The 4 Rs of Choosing a QC Vendor
By Michael Steer
September 9, 2019
Michael Steer is president of Mortgage Quality Management & Research, LLC (MQMR). Contact him at firstname.lastname@example.org.
There are only a handful of reasons why lenders go looking for a new quality control vendor--either they have undergone a bad audit, they are unhappy with their current provider or they've decided to no longer conduct QC in-house. Whatever the reason, choosing a QC vendor can be a process fraught with uncertainty, as this entity provides a mission-critical function for any mortgage company.
However, by knowing how to make the right choice, lenders can ensure they pick the vendor that works best for their organization. When choosing a QC vendor, there are four important "R-factors" to consider: References, Reports, Rapport and ROI.
The first step in this process is to ask for references. Talking to similarly situated lenders to learn how they like their vendor, what type of support their vendor offers and the level of communication provided by their vendor helps create a clearer picture of the type of experience one could expect when working with that vendor. Fannie Mae and/or Freddie Mac seller/servicers can also ask their quality control contacts for "unofficial" insights into QC vendors that consistently perform well.
Some vendors are better suited for larger lenders, whereas others are a better fit for smaller organizations. Either way, knowing where potential vendors fall on the spectrum can help narrow the field, making the remainder of the search process much more efficient. The goal is to start with a well-honed list of vendors who can comply with GSE requirements, so as not to waste time interviewing companies that may ultimately prove to not be a good fit.
Once the list of potential vendors has been set, the search then moves into the interview process, and one of the key areas to inquire about is reporting. The level of reporting runs the table from bare minimum to more than could possibly be imagined. Some vendors will simply do a loan-level review and provide the data, leaving analysis up to the lender. Lenders often find that the best QC vendors will offer the following:
--Portal for secure upload of files to the vendor.
--Robust IT security controls. This covers both internal and external security issues as well as strong controls actively in place.
--Penetration testing, Business Continuity Plan, Disaster Recovery Plan and proof of adequate insurance are also important.
--Receipt of reports through a secure portal.
--Insights into industry or peer trends the vendor is seeing particularly as these relate to recent investor guideline changes, changes in compliance standards or performance of loans.
--QC reporting that is easy to navigate with color-coded charts and graphs that the lender can incorporate into its own internal QC management reporting.
--Recommendations for how to address the root cause of defects identified.
--Recommendations for details to include in the lender's own QC management reporting.
--Direct access to a senior auditor and/or manager to discuss findings.
--Calibration calls to review findings to ensure the lender and vendor are on the same page.
--List of minimum qualifications the QC vendor maintains for its QC review staff and proof that the staff possesses the qualifications and experience required to provide quality reviews and meaningful analysis.
During the interview process, it is advisable to request sample QC audit reports from each vendor under consideration. A vendor's monthly QC reporting should include the following items:
--Purpose of the audit and description of the selections made.
--A summary of the vendor's policies and procedures.
--Sample selection criteria including a breakdown of the random, discretionary and targeted reviews performed: results for each must be separated for the lender to review independently. The vendor should provide the details on how each was selected.
--Defects identified along with details on the level of the exceptions and ratings of loans reviewed: defects should be presented separately for credit and compliance-related categories.
--A comparison to the lender's target defect rate (actual versus target).
--A summary of the reverifications requested and received, including a percentage of those reverifications received. The vendor should provide details on why attempts to obtain reverifications were unsuccessful.
--Trending data by role (branch, LO, broker, processor, underwriter, closer/funder, etc.) and loan type.
--Loan-level details on each loan reviewed including commentary on the defects identified.
--Review appraisal and/or field review appraisal summaries.
--Final QC audit reports following any rebuttals.
----Summary of the rebuttals received and the outcome.
----Gross and net defect rates compared to the lender's target defect rate.
In addition to analyzing the extensiveness of a vendor's reports, it's important to know about the rapport they have with their clients. Some vendors treat their clients as partners and work hard to build a positive and communicative relationship. Other vendors simply gather data and send reports, with customer service and responsiveness being nearly nonexistent, and still more fall somewhere in between. This may or may not be a deal-breaker in the end, but knowing what to expect ahead of time can help set expectations.
Lastly, one must consider the return on investment--which may be defined differently by each lender - because at the end of the day it always comes down to cost versus value. Once the interview process is complete and all sample reports have been reviewed, take time to assess the value that can be derived from those reports and, therefore, that vendor. Does the vendor simply relay the data, or do they also provide analysis? Does the vendor provide reports with or without interpretation, or is it somewhere in between?
Also, don't forget to factor in any expenses that may be incurred beyond the vendor's fee or retainer. If a vendor does not provide any analysis or interpretation of reporting, that responsibility must then fall on an internal employee receiving some sort of financial compensation, and that cost must be factored into the overall decision. In some instances, it's often cheaper in the long run to go with a more expensive but full-service QC vendor than the low-cost provider but ultimately that is the decision for the lender to make.
Obviously, References, Reports, Rapport and ROI are not the only considerations necessary when choosing a QC vendor, but they are four of the biggest. The ideal QC vendor should be a partner that delivers a smooth working relationship. With that in mind, there are also several red flags to keep an eye out for during the interview process, including:
--How frequently is the vendor willing to get on the telephone and talk through results? This should be at least monthly, if the lender is willing to put in the effort.
--Is the vendor's senior management team available to the lender's management team or board of directors as needed?
--How easy is it to reach your primary contact? How quickly does he/she respond to your requests through email and telephone contact?
--Does the vendor work with you to ensure that severity ratings and definitions correspond to your QC Plan?
--Is the QC vendor willing to correct mistakes made?
--How easy is the exchange of information to navigate?
--Is the vendor capable of reviewing specialty products including portfolio products that the lender intends to originate?
--Does the vendor offer a second-level review prior to issuing final reports?
All of this may sound exhaustive and superfluous, but when the alternatives include spending time and money with a vendor who is difficult to work with, who doesn't adhere to GSE requirements or who proves to not be a good fit six months or a year down the line, the time invested in choosing the right QC vendor (or any vendor for that matter) the first time delivers an ROI that cannot be denied.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)