Bipartisan Bill To Curb GSE Lobbying Efforts

Rep. Nydia M. Velázquez (D-NY) has authored bipartisan legislation, HR 2380, directed at restricting the two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, from engaging in lobbying activities. The bill, the Fannie Mae and Freddie Mac Lobbying Regulation Act, is cosponsored by Reps. Loudermilk (R-GA), Foster (D-IL) and Hollingsworth (R-IN).

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In response to the 2008 housing market crisis, the federal government took control of the GSEs placing them in conservatorship and infusing them with taxpayer money to shore up their finances.  The enterprises’ regulator, the Federal Housing Finance Administration (“FHFA”), later banned the mortgage giants from lobbying, but the exact provisions of the rule have continued to remain unclear. 

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Congress has yet to come up with a permanent legislative reform for these mortgage giants since the crisis.

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Recent news reports indicate that senior Fannie Mae and Freddie Mac officials may be working to support legislation that would result in relinquishment of their federal control, something the legislation would seek to block.

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“It’s been over a decade since Congress placed Fannie and Freddie into conservatorship. I am deeply distressed to learn of acts by senior Fannie and Freddie officials trying to influence and control management of the agencies,” said Velázquez. “Congress is the only authority equipped to make decisions on the future of Fannie and Freddie.”

“Recent reports of Fannie Mae and Freddie Mac officials lobbying Members of Congress and the administration to recapitalize and release the entities from conservatorship are troubling,” Congressman Bill Foster (D-IL) said. “I’m proud to join my colleagues to cosponsor bipartisan legislation that reinforces regulatory prohibitions on political activity and lobbying activity by Fannie Mae and Freddie Mac.”

“Fannie Mae and Freddie Mac have significant power over the mortgage market, and have been bailed out by taxpayers to the tune of nearly $200 billion since the financial crisis began,” said Rep. Barry Loudermilk (R-GA). “The terms of their conservatorship prohibit these entities from lobbying, so they cannot unduly influence policymakers on housing finance reform. Unfortunately, it has become clear that the lobbying ban is not being followed by these entities, nor is it being enforced by their regulator. It’s time for Congress to place the lobbying prohibition into federal law.”

“If we want to fix the laws coming out of Washington, we need to fix the way laws are made.  That includes making sure decisions about housing finance reform are based on what is best for Americans, not what is best for Fannie Mae and Freddie Mac lobbyists,” said Rep. Trey Hollingsworth (R-IN). 

The full text of the Fannie Mae and Freddie Mac Lobbying Regulation Act can be found HERE.

Ready Or Not, Here They Come: Changes To Freddie Mac Investor Reporting

In February 2017, Fannie Mae implemented changes to investor reporting requirements in accordance with new regulations set out by the Federal Housing Finance Agency (FHFA). FHFA’s goal was to increase efficiency for servicers and streamline the reporting process for investors, as well as prepare for the Single Security Initiative (SSI), which is a joint venture between Fannie Mae and Freddie Mac under the direction of FHFA. This initiative aims to develop a common mortgage-backed security to be issued by Fannie Mae and Freddie Mac.

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Now that mortgage servicers have had the opportunity to adequately acclimate to Fannie Mae’s reporting changes, it’s time to prepare for Freddie Mac’s changes. The GSE has been developing its own Investor Reporting Change Initiative (IRCI) with an implementation date of May 2019.  While these changes may still be a way off, the initiative has been in the making for quite some time now, with Freddie Mac beginning work on Phase 1 before Fannie Mae’s changes went into effect early last year.

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Any changes to regulatory standards will have a direct impact on servicers’ operations, requiring modifications to their processes and technologies. So, what do servicers need to know and do to comply with the new Freddie Mac IRCI?

What’s New

While there are many updates referenced in the new regulations, some of the most significant changes include:

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>>The implementation of a standardized industry investor reporting cycle beginning on the first day of the month, as well as a standardized remittance due date for both principal and interest payments across all loans;

>>The ability for servicers to report and adjust loan-level criteria on a daily basis; and

>>The automatic draft of remittance funds from the servicer on the specified remittance due date

Fortunately for today’s servicers, these changes are relatively similar to Fannie Mae’s Changes to Investor Reporting. While there are some similarities, Freddie Mac’s changes also differ in a few ways. Freddie Mac leveraged Fannie Mae’s valuable groundwork as a jumping off point to make it even simpler for servicers who report to both GSE’s to manage the new Freddie Mac changes.

In preparation for the May 2019 go-live date, Freddie Mac has designed numerous training webinars, testing scenarios and documentation to help prepare Freddie Mac servicers for the transition. Training meetings—conducted between a software vendor or service bureau, their customers and a dedicated Freddie Mac representative—also provide servicers with important updates and the opportunity to ask specific questions about the IRCI.

Key Benefits

Freddie Mac has developed its IRCI with the overarching goal of converting Single-Family investor reporting requirements to an industry standard. As a result, reporting will be both faster and easier for servicers and more accurate and streamlined for Freddie Mac. In addition, the IRCI will also support the joint Single Security Initiative with Fannie Mae. With the new ability to edit and report loan criteria on a daily basis, servicers can be more up-to-date and precise in their reporting, reducing potential errors. With the submission of loan data reduced to a single source, loan quality will be further bolstered. Since reporting is streamlined and centralized, servicers will also be able to gather investor feedback much more quickly than before.

Freddie Mac will also benefit from streamlined reporting. With loan submission on a fully standardized schedule and guidelines in place to support accuracy from the very beginning, Freddie Mac will be able to evaluate and accept loans much faster and ensure they meet the highest quality standards.

Training Sessions are Essential 

Servicers need to begin carving out the infrastructure to accommodate these changes before the May 2019 cut-over date. For Fannie Mae servicers who have already undergone a similar process, the transition to Freddie Mac’s IRCI will likely be much easier.

Leading up to the 2019 deadline, servicers should view their mortgage software vendor as a helpful ally in preparing for these new changes. To begin, servicers should contact their current vendors to see where they are in the process of updating their software to encompass the changes. Servicers should also take advantage of testing training and implementation support training offered by their vendor or Freddie Mac as it becomes available. 

The importance of attending these scheduled training sessions cannot be emphasized enough. These meetings provide servicers the invaluable opportunity to ask questions specific to their business and learn important information about the changes straight from the source. Armed with guidance from both their mortgage software vendors and Freddie Mac itself, servicers will be well prepared to tackle the changes head-on in May 2019.

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INTEGRA, New Penn And Freddie Mac Set Out To Improve The Borrower Experience

INTEGRA Software Systems is collaborating with New Penn Financial and government sponsored enterprise (GSE) Freddie Mac to launch a one-click submission of loan data to Loan Product Advisor, the GSE’s automated underwriting system (AUS). The solution will provide seamless integration that will help New Penn increase efficiency and maximize secondary market execution by allowing data to be simultaneously submitted to both GSE AUSs at point of sale.

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“Our collaboration with New Penn and Freddie Mac will increase productivity, improve accuracy in the loan decisioning and underwriting process and reduce the overall origination cycle time,” said Rick Allen, Senior Vice President of Operations, INTEGRA Software. “The seamless integration between our systems will allow for more efficiency, including configuration to identify loans eligible for data validation for income, assets and collateral so New Penn can identify the loan that is most favorable to the borrower.”

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INTEGRA’s web-based Epic solution allows lenders to submit loan-data via a single click to both Freddie Mac and Fannie Mae’s AUSs, enabling lenders to see the full view of options available to their borrowers and ultimately leading to an improved borrower experience. The Epic solution provides real-time data information which improves lender efficiency while streamlining the residential real estate transaction.

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“We are always looking for technology that provides our team with tools to better serve our customers,” said Dena Kwaschyn, Chief Fulfillment Officer at New Penn Financial. “With results from both GSE AUSs, we can give borrowers access to more options, like appraisal waivers, so they can save money and shorten the time it takes to close a loan.”

“AUS-Neutral Design (#AND) is an innovative movement supporting the idea that lenders should run both underwriting systems to identify the best path for their borrowers and, in many instances, the optimal processing path for themselves. It is a win for everyone and we’re happy to support this positive change in the industry,” said David Fulford, Vice President of Strategic Technology Integration at Freddie Mac for the Single-Family Business.

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Freddie Mac Expands eMortgage Solutions With DocMagic’s eVault Technology

Freddie Mac has implemented DocMagic’s  SaaS-based eVault technology and SmartREGISTRY platform. DocMagic’s eVault provides a secure electronic repository for storing documents and performing automated eNote certification to Freddie Mac eMortgage lenders via Loan Selling Advisor.  By automating the eNote certification process, Freddie Mac will speed the funding process, thereby improving liquidity in the mortgage markets and reducing lender’s warehouse line costs.

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“Freddie Mac is committed to streamlining the mortgage process for lenders and borrowers, and has been a leader in purchasing eMortgages since 2006,” said Andy Higgenbotham, Freddie Mac’s Single Family Chief Operating Office. “We rolled out our automated certification process in 2015 to speed up the funding process, thereby improving liquidity in the mortgage markets and reducing lender’s warehouse line costs. We are now expanding this process to include the DocMagic platform.”

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DocMagic’s eVault provides safe and secure storage for sensitive loan documents. It also automatically parses and validates data in a SmartDoc eNote against data in the user’s core system of record. Additionally, DocMagic’s SmartREGISTRY platform enables holders of eNotes to securely transfer these electronic documents to other eVault systems, such as those used by investors, conduit aggregators and servicers. Ultimately, it facilitates real-time access, delivery, storage and much needed control of electronic loan files.

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“Freddie Mac has been a long-time visionary and champion of eMortgages over the years and has made great strides with their unwavering commitment to automation across the supply chain,” stated Dominic Iannitti, president and CEO at DocMagic. “Now, with the successful rollout of SmartDoc eNote data validation prior to funding, this demonstrates the advantages and a clear-cut ROI of going completely ‘e.’ We look forward to ongoing collaboration with Freddie Mac and to further adoption of the digital mortgage process.”

Notable is that that Freddie Mac encourages the use of ‘SMART’ (securable, manageable, archivable, retrievable, transferable) eNotes because static documents do not contain source data, and thus make it difficult, costly and time consuming to confirm the data on documents match.

DocMagic established a process that guides lenders on how to begin using SmartDoc eNotes. The company’s eVault technology is integrated with its Total eClose platform, which is an eClosing solution that creates a 100 percent paperless digital mortgage process — from origination through eClosing, eWarehouse lending, investor eDelivery and eServicing.

Paradatec Named Verified UCD Producer By Freddie Mac

Paradatec, Inc., a provider of Optical Character Recognition (OCR) solutions for mortgage file processing, announced that it is a verified technology integration vendor for Freddie Mac’s Loan Closing Advisor platform. Paradatec’s WriteUCD module was developed in accordance with Freddie Mac’s requirements for producing valid Uniform Closing Dataset (UCD) files.

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The UCD is a common collection of data that mortgage lenders will be required to deliver digitally to Freddie Mac and Fannie Mae starting on Sept. 25, 2017. This requirement is part of the Uniform Mortgage Data Program (UMDP), an industry-wide drive to build a better housing finance system in the United States.

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The WriteUCD module leverages Paradatec’s advanced OCR solution for the mortgage market to extract data from closing disclosure (CD) documents in mere seconds per page and then format that data in the required format.

According to Neil Fraser, Paradatec’s Director of US Operations, “We’re pleased to have obtained Freddie Mac validation as our clients need the assurance that they can meet the GSEs’ requirements well in advance of the September deadline. If a lender’s current loan origination system partner or document provider is struggling to produce a valid UCD file, they can sleep soundly knowing that Paradatec has them covered with our new WriteUCD module.”

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Paradatec also announces the release of their new AuditUCD module for auditing UCD file content against the closing disclosure contained in the UCD file. Fraser continues, “Since we’re building the UCD file from extracted closing disclosure data, it’s just as easy for us to unpack a UCD file’s content to compare the individual data elements against the values extracted from the submitted CD to verify the integrity of both components in the UCD file. Any elements that don’t match will be flagged in our XML output for further review and resolution. Given the volume of content that will be produced and need verification with this UCD initiative, our solution is uniquely positioned to offer a high degree of automation and operator efficiency.”

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GSE Approves New eMortgage Technology Solution Provider

NotaryCam, Inc., a provider of online notary and mortgage eClosing services, announced that the company’s eClose360 online notary platform has been tested and approved by Freddie Mac for eMortgage origination. To be approved, vendors must meet Freddie Mac’s requirements to provide eMortgage solutions.

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“We are very pleased that our technology has now been approved by Freddie Mac for eMortgage closings,” said Rick Triola, Founder and CEO of NotaryCam. “Many portfolio lenders and those who sell eMortgages to other investors have been relying on our patented eClose360 ceremony for some time. Now, mortgage lenders who sell their production to Freddie Mac can execute a full set of loan docs, register with MERS eRegistry and fund in near real-time and share those benefits with their partners and borrowers.”

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NotaryCam’s eClose360 is an online notary platform that allows mortgage closings to take place entirely online, solving the last-mile digital challenge, thereby removing all associated stress and the friction of having to attend closings physically. The technology won more attendee votes than any other digital mortgage technology in its category after its demonstration at the recent Digital Mortgage Conference in San Francisco.

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NotaryCam allows businesses and individuals to legally notarize, sign and execute documents and agreements online. The company has legally completed tens of thousands of notarizations in all 50 states and over 65 countries. Parties from anywhere in the world can connect to a live notary public in a secure virtual signing room. Identities and eSignatures are verified in a face-to-face web interaction to eClose real estate and mortgage transactions, notarize deeds, power of attorney, health directives, and more. NotaryCam was developed in lockstep with the needs of both Government Sponsored Enterprises (GSEs) to ensure that eClose360 meets all of their requirements. NotaryCam signing agents are also certified by the National Notary Association.

LOS Launches Major Upgrades

Ellie Mae has made major enhancements to its Encompass LOS. Encompass 16.3 includes new features for Encompass, enhancements to Fannie Mae and Freddie Mac solutions, new Total Quality Loan (TQL) service ordering options, additions to Secondary Marketing and significant enhancements to Encompass Product & Pricing Service.

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“The latest major release of our Encompass all-in-one mortgage management solution offers enhancements to our integrations with Fannie Mae and Freddie Mac and more customer choice when ordering TQL services with leading providers like First American Mortgage Solutions and DataVerify,” said Jonathan Corr, president and CEO of Ellie Mae. “And later this fall we’ll be offering major enhancements to the Encompass Product & Pricing Service expanding our lenders ability to manage their own custom programs and well as a new dashboard to provide visibility into the status of pricing files as well as securely manage investor credentials.”

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Encompass 16.3 features several core updates, including:

>>Settings Report: This new reporting feature enables the quick generation of reports that contain an organization’s user access settings, providing visibility for business managers as well as responses to possible auditor questions related to access rights.

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>>Business Rule Export and Import: This new feature enables the export and import of a variety of configurable business rule types to Extensible Markup Language (XML) files. These business rules are those that are changed most often and the export view assists lenders deploying Encompass software updates between test and production environments.

>>Enhanced Support for Uniform Closing Dataset (UCD) Export: Well in advance of the new UCD delivery requirements going into effect September 25, 2017, lenders are able to test this updated export in support of the more detailed data collection expected by Government Sponsored Entities (GSEs), including detailed classification of adjustments and other credits.

Secondary Marketing Enhancements: New tracking features have been added, designed to support multiple types of Loan Collateral and includes calendar driven follow-ups for collateral requests and a history of collateral requests, receipts and shipments with associated comments. Encompass has also expanded its lock desk hours feature to include separate hours by loan channel (Retail, Wholesale, Correspondent) and the ability to have different lock desk hours on Saturdays and Sundays. Secondary Marketing functionality also now supports Fannie Mae’s Pricing and Execution (PE) MBS pricing platform. And finally, updates were made to the 1098 Mortgage Interest for creating a 1098 that will comply with the tax rules for 2016 and beyond.

Fannie Mae Enhancements: Enhancements to Encompass’ unique automated workflow for Fannie Mae’s Desktop Underwriter and EarlyCheck drive more efficiencies and help identify and correct any potential eligibility or data discrepancies prior to loan delivery.

Freddie Mac Enhancements: Encompass now offers pop up screen capabilities that show data elements changed between orders within Automated Underwriting System (AUS) tracking to help easily identify any data discrepencies when using Loan Product Advisor, the cornerstone tool in the Freddie Mac Loan Advisor Suite.

New Housing Program Helps Underserved Communities

Freddie Mac,  in partnership with New American Funding, and Alterra Home Loans, two  national mortgage bankers, announced the launch of Your Path, a new loan program that makes affordable homeownership opportunities available to underserved communities.

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After researching the U.S. housing market, Freddie Mac identified that certain demographics were experiencing obstacles with purchasing a home. Your Path provides flexible financing options to responsible lenders who serve a diverse range of homebuyers.

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Your Path puts affordable homeownership within reach for underserved communities:

  • Self-employed workers – provides flexible self-employment verification
  • Seasonal employees – accepts shorter secondary income history
  • Multi-generational families
  • Buyers using cash toward the purchase
  • Gives consideration for non-traditional income sources
  • Expanded guidelines

“We have a passion for making sure everyone has an equal opportunity to achieve the American Dream.  That’s why we’re excited to work with Freddie Mac to create a greater pathway to homeownership for more people,” said Patty Arvielo, President of New American Funding.

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“By collaborating we can put what matters most first, better serving underserved consumers and helping them build wealth through homeownership. We are excited to partner with Freddie and NAF in this effort”– Jason Madiedo, CEO of Alterra Home Loans.

In a time when automated underwriting is the standard, Providing access to credit for more consumers to enjoy the benefits of homeownership companies must use  both automated and manual underwriting, which allows underwriters to individually review a borrower’s financial profile in order to make sure qualified buyers aren’t denied access to credit opportunities.  As a result, Freddie Mac decided to work with New American Funding and Alterra Homes Loans  as a trusted lenders because of their  demonstrated track record in effectively evaluating creditworthiness for the broader  public.

CoreLogic Updates Comply With GSE Demands

CoreLogic announced that its condominium project review solution, CondoSafe, will support the new Fannie Mae and Freddie Mac Condominium Project Questionnaires that the Government Sponsored Enterprises (GSEs) announced on March 29, 2016. CondoSafe helps lenders and mortgage investors determine whether individual condominium projects meet eligibility guidelines and also improves the efficiency of condominium project review by delivering the required association documents.

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Designed as an industry-wide service, CondoSafe solicits, stores and monitors information from more than 140,000 condominium associations (COAs) in the U.S., and conducts a questionnaire-driven structured analysis of that information to assist lenders in determining if a condominium project is eligible for GSE and investor lending. In addition to the standardized CondoSafe questionnaire, the GSE Short and Full Form Condominium Project Questionnaires can be requested within CondoSafe, and will be delivered along with the related COA documents that are needed to complete the project review.

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“In 2015, over five million home sales in the U.S. were in condo projects, representing a 10 percent share of the market. Changes in demographics and housing preferences favor faster growth of multifamily housing, including condos. CoreLogic worked closely with leading lenders, U.S. housing agencies, condominium industry groups and real estate professionals to create an industry-standard condo project review solution that addresses the inherent problems found in condo lending.” said Jacquie Doty, vice president, industry outreach, for CoreLogic. “We are excited to incorporate the new condo project questionnaires introduced by the GSEs to help bring consistency to condo project reviews across the industry and reduce lending risk for both originators and investors.”

The Cost Of Quality


TME-Becky-BarbaraHow much should we pay for quality? Is focusing on quality the right choice when the cost exceeds the return? These questions are being asked a lot these days but very few if any answers are forthcoming. Most companies seem to be so concerned about the consequences of any problem that does or might exist in any one loan, they are doubling or even tripling the number of file reviews being done. Is the cost of these additional reviews actually worth it?

Because of the quality failures that were at the very heart of the Great Recession, we are now experiencing the repercussions from Fannie Mae, Freddie Mac and FHA as all have come out with new Quality Control requirements that are designed to produce loans with zero defects. In addition, the new regulations and standards that CFPB have placed on both servicing and production require strict adherence to the standards established for the quality of these operations. To the industry this has meant adding additional reviews, more frequent reviews and more rework on loans. And still the risk of repurchase or consumer action remains. All of these activities result in more costs but so far we haven’t seen any financial benefit for these efforts. Is this normal? Is this what we should expect? Or should we, as one frustrated manager put it, start making buses instead.

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Stefen Heinloth, in the February 2000 edition of The Quality Digest asked a similar question by querying “Are quality related efforts worth their cost?” In answer to this question he described two things that have to exist for the answer to be true. One is that quality has to be measurable. Only then can a company determine if what they are spending to meet standards, theirs or others, is really worth it. The second thing is that there must be a cause and effect relationship between quality and financial results. He goes on to say he sees that “companies are taking a return on quality approach, viewing quality as an investment and holding quality efforts accountable for bottom-line results.”   Of course this was for other industries such as manufacturing, not ours.

The concept of value.

Unfortunately Mr. Heinloth’s statement was focused on the application of quality management techniques and concepts that this industry has yet to learn. Despite the labeling of ideas and dictates as “manufacturing quality’, what we have been directed to do or what we have scared ourselves into doing is not in any way shape or form, Quality Management. In order to better understand what they are and how we, as an industry can implement them in a manner that allows us to value quality improvements several of these concepts need further explanation.

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One mainstay of Quality Management is the ability to gain value by the improvement of the product/service being provided. However, improvement requires measuring the process and finding out what is not working right; what requires rework and what process failures result in products that have to be “scraped”. In order to do that we must be able to measure our processes. Edwards Deming stated that if you can’t measure it, you can’t improve it. So if we are going to identify what parts of our processes are causing us problems we have to measure them. Of course, the quality control process is supposed to be doing that, right? Unfortunately there are numerous flaws in the programs that Fannie Mae, Freddie Mac and FHA require. But more importantly, when lenders are dissatisfied or question the results of their QC programs they fail to make any changes that would be beneficial. One reason is that most don’t know what is wrong or how to fix them. So here’s a quick guide to QC that anyone can follow.

1.) QC should be measuring where you have a risk in your process. For example, if a processor or underwriter doesn’t calculate the borrower’s income correctly, that is a risk to the process. In addition, if they enter the wrong amount of income into an automated underwriting system, that is also a risk. These process variance or “defects” should be measured for every loan yet there are far too few measurements that tell the number of times this type of process failure occurs.

2.) Process variances cannot be labeled by some subjective measure of precision. In other words there are no “critical” defects or “minor” defects. A defect is a defect. Since it is only when this defect has proven to cause a default can it begin to be labeled as a critical issue. As we all know there are very few, if any defects that impact a loan to this degree.

3.) Random events do occur. We seemed to have ignored this concept. Way too many underwriters and production staff spend time defending a defect in a loan when it is simply a ransom mistake. Way too much time and effort is spent on reworking a loan file when QC identifies an error. This is particularly true of “curable” items. Over and over QC reports identify defects rated as curable. What does this even mean? There is no lender in the industry whose process says, generate this document but DON’T put it in the file so that when we discover an error we can “cure” it. It sounds like some type of disease.

In reality failing to put documents in the file is part of the process and if it doesn’t get done when the process says it should, it is a defect. Spending time going back to find the document or creating another one, is plain and simple just unnecessary rework and rework costs money.

4.) Which brings us to another basic issue. How do we know if the defects identified in a review are really worth spending money on to fix? Here is where statistical knowledge is at its best. Since we are not doing a review of all loans, we need to know if the frequency of a defect is really a problem. Identifying this with just one review is probably tough, but if looking at multiple reviews, QC staff should be able to tell management the probability that the defect found is not random.

5.) Since the majority, if not all QC staff do not have the statistical knowledge to achieve this, another way for a lender to determine if something in the process needs fixed, is to look at the industry as a whole. Having a benchmarking tool that can be used to compare rates of occurrence on a specific issue within the industry to your defect rate would immediately tell you if you have some type of systemic problem that is driving this excess number of mistakes. If your percentage of errors is much larger then it would normally be, there is a good bet that something needs to be fixed.

6.) Finally there has to be an established cause and effect relationship between the defect and the risks inherent in the product. If there is none, then why are you spending time and money testing for it, “curing” it or trying to redo the process? Well of course you say, that only makes sense. So then, what are the defects that cause an unacceptable level of risk in a mortgage loan product or a loan servicing outcome? Unfortunately, we don’t know, or at least most of us don’t know. Sure we say LTV is a risk or DTI. And what about insufficient reserves? But where are the statistics that validate that?

While the industry has lots of data on performance and some of these static elements we attribute to poor performance, we have no way of knowing if the data we have used is accurate. In reality the only work done that is publically available are the results of investors and others whose interest is selling the product not improving the process.

Ultimately we do not have a standardized way to test our processes or relate them to product failures. We have failed to develop any meaningful relationship between process failures and risk and we spend all of our time and money on rework and unproven changes. No wonder recent MBA data identified that total loan production expenses increased to $6,932 per loan in the second quarter of 2014 from $5,818 per loan in the same quarter the previous year. This number is only going to get worse as QC staff increase the number of reviews for TRID and other regulations and agencies changes.

Where is the value?

Based on all the issues identified above, it is hard to comprehend that the industry has any idea of the value of their operational processes. Since we haven’t correlated defects to repurchases or rework let alone done any real work of identifying the causal relationships of these errors, it is impossible to know the difference between the cost of a product produced by a satisfactory process or the value of a consumer/investor that is satisfied with a successful servicing program. However, in order to determine that we do in fact know some of these numbers, let’s discuss the return on investing in quality improvements.

The return on the investment for any process improvement is calculated as the ratio of two financial estimates:

ROI=Net returns from improvement actions/ Investments in improvement actions. The numerator and denominator are defined as follows:

  • Net returns from improvement actions is the financial gains from the implementation of the improved actions, which are generated by new changes in quality, efficiency and utilization of services, or in payment for those services.
  • Investment in improvement actions are the costs of developing and operating the improvement actions.

Looking at an ROI calculation from this perspective it is fairly straightforward as to what the quality, efficiency and utilization of resources are involved in producing loans. If a produced loan does not follow the guidelines or processes in place to ensure a quality loan, then it is defective. This can mean that if the defect(s) are discovered by an investor, the loan may be rejected by the investor. If discovered prior to sending the loan to the investor it may have to be placed in portfolio, may have to be held on a warehouse line for an excessive amount of time increasing costs or sold as a “scratch and dent” loan. If problems are discovered during the process or by QC, the problem will have to be “cured” which involves rework by staff or even asking the consumer to supply additional information or replace documentation that was provided earlier. Again, this is more cost. And we can’t forget to include the time that production resources are dedicated to fixing something that has already been through the process rather than on generating additional income by producing additional loans.

However, we can develop a hypothetical example of how the ROI on quality can be determined. For our purposes let’s say that a review of the defects identified above cost around $2,000 per loan on average. Using the MBA production cost of $6,932 per loan we would add these additional costs of $2,000 per loan which raises the overall average cost production $7435. The cost of producing 100 loans per month is therefore $743,500.

Once we identify the operational controls that failed in the origination process that increased these production costs, we know what we have to fix. For our purposes we hypothesis that a change to the system will prevent the loan from moving to the next stage of production when these errors occur and training of the processors should correct the error.   The cost of these fixes is $25,000. The change is then implemented.

Once implemented, the QC staff measures the results. They find that the problem has been eliminated by these changes. In addition, the efficiency created by the revised process flow has taken an additional $10.00 off the cost of producing a loan.   Therefore we have achieved a net return of $2,010 from these improvement actions.   This change reduces our cost per loan to $5,425. Our monthly production cost, on average for 100 loans is therefore $582,500 or a difference of $ 2,010. Using the ROI formula for quality improvements our return is 6.44%.

While this example is somewhat simplistic in nature, it demonstrates that if individual companies were to understand and apply the concepts of quality management to their organizations, the value would be clear. So instead of complaining about the costs of quality control and the perceived cost of reviewing an excessive number of loans to ensure that they meet investor and regulator QC standards, lenders would be wise to redefine quality and begin to implement these previously validated, achievable returns on the investments they make.

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