Question
We have
developed Net Defect Rate Targets, but we do not see the need to set targets
for Gross Defect Rates. Is this acceptable?
Answer
No,
it is not acceptable for several reasons. First of all, Fannie Mae requires
lenders to set targets for both Gross and Net Defect Rates and then to track
their performance with respect to meeting these target levels each month
through their Post-Closing Quality Control Program.
More
importantly, lenders need to track and monitor their Gross Defect Rates, because
this percentage measures the efficiency or inefficiency of their loan
origination process. In other words, how good of a job are they doing at
originating, underwriting and closing mortgage loans? With today’s mortgage origination
environment and ever shrinking profit margins, it is imperative that lenders
have an efficient and cost effective process of producing viable mortgage
loans.
Gross
Defect Rates are an excellent way of measuring and monitoring, over time, how
good the production operation is performing, as this metric indicates the
condition of the loan file documentation as received by the lender’s quality
control department, directly from the production operation.
Net
Defect Rates, on the other hand, indicate the condition of the loan file
documentation of the sample of loans after findings or errors have been
fixed, remedied or explained away. Keep in mind that defect rates are
calculated from the errors or findings found in the sample of loans, not
the lender’s total book of business for the audit period.
If
a lender has a high Gross Defect Rate but a low Net Defect Rate, that indicates
it is good at fixing findings in the loans being sampled, but it is failing to
realize that a high Gross Defect Rate in the sample indicates a high error rate
in the total loans originated – assuming that the sampling method resulted in
the sample being statistically representative of the total population. High
error rates in a lender’s total book of business is costly and could increase
the probability that loans will be originated that end up as ineligible for
sale to investors.
Many
lenders will concentrate on their Net Defect Rates in order to get an excellent
Final Quality Control Audit Report to show their senior management, board of
directors, and investors; but, these lenders are missing an important element
of quality control, which is evaluating the cost effectiveness of their
production operation.
I
urge you to set targets and track your Gross Defect Rates, in addition to your
Net Defect Rates.
Bruce
Culp
Director/Quality
Control & Loan Analytics
Lenders
Compliance Group
