The April 1st National Mortgage News carried a story of the federal government’s legal battle with Wells Fargo, saying that Wells Fargo delivered FHA loans for insurance that they knew did not comply with FHA guidelines. How, you ask did the senior executives know? It seems that their Quality Control process told management about these problems but senior management ignored their QC reports and did nothing about it. An open and shut case-right? Quality Control did its job and management, as is overwhelmingly typical in this industry, ignored the information. These guys should be punished for ignoring this information- right? Wrong! The feds are now going after the senior quality control executive because he knew about the problems and didn’t report them to FHA. In fact the headline of the article warns executives that Quality Control may be hazardous to their legal health!!
In fact, just the opposite is true. Just think, if those executives had paid attention to what the Quality Control reports were telling them, they could have avoided this problem in the first place. Now, instead of the opportunity to show the value of QC, this litigation has firmly established in the minds of executives the risk and potential problem of supporting a good quality control program. And this is occurring just when the federal agencies and regulators are sending the opposite message. Unfortunately this mess has actually been caused by these agencies. Not necessarily by what they require but what they don’t.
The notion that the Wells Fargo QC manager should have reported this information to FHA is ludicrous. While there is a reporting requirement, is it realistic to believe that an internal organization, even if it is viewed as an auditing function, would, or even could report this information without being fired? Come on guys, get real! It was the responsibility of the senior executives to do this, not QC. So why make the QC guy the patsy for this problem? Because they can. And that is the problem in a nut shell.
Quality Control is not part of audit; it is not a file inspection. The intent of Quality Control is to monitor the internal operational processes and identify any that are not meeting the organization’s standards on a non-random basis. Of course, the federal agencies that dictate QC requirements (Fannie, Freddie and FHA) really don’t understand this, despite their new mantra of “manufacturing quality”. Furthermore, until the mortgage crisis they, nor any of the senior executives in the industry, really paid any attention to QC. It was simply a “cost of doing business”. In fact, in order to attract larger lenders to deliver loans to them, these entities would negotiate away many of the QC requirements.
Unfortunately what this lawsuit and article have done is not re-inforce the need to stop ignoring QC but make it appear that a better idea is to eliminate it entirely. That would solve the problem. Executives could claim they didn’t know so they weren’t responsible, and keep originating and insuring loans that don’t meet the requirements.
Of course, there is another way. Fannie Mae, Freddie Mac and FHA could require an independent third party to conduct these reviews and make it their responsibility to report the information. Of course these third parties would have to have employees that were trained and qualified to conduct these reviews as well as conduct valid analyses on the results of the reviews. The industry would have to have some standardization of the methodologies in how the reviews were conducted and a means to measure the effectiveness of the program as well. This third party independence would also mean that investors could obtain this information to evaluate the overall quality and reliability of the company’s operational processes. Just think! Loans that did not meet standards wouldn’t get sold into the secondary market- wow, what a concept.
Despite the untenable position this lawsuit has created for Wells Fargo’s QC manger, maybe the situation has a silver lining. Maybe, just maybe, all parties involved in ensuring that quality control is valid, effective and drives improvement by senior executives will come together to create a Quality Control process that actually works. I’d be glad to help. Just give me a call.
About The Author
rjbWalzak Consulting, Inc. was founded and is led by Rebecca Walzak, a leader in operational risk management programs in all areas of the consumer lending industry. In addition to consulting experience in mortgage banking, student lending and other types of consumer lending, she has hands on practical experience in these organizations as well as having held numerous positions from top to bottom of the consumer lending industry over the past 25 years.