Plan for QC Success in 2017 with Integrated Action Planning
By Phil McCall
(Phil McCall is COO of web-based mortgage quality control and audit technology provider ACES Risk Management Corp. (ARMCO). He can be reached at firstname.lastname@example.org.)
With a new year comes new opportunities to start fresh. Now is the time for lenders to formulate a plan for loan quality success, and that plan starts, oddly enough, with a plan--an integrated corrective action plan, that is.
Regular quality control audits and corrective action planning are two major components of Fannie Mae's Loan Quality Initiative, yet for many lenders, the systems through which they manage each of these elements are bifurcated, making it difficult to create a feedback loop to determine the effectiveness of corrective actions taken based on reporting results.
So what does this look like in action? Consider the follow scenario:
During the pre-funding QC audit process, Auditor A conducts a re-calculation of income for an individual loan and discovers that the debt-to-income ratio was improperly calculated. The miscalculation was an error in the income analysis of a self-employed borrower. Auditor A notes this in the pre-funding audit report, and corrective action at a loan level takes place. However, the corrective action was only at a loan level, allowing the same mistake to go unidentified on loans either previously underwritten or still to be underwritten by the same underwriter in the given month.
The following month, during the post-closing QC audit process, an additional loan is cited for the same type of miscalculated income of a self-employed borrower - by the same underwriter. A standard process is for senior management to review the pre-funding QC results at month end, and by doing so, the opportunity to take immediate corrective action at the root cause of noted defect is missed. In this scenario, the issue wasn't addressed beyond the loan level review, and by not addressing the root cause of the problem, the lender was unable to prevent the same mistake from occurring in additional loans underwritten that very same month.
This scenario plays out far too often in mortgage lending shops across the nation, and the two biggest reasons why this disconnect exists are (1) auditors lack the means to communicate with Areas of Responsibility in real time and (2) corrective action planning isn't linked to the QC audit platform, which makes it difficult to gauge results in later audits. However, it doesn't have to be this way.
With an integrated system, lenders can leverage audit findings more effectively by notifying AORs and expediting remediation using an online communication portal for immediate feedback and automated e-mail alerts to ensure timely responses. This also enables the organization to extend the system to other business areas, such as servicing or capital markets, to improve loan quality across the entire organization. By integrating the audit and remediation systems, lenders create a single system of record for all QC-related activities, which ensures a fulsome and complete audit trail and, ultimately, a much smoother regulatory review of QC findings.
In addition, an integrated system ensures corrective actions are linked directly to QC findings so that all parties can track progress and measure results. This also helps lenders categorize issues based on their root cause (i.e. systemic, procedural and/or operational) to determine the best course of action, adjust as necessary and conduct follow-up audits to evaluate the effectiveness of the actions taken. Moreover, by cross-referencing corrective actions along with audit findings, lenders can easily identify trends across all audits, further ensuring that lenders have a clear picture of how well corrective actions are addressing loan defect issues.
Here's how the earlier scenario could have played out differently using an integrated system:
During the pre-funding QC audit process, Auditor A conducts a re-calculation of income for an individual loan and discovers that the debt-to-income ratio was improperly calculated. The miscalculation was an error in the income analysis of a self-employed borrower. Because a critical defect has been noted, senior management is notified about the issue immediately through the QC audit system's communication portal and determines that the best course of action is:
--Take the necessary corrective action for the reported loan-level defect.
--For the next 60 days, have a supervisor review all self-employed income analysis conducted by this underwriter.
--Establish a written training protocol to assure this underwriter has the proper knowledge to complete the required income analysis.
--Immediately review any loans, closed or unclosed, that have these same characteristics and were underwritten by this underwriter to assure no additional loans are closed with critical defects or to assess any potential repurchase obligations that may exist.
This is all documented in the action plan linked to Auditor A's initial findings. In subsequent reports, senior management can view the results of the corrective action and report on these results.
By injecting industry benchmarking into the mix, lenders can extend the value of their integrated system by comparing their QC results against their peers to gauge their successes and pinpoint shortcomings. The perspective this type of comparison can provide is invaluable, as it can identify less obvious areas for improvement and aid in determining criteria for future targeted and discretionary audits.
As clichéd as it sounds, success is nearly impossible without having a plan in place. By integrating action planning into the QC review system, lenders can take a more robust, holistic approach to QC that ensures real-time communication and redress of loan defects, as well as continuous monitoring of corrective actions and comparison of results against industry peers. Thus, as you make your resolutions for the coming year, commit to better loan quality through integrated corrective action planning.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Mike Sorohan, editor, at email@example.com.)