Quality Mortgage Services Feature Article

How to Know If Your Mortgage Bank is at Risk

By Thomas Duncan After 20 years in this business, the executives at Quality Mortgage Services have seen a number of mortgage companies come and go, more lately than ever before. This downturn has been particularly difficult on mortgage banks and weve seen them exit the business by the hundreds. Some left because as the market turned, order taking was no longer a sufficient way to capture business. Others left because they were unwilling to comply with new regulations. Far too many left unwillingly because they made mistakes that could have been corrected. Over the years, we have found a set of common behaviors among the mortgage lenders in that last category, most of whom went out of business because of poor loan quality. In our analysis of a statistically significant number of failed mortgage banks, we have found that they share a common set of poor quality control practices. In cases where we have audited banks that have been assessed large fines, have lost lines of credit or have failed out of business due to repurchase requests that resulted from high levels of loan defects, we found consistently poor underwriting practices, loan processing practices and almost non-existent quality control practices. In this short article, well outline our findings and reveal some of the signs that a mortgage banking operation is at risk of exiting the business in the near future. Sign 1: The lender fails to provide its Quality Control company with a production list or loan selection within a week after a production period. Mortgage firms that quickly develop their loan selection for post closing QC via their QC company or by using other tools that provide statistical sampling are usually on top of their QC program. This simple exercise demonstrates that they are sensitive to the time requirements established by the agencies for completing post closing audit reviews. This is the first step in being fully compliant, but it is surprising how many firms are still deficient in this area. If a mortgage lender is not aggressive at meeting this initial requirement, we have found that the firm is usually not aggressive in their QC program and typically will not follow their own QC plan, even if they have one in writing.

In our experience, those mortgage bankers who fail to produce a statistical sampling of loans and then provide those loans to QC auditors will always have a high percentage of problem loans and see more repurchase requests than those lenders that perform diligent post-closing loan audits. Sign 2: The lender fails to provide the loans selected from its statistical sampling process to the QC company within 5 days of the loans being selected. In this age of electronic data transfer and paperless mortgage files, the QC company should always see the sample loans within a week of their selection. In every case where we have found lenders that fail to provide their QC company with sample loans within a reasonable amount of time after closing, we have found more risky loans than lenders that are more aggressive with their QC process and that deliver their loans more quickly. A best practice among mortgage banks that we have audited is to write time requirements into the quality control plan for loans moving through the post closing QC audit process and the require that employees follow those requirements. Firms that do this consistently demonstrate better loan quality than those mortgage lenders that fall short of providing their mortgage loans to their QC vendor within 5 days of the end of the production period. Sign 3: The lenders percentage of high risk loans totals 5% or more of the total files audited in any post closing QC audit period. If a mortgage lenders post closing QC report indicates that 5% or more of the loans audited have a risk of triggering a repurchase request, there can be no other conclusion but that the lenders underwriting department is not operating correctly and that its QC program is not capable of ensuring the delivery of a quality product to investors. Almost every mortgage lender uses some form of automated underwriting system (AUS). These tools are fine if used properly, but our experience indicates that the majority of the serious loan defects found during an audit involves loans submitted through an AUS where the data was manipulated after the fact in order to receive an acceptable decision. Sign 4: The lender does not have a designated and empowered QC manager who is committed to addressing every discrepancy found in a post closing QC audit with the production staff or correspondents. Those mortgage bankers who delegate the interaction with their loan production staff and correspondents in order to resolve gaps and to prevent loan defects in loan production and preclosing QC to dedicated QC managers have better loan quality than those that do not. QC managers must then be given the authority to provide analysis, solicit and provide feedback, and to train the loan production and underwriting staff.

Sign 5: The lender waits until someone else notifies the bank of early payment default before taking action. It has been our experience that lenders that wait until they have been audited by an agency or receive a repurchase request before auditing their early payment defaults are usually failing in one or more of the areas mentioned above. If the lender waits until someone else alerts the institution to early payment defaults, it already too late. By that time, no QC vendor can help because large fines, lost lines of credit and repurchase requests are already on the way. Sign 6: The banks principal leadership does not empower the QC Manager to accomplish the job. If loan production staff and correspondents do not feel that the banks QC managers have the power to stop a deal, they will not comply with QC procedures set by the bank and loan quality will suffer. It falls to the companys highest executives to empower QC managers to do their jobs. When they fail to delegate this authority, they routinely fall short of their goals for loan quality. In todays environment, thats like asking federal regulators to put you out of business. It is a best practice among lenders that we have audited to routinely delegate authority to strong QC managers who are empowered to make go/no-go decisions on loan transactions and then back them up with the services of a professional post closing quality control vendor that specializes in providing QC audits and that offers the resources to track, monitor, manage, and perform mortgage quality control with powerful software. If mortgage executives consistently watch for any of these risk indicators in their own businesses and stick to best practices for quality control within their enterprises, they will continue to thrive in the new environment. About the Author Thomas Duncan is president of Quality Mortgage Services, a firm he founded in 1992 to provide QC audits to lenders and software tools for auditors. He was formerly with the HUD/FHA Monitoring Division and the Office of Lender Activities and Interstate Land Sales. ###