Proactive quality control for lenders: How to navigate market shifts, regulatory changes and improve loan quality.
With interest rates trending downward and refinances picking up, the industry is preparing for an upswing. This shift is welcomed good news given the tough origination market over the last two years. However, the most recent ACES Mortgage QC Industry Trends Reportfound critical defect rates jumped up in the first quarter (Q1) of this year. Not only does this break a five-quarter-long downward trend, but this uptick in defects happened at a time when mortgage originations were at their lowest levels since 2000.
With purchase originations recovering and a refinance market surfacing, lenders must pick up their quality control (QC) and quality assurance (QA) practices before it’s too late. Heightened enforcement at both the federal and state levels is expected to continue, especially as the election year comes to an end and state regulators intensify their focus on consumer protection. As such, lenders must stay vigilant in monitoring and adhering to state-specific regulations, particularly around “junk fees” and escrow management.
QC professionals are at the forefront of navigating a landscape shaped by shifting regulations, interest rates and operational complexities. We spoke with several QC professionals to get their take on the future and how they maintain high-quality QC and compliance. The three overarching themes in all of these conversations include:
- Operational efficiencies for delinquent accounts: QC teams are honing in on how effectively operational processes are managed for delinquent loans, from customer service to loss mitigation. Regularly monitoring customer interactions has become essential to ensure compliance and maintain high service standards.
- Pre-CTC review processes: In a proactive shift, some lenders are moving their QC efforts earlier in the loan process, conducting pre-clear-to-close (CTC) reviews. By identifying potential discrepancies and compliance issues upfront, lenders can prevent more significant problems from surfacing post-closing.
- Training for refinance preparedness: With potential market shifts on the horizon, organizations are investing in training loan officers to handle refinances effectively. Ensuring compliance with the latest refinance guidelines helps lenders stay agile and reduces potential errors in the process.
In addition to these operational areas, QC professionals are focusing on action planning and reporting to enhance data-driven decision-making. The Consumer Financial Protection Bureau (CFPB) consistently emphasizes the importance of self-assessment and remediation. Lenders who maintain detailed records and regularly ensure their internal processes meet regulatory requirements stay ahead of the curve. Not only does this demonstrate adherence to established guidelines, but in the event of an audit, clear reporting provides a solid roadmap of the organization’s efforts.
The importance of proactive QC
The mortgage industry has often found itself in a reactionary mode, especially regarding quality control. However, with increased regulatory scrutiny and unpredictable market dynamics, the time has come to shift from reactive measures to proactive QC strategies.
One critical shift is the adoption of pre-funding QC reviews. Fannie Mae now requires that at least 10% of production undergo pre-funding QC, a mandate designed to catch potential issues early. This change has made a proactive approach not just a best practice but a regulatory requirement.
“This year, we’ve implemented a new pre-close audit before our underwriters finalize the loan. We’re reviewing loans at the stage where they’ve been approved with conditions, giving us an earlier look before fully committing to underwriting,” said Anne Green, risk QA specialist at Enact MI. “By scrutinizing the underwriters’ decisions earlier, we aim to identify potential concerns before they become defects. While still in the pilot phase, this process has shown promising results. We’ve already identified a few areas for improvement, which will serve as valuable training opportunities to further enhance underwriting quality moving forward.”
Leveraging technology for QC success
Advances in audit and compliance technology are enabling lenders to enhance their QC processes and reduce risks. Technology also plays a crucial role in managing the complexities of reporting. QC teams can now track exceptions, trends and action plans in real time, helping organizations stay on top of emerging risks and stay compliant.
“We’re able to pull a lot of reporting from ACES on the findings that we have to report out to our operations teams and our title partners. We can easily pull reports on trending such as the top exceptions that we are seeing,” noted one post-closing operations manager. “We have quite a few areas of responsibility, and they all use the reporting to understand individual trends so we can remediate and improve our error rate.”
Preparing for future market shifts
As lenders anticipate changes in interest rates and market conditions, proactive QC will be essential to ensuring both compliance and growth. With interest rates expected to decline following the Federal Reserve Board’s rate cut announced at its September 2024 meeting, the sale of loan pools may increase, leading to shifts in servicing responsibilities and potential compliance challenges. In this environment, lenders must pay close attention to mortgage servicing rights (MSR) valuations and the fees charged to borrowers throughout the loan process.
A proactive QC approach will also help lenders navigate regulatory changes more effectively. Organizations can mitigate risks and avoid costly loan repurchases by staying ahead of compliance issues through early-stage reviews and robust technology solutions.
“I have to say ACES has been such a tremendous help in our QC review process. We went from literally a Word document checklist into ACES, which was also overwhelming but in a good way, because in trying to manage our own questions and stay up-to-date, at the end of the day, we weren’t,” said Sarah Serrano, QC manager at Neighborhood Loans. “With ACES, everything is current, and the resources and links that take you right to the guide, it’s phenomenal.”
The mortgage industry is at a crossroads, and proactive QC is the key to success in a complex, regulated and rapidly evolving market. By leveraging technology and shifting the focus to early-stage QC, lenders can safeguard loan quality, reduce risks and position themselves for long-term growth.
