I was recently asked to evaluate a lender’s quality control program in order to ensure that it met agency and FHA requirements. While completing my review it became apparent that they had retained a QC outsourcing company to complete the file review and re-verification process. When I asked to see copies of the reports this company had provided I was shocked. The report consisted of a few lines of a spreadsheet with abbreviated information on some regulatory issues. There was none of the information that was to be included, none of the sampling requirements were met and none of the classification of errors that are a critical part of the Loan Quality Initiative (“LQI”) that were instituted in the wake of the Great Recession. Where, I wondered, were the vendor management standards that were now part of our regulatory landscape? Why would Fannie Mae, Freddie Mac and FHA permit a lender to use such a shoddy QC operation to exist in the industry? So the next time I met up with representatives for these entities I asked. The answer I received was not unexpected, but cast doubt on the viability of these organizations to really make a difference in the level of quality found in loans sold into the secondary market.
Why you asked? Aren’t lenders responsible for making sure that the vendors they choose are conducting business appropriately and as required by their customers? Aren’t lenders held accountable for the quality of the loans by these agencies? Aren’t lenders required to conduct a 10% review of the loans that are reviewed by vendors? Don’t these vendors have to have security measures in place to protect the confidentiality of the borrowers and insurance to cover their errors and liability? Why would a lender use such a company? The answer to that is quite simply money.
Despite all the evidence that shows the devastating impact of poor quality originations and underwriting and the subsequent changes to the quality control requirements, the analysis of loan files that validate the lender’s adherence to both underwriting and regulatory guidelines is considered an unwelcome cost of doing business. In addition, most find that the reviews provide little, if any useable information and therefor their mantra is “If we have to do it, let’s find the cheapest means to get it done.” Lenders have failed to recognize that sound quality control programs will improve their loan production and servicing programs and return more than the costs generally associated with it.
It seems ironic to me that despite all the attention focused on proper vendor management that these entities continue to thrive and that lenders continue to accept this inadequate, insufficient and mismanaged quality control programs as they cry out for expanded guidelines and reduced regulatory requirements. Furthermore, it is unfathomable to me that investors and insurers do nothing to prevent these vendors from proliferating in the industry.
While many may close their eyes and minds to the need for stronger quality control that is standardized across the industry, it is imperative that this be done. Having a standard data set and comprehensive collection of quality data would provide lenders, insurers and regulators with the ability to utilize comparative, fact-based information when making decisions on who do business with. Maybe it would even go so far as to bring this industry in line with all others and allow better quality product to earn better pricing. Unfortunately, we continue to allow poor quality loans have even poor quality reviews conducted through mismanaged vendors. When will we ever learn?
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.