REQUIRED READING: Imagine you're on an airplane, about to fly from the U.S. to Europe. Now imagine the pilot announcing that your aircraft has been cleared for safety because the computer system has checked and cleared the landing gear for take off. Maybe you learn that other areas of vulnerability are scanned by an onboard computer system only if the responsible party remembers, and at no time was the entire plane reviewed as a whole. Would you feel safe as you embark on that multi-hour, transoceanic flight?
Rightfully so, you may have a concern that a series of disparate computer systems might not ensure the quality of the plane, especially if there was no formal protocol for the people working on the aircraft and no way to ensure that all safety checks were performed at the right times, if at all.
This scenario, as illogical and risky as it seems, may not occur in the airline industry – but it's exactly the way that many lenders are handling the mortgage process. They utilize numerous separate solutions to address different areas of vulnerability and often do not cross-reference any findings. This checklist approach to quality can be very risky and can expose lenders to errors and oversights, as well as outright fraud and noncompliance.
In our industry, it is not a good idea to use a component-based approach to quality. These days, we've learned that we need to use a combination of micro and macro perspectives. The mortgage process is intricate and detailed. It comprises of several micro tasks, segments and processes – and while they all may be separate, they're all interconnected.
Treating each component as a separate entity might allow for a specialized level of evaluation, but it's not a reliable means for compliantly responding to changes within the loan while it is in progress. As an example, information about an appraisal can impact actions involved with processing, underwriting or due diligence. In fact, any information – anywhere in the process – can trigger a chain of events that can leave a lender wide open to risk of noncompliance, fraud, errors or oversights.
When quality is viewed as a component-based issue, companies run the risk of the right hand not knowing what the left hand is doing. And in the mortgage industry, that's a risky proposition.
Regardless of the size of the lender – whether it is a high-volume powerhouse, a community bank or a credit union – the first step in elevating loan quality is to begin thinking of the quest for quality as a holistic practice. Quality requires details, as well as the scope of the big picture.
Rather than looking at quality in terms of industry segments, let's look at it in terms of lenders' basic concerns. There Is the issue of regulatory compliance violations and the risk of repurchases. When it comes to potential damage to the company's bottom line, future business and reputation, there Is no single risk that outweighs the other. Both are hugely important. Both could result in big losses to the balance sheet if not addressed.
Where regulatory compliance is concerned, there's no way around it – lenders must have standardized processes that address all laws and regulations, whether issued by the state, federal government or a government agency. This may sound like common sense, but there are still lenders that are not addressing the issue of disclosure on a holistic basis.
In the past, it wasn't necessary for disclosures to be an active, consistently monitored part of the loan cycle, certainly not beyond the initial part of the process. Once disclosures were sent to the borrower, and there wasn't much need for additional follow-up, except to ensure that those documents were signed and returned.
But times have changed, and so have the industry's regulations. Recent changes to the Real Estate Settlement Procedures Act guidelines mandate that lenders to re-disclose rate and term changes that fall within certain thresholds – and when variables change, those changes must be disclosed.
As we all know, change is ubiquitous and frequent in our industry – and there's no such thing as a finish line when it comes to disclosures. As long as the loan is active, there's no mechanism to simply check a box and declare the task completed. Without an interactive system and set, standardized processes, lenders are risking that the information will not get disclosed within the required time frames.
To get the highest level of protection, it makes sense to have compliance technology integrated into the software used to manage the mortgage cycle. And in view of recent concerns regarding the lack of proper paperwork relating to loan ownership and repurchase risks, it is advisable to have a solution that provides audit trails. This will enable anyone to look beyond the task at hand and see a trail of actions that occurred at any stage in the process.
If the industry wants to ensure quality, it needs to be able to see every aspect of loan documents and data. The notion of using a system that must be manually applied to each transaction is similar to an aircraft's onboard computer system only monitoring when someone remembers to turn it on. And not unlike that ill-conceived aircraft, the industry will never have a smooth flight if it doesn't get its technology needs in order.
Jonathan Corr is chief strategy officer for Ellie Mae, based in Pleasanton, Calif. He can be reached at (925) 479-1360.