The Holistic Approach: A Paradigm Shift for Quality Control in Mortgage Lending

In the modern mortgage landscape, quality control is a crucial pillar that supports the integrity and stability of the industry. As market conditions fluctuate and regulatory scrutiny intensifies, lenders must adopt a comprehensive QC approach that goes beyond compliance check boxes. Ed Gerding of Consolidated Analytics offers recommended strategies and best practices to take lenders’ QC programs from adequate to exceptional.

The Holistic Approach: A Paradigm Shift in Quality Control

The traditional view of QC as a post-closure audit function is quickly becoming outdated. Ed Gerding, CMB, advocates a more comprehensive strategy: “A holistic approach is extremely crucial for lenders to reduce financial, operational and reputational risks,” he explains. This approach integrates QC principles throughout the entire credit process, from application to service provision.

The key components of a holistic QC program include:

1. Organizational structure: Guarantee independence from production pressure
2. Personnel and management: Recruiting experienced professionals with proven track records
3. Course: Implement and maintain robust, up-to-date training protocols
4. Policies and procedures: Updated regularly to reflect current market conditions and investor requirements
5. Reporting: Developing comprehensive analyzes that highlight trends and areas of high risk
6. Supplier management: Oversee outsourced QC functions

Implementing these elements creates a framework that not only catches errors, but also prevents them from occurring in the first place.

Seasonal lulls as opportunities for QC improvement

The cyclical mortgage sector offers challenges and opportunities for quality improvement. As Gerding notes, “Typically, the volume of mortgage production has declined slightly in November and then through the winter months.” Instead of seeing this as a setback, forward-thinking lenders can use this time to their advantage.

During slower periods, lenders should:

• Conduct thorough reviews of their quality control programs
• Update policies and procedures
• Provide additional training for staff
• Implement new technologies to improve QC processes

By investing in these areas during downtime, lenders position themselves for success when the market inevitably rebounds.

The power of proactive quality control

One of the most important shifts in QC philosophy is the transition from reactive to proactive strategies. Gerding emphasizes this point: “A proactive quality control program really tries to identify and minimize risks before they become a major problem.” This approach involves analyzing data from post-closing assessments to inform discretionary sampling for funding.

Implementing a proactive QC strategy provides several benefits:

• Reduction of credit defects
• Improved loan quality
• Improved investor confidence
• Reduced buyback risk

Lenders that take this forward-thinking approach often lead the way when it comes to loan quality and regulatory compliance.

Overcoming common QC pitfalls

Even well-intentioned quality control programs can fall short if they don’t address certain key areas. According to Gerding, a common mistake is inadequate reporting: “QC reporting can often be improved by adding a summary component.” This summary should show defects over time and across all types of reviews, giving executives a clear, concise view of the quality of credit production.

Other possible pitfalls include:

• Insufficient sample size
• Lack of integration between pre-financing and post-closing QC
• Failure to take action on QC findings
• Inconsistent application of QC standards across different channels or products

By addressing these issues head-on, lenders significantly strengthen their quality control programs and overall risk management strategies.

The need for data integrity

In an age where data drives decision-making, ensuring the accuracy and completeness of loan data is critical. “Data integrity is critical to effectively managing the quality of a lender’s loan production,” says Gerding. This focus aligns with Fannie Mae’s QC requirements and reflects the growing importance of data in the credit process.

Strategies for improving data integrity include:

• Implementing automated data validation tools
• Carrying out regular data audits
• Train staff on the importance of accurate data entry
• Setting up a clear data management policy

By prioritizing data integrity, lenders will not only improve their QC results, but also position themselves to leverage advanced analytics and machine learning technologies in the future.

Adjusting quality control for lenders of all sizes

While large institutions can devote significant resources to quality control, smaller credit unions and independent mortgage bankers face unique challenges. However, Gerding emphasizes that size should not be a barrier to effective quality control: “It is still critical that they have access to their quality control programs to ensure they are compliant from a regulatory and agency requirements perspective .”

Smaller lenders can improve their QC programs by:

• Leverage technology to automate certain QC tasks
• Outsourcing specific QC functions to specialized suppliers
• Focusing on high-risk areas identified through data analysis
• Collaborate with industry peers to share best practices

By taking these steps, even lenders with limited resources can develop robust quality control programs that reduce risk and ensure compliance.

Preparing for the future of mortgage QC

As the industry looks ahead, several trends are likely to shape the future of mortgage quality:

1. Increased automation: Machine learning and AI will play a greater role in identifying potential defects and anomalies.
2. Real-time quality control: The line between pre-financing and post-closing quality control will blur as technology enables more real-time quality control.
3. Improved data analysis: Predictive models allow lenders to identify potential problems before they happen.
4. Regulatory Technology (RegTech): Specialized tools help lenders stay compliant with ever-changing regulations.

Gerding advises lenders to remain flexible and prepared: “As interest rates fall and production volume increases, it becomes critical to ensure you have the right number of employees for your quality control, compliance and internal audit functions, as the workforce has decreased in recent years with production volume.”

As the mortgage industry continues to evolve, a comprehensive and adaptable approach to quality control will be essential for lenders looking to thrive in a competitive marketplace. By embracing holistic strategies, leveraging technology and staying ahead of industry trends, lenders can turn their QC programs into a real competitive advantage.