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Thursday, October 3, 2013

Monitoring the Quality Control Auditor

QUESTION
Our investor has told us that we need to monitor our quality control vendor.  Exactly how do we do this?

ANSWER
Your investor is correct. It is very important to monitor your quality control provider to ensure that the firm is performing the audit work in accordance with your Quality Control Plan (“Plan”) and pursuant to industry requirements. Even though it is acceptable to outsource the quality control function, as the lender you are ultimately responsible for the administration and performance of your quality control program. The following are our suggestions to properly monitor your quality control vendor.

At least annually, review your Quality Control Plan with your quality control provider to ensure that the Plan is up to date with respect to any changes in investor and regulatory requirements, and also to verify that the quality control provider is aware of the changes and has incorporated them in its audit procedures. 

Closely review the quality control audit reports you receive each month from your quality control provider and do not hesitate to question the findings and conclusions. As part of your required process to determine the cause of the findings and to take appropriate action to prevent the re-occurrence of the errors, you will be able to verify the correctness of the findings as reported by your provider. If you have documentation that disputes the findings, discuss these matters with your provider, and if they made a mistake require them to issue a revised report.

Periodically, request from your quality control provider copies of the audit work papers, checklists and all supporting documentation for a sample of loans that have been audited. It is not necessary or practicable to re-audit the files; instead, check to make sure that all questions or audit steps on the checklists have been answered and satisfactorily completed. Also review the documentation to ensure that there is adequate proof that the auditor did, in fact, satisfactorily re-verify the credit documents supporting employment, income, assets and gifts, and so forth, used by the underwriters.

Some lenders will rely on their Internal Audit Departments or independent, outside auditors to perform this task as part of their annual audit of internal control systems, of which Quality Control is a major secondary internal control point.

Other lenders will perform this task monthly or quarterly rather than waiting until the end of the year audits. In fact, Fannie Mae, in their recent Selling Guide Announcement SEL-2013-05, stated that “the lender must perform a monthly review of a minimum of 10% of the loans reviewed by the vendor to validate the accuracy and completeness of the vendor’s work. The 10% sample must include loans for which the vendor identified defects and for which no defects were identified. This review must be performed by the lender itself, and may not be contracted out.” This Announcement was issued on July 30, 2013 and can be implemented immediately, but must be implemented by January 1, 2014. The new 10% requirement might seem extreme; however, it is an excellent way to monitor your quality control vendor to ensure that it is providing you with top quality service at all times.

Bruce Culp
Director/Quality Control and Loan Analytics
Lenders Compliance Group