QUESTION
We are a lender in the southwest. I am the
VP of mortgage lending. Our loans are only conventional on 1-4 single family
residential property. Our primary investor is Fannie Mae. We do not originate government
loans or investor loans.
Recently, we ended the relationship with
our quality control auditor. So, we're now looking around to replace them. We
went to a conference where several lenders highly recommended your firm. So, our
compliance manager will be contacting you soon.
Now, we're updating our quality control
plan. We need to start over with a new quality control plan. We need guidance
about the areas we should outline in the QC plan. I realize this is a big
subject, so maybe you can provide an overview of the basic elements.
What are the basic requirements of a QC Plan?
ANSWER
There are essentially six parts to a basic
Quality Control Plan ("Plan" or "Program"). More about that
shortly. Depending on the company's size, risk profile, complexity, loan
products, and investor conduits, to name a few factors, the Plan's purpose is
central to controlling a mortgage lender's originating environment.
Thank you for contacting us to handle
your quality control auditing. We can accommodate any production size and audit
virtually all loan products. We have an entire group devoted to quality control, headed by an Executive Director, and staffed with an accomplished
audit staff.
Please contact us here. We'll
see that you speak directly with our audit management team.
I would add that it is critical to
ensure that the Plan and the QC auditing are aligned. When regulators and
investors review your QC reports, they want to see that you are implementing
the requirements of your specific Program. When LCG conducts QC, we can provide
a Plan that properly reflects your auditing needs. Be sure to discuss the Plan
requirements when you speak to us.
You should consider establishing a baseline review of your quality control compliance. To effectuate this assessment, many company's use our QC Tune-up. This mini-audit provides substantive evaluation of your quality control function and provides a risk rating. It's cost-effective, hands-on, and quick. If interested, contact us here for information about the QC Tune-up.
Because you originate only conventional loans
and your primary investor is Fannie Mae (“Fannie”), my response will address the QC
requirements for conventional generally and Fannie in particular.[i]
Your QC Plan must define your lending
standards for loan quality, establish processes designed to achieve those
standards and mitigate risks associated with the loan origination processes. In
that regard, Fannie requires the lender to develop and implement a QC program
that provides a structure for identifying the deficiencies in the loan
manufacturing process and implementing plans to remediate those deficiencies
and underlying issues quickly.
Six Parts of a Quality Control Program
I mentioned above that there are six
parts to a basic Quality Control Plan. I am going to provide a brief description
of each part. I urge you to contact us if you want a more detailed discussion.
The six parts of a QC Program are:
1.
Overview;
2.
Contents;
3.
Standards
and Measures;
4.
File
Reviews; and
5.
Reporting
and Remediation.
Overview
Put simply, the Program must include a
documented QC Plan that outlines requirements for validating that loans are
originated under its established policies and procedures.
The Overview must provide guidelines to ensure
that:
· the
loans comply with applicable federal, state, and local laws and regulations;
· the
loans comply with investors' guidelines, such as Fannie Mae's Selling Guide,
all related contractual terms and agreements, and are in all respects eligible
for delivery to Fannie; and
· the
Plan must guard against fraud, negligence, errors, and omissions by officers,
employees, contractors (whether or not involved in the origination of the
mortgage loans), brokers, borrowers, marketing partners, and others involved in
the mortgage process.
Contents
The Plan must include documented QC procedures
that establish standards for quality and incorporate systems and processes for
achieving those standards. At a minimum, the Plan must contain the following categories.
· Quality
standards and measures, including:
o
a
general overview and description of the QC philosophy;
o
the
plan objectives;
o
specific
risks to be measured, monitored, and managed; and
o
the
methods used to ensure the Program is an independent and unbiased function,
including program governance (targets, sampling) and transaction execution.
· Procedures involving detailed operating and
reporting methods for all employees affected by the QC process.
· QC file
review process: a process for performing prefunding and post-closing QC
file reviews, including, at a minimum, a method for
o
confirming
compliance with the investors’ guidelines, all related contractual terms and
agreements, and that the loans are in all respects eligible for delivery to
Fannie; and
o
confirming
compliance with applicable federal, state, and local laws and regulations.
· Sample
selection process: the procedures and metrics for identifying a
representative sample of loans for QC file reviews using both random and
discretionary selection methodologies, as applicable, that include loans
o
originated
through each applicable production channel (for example, retail, correspondent,
and third-party originators);
o
originated
under all mortgage products (for instance, fixed, ARM, and special or niche
programs); and
o
originated
using all underwriting methods (manual and AUS).
· Reporting: written procedures for reporting the
results of the QC file reviews, including the method of monthly reporting of
review findings, including
o
the
method of monthly reporting of review findings;
o
identifying
critical components included in the reports;
o
distributing
summary-level findings to senior management;
o
distributing
loan-level findings to the business unit(s), specifically to parties within the
business unit(s) responsible for resolution;
o
requiring
a timely response to and resolution – or resolution plan – of findings
identified in the QC review process; and
o
maintaining
accurate and detailed records of the QC reviews’ results.
· Vendor
review: a process for
reviewing the QC work performed by the third-party auditors.
· File
retention: procedures
for maintaining for three years records of the QC findings and reports, loan
files reviewed, and all related documentation, including chronicling the
location of such records.
· Audit: an audit process to ensure that the
lender’s QC processes and procedures are followed by the QC staff and that its
assessments and conclusions are recorded and consistently applied.
Quality Standards and Measures
This is a somewhat complicated area,
often leading to confusion. So, I will offer a high-level description. A lender
is responsible for the development and maintenance of standards for loan
quality and the establishment of processes designed to achieve those standards.
To evaluate and measure loan quality
standards effectively, the lender must establish a methodology for identifying,
categorizing, and measuring defects and trends against an established target
defect rate.
At a minimum, the lender must identify
any loans with a defect; specifically, these are loans not in compliance with investor
guidelines or other related contractual terms and agreements. A methodology
must be established by which all loans with identified defects can be
categorized based on the severity of the defect. The lender must define the
severity levels appropriate to its organization and reporting needs; however,
the highest severity level must be assigned to those loans with defects
resulting in the loan not being eligible as delivered to Fannie.
The lender must also establish target
defect rates for its organization, reflecting its quality standards and goals. Establishing
a target defect rate is based on a lender’s post-closing random QC sample. It
enables the lender to regularly evaluate and measure progress in meeting loan
quality standards.
Different target defect rates may be
established for different severity levels; however, at a minimum, a target
defect rate must be established for the lender’s highest level of severity.
Here’s an suggestion: a target defect rate that is as
reasonably low as possible should be established. Once the targets are set,
performance against the targets must be measured at least quarterly and
reported to management. It is also essential that the target defect rate(s) be
evaluated and, if necessary, reset at least annually. The lender must
document the rationale for establishing the target rate(s). During a Fannie
review, consideration may be given to how the lender’s chosen target defect
rate affects the investor’s risk. Sometimes, this leads to the investor
requiring a more realistic target.
