
Because of the way the industry is built, lender-conducted QC is a requirement for investors, warehouse lenders, the Federal Housing Administration (FHA), regulators and MERS. All of these entities are saying, ‘You promised us that you are doing a good job. Now, I need you to show me your test results.’
As a requirement for FHA, for example, lenders have to prove to the agency that all of the QA procedures they have put in place are working by sampling a percentage of their loan population and providing FHA with the QC results. This is a textbook example of how QA (i.e., the procedures) and QC (i.e., the sampling and testing) work in tandem to build a culture of quality.
Process vs. product
Until recently, the industry has been focused on vetting the quality of the product as opposed to reinforcing the quality of the process. Technology is only now beginning to focus on the minutiae of loan production. For years, tech was dazzled by the sexier aspects of origination, customer relationship management, and pricing features and functions. Now that quality production is more than a brochure bullet point, technology has to catch up – the industry produces loans in a fundamentally new way, and that is changing almost daily.Â
To date, the industry has plugged-and-played with myriad technology, but it has not done the yeoman's work of building bridges and connections to ensure all of the bits and bytes that comprise the loan production supply chain have a thread of quality running through them. QA checkpoints must be placed like sentinels throughout the loan life cycle, from application through underwriting, to closing, sale on the secondary market and servicing. Implementing loan-level review, granular borrower due diligence, stricter processes through underwriting, and correct data mapping so that the documentation and the system of record remain accurate throughout the process is how to build QA. Â
With so many data elements, required documentation and interlocking pieces of the loan production puzzle, quality must be the overriding production goal. Otherwise, QC will shake out all of the mistakes that have been made, but it will be too late to resolve them without penalty.Â
In the years following the economic meltdown, there has been a lot of indignation and finger pointing. At issue, the industry chafes under the regulations, directives and guidelines being handed down by the federal government.Â
Without repairing the battered relationship between those that produce loans and those that fund them, the industry will continue to be beleaguered by the government. Why? Because the government is our sole investor, and as the facetious ‘golden rule’ adage goes, he who owns the gold makes the rules.
We have to look into the future and decide where we want our industry to go. When lenders are willing to embrace the needed self-implementation of QA throughout the entire loan life cycle, then we will begin the foundation of a new relationship with private investors.Â
While no one wants to pay for the sins of the past, someone has to. There is no doubt that the government-sponsored enterprises and major banks have no real interest in being the ‘bad guys.’ However, in this post-collapse environment, it is an ‘us versus them’ conundrum. Clearly, they are unwilling to take it on the chin and accept their clients' poor production and sloppy processes.Â
If the industry wants to stand on its own two feet again, we must be proactive and put in place the changes needed without waiting for Big Brother. Character is only tested when no one is watching. What kind of character can the industry lay claim to when we elect to do only what is required and not what is truly prudent?Â
In this Year of the Dragon, let's embrace QA and QC as a formidable one-two punch that guarantees the restoration of our industry. Let us telegraph to investors our willingness to be transparent and accountable. Finally, let us forge a path that is predicated on true private investment, healthy risk mitigation and a robust return on investment.
Ruth Lee is executive vice president at Titan Lenders Corp., based in Denver. She can be reached at ruth.lee@titanlenderscorp.com.
