With today's increased scrutiny on the internal operations of lender and servicers, it's only natural that the requirements for quality-control (QC) programs have followed suit. [paragraph] Fannie Mae, Freddie Mac and the Department of Housing and Urban Development (HUD) have all issued revised program guidelines and review requirements for loan origination programs. These include new pre-funding reviews and, in an effort to mimic the standards of manufacturing quality, they have required that mistakes in the files be labeled as "defects." On the servicing side, servicing QC programs from Fannie Mae and Freddie Mac have been added to the existing HUD programs, along with the new Consumer Financial Protection Bureau (CFPB) servicing standards. All of this caught many companies off-guard. In numerous discussions with lenders and servicers, I've found that, by and large, they are struggling to keep up with the many changes. [paragraph] Quality-control programs monitor the risk associated with failures in the operational process. Investors and regulators closely analyze the QC process employed by lenders to ensure that loans being produced are of investment quality.
Unfortunately, many QC programs have not kept pace with the changes resulting from emerging regulations and loan evaluations in the mortgage industry. Through my discussions with colleagues from various companies, I've learned that they are struggling to incorporate the "defect" label into the results in a way that makes sense or is meaningful. One lender I spoke with expressed the frustration by commenting that these defects were supposed to be indicators of potential repurchase risk. And while the number of defects the lender found was higher than it would have liked, the lender had only had one repurchase request--leaving management wondering if all the extra time and cost was really beneficial.
Traditionally the industry has followed the QC program requirements designated by Fannie Mae and Freddie Mac for conventional loans, and Federal Housing Administration (FHA)/Department of Veterans Affairs (VA) requirements for government loans. During the past year, those guidelines have undergone major revisions.
For example, Fannie Mae's new guidelines place the responsibility for establishing quality standards on the lender. The new guidelines, including the revised Part D of the quality-control requirements of the guide and Freddie Mac's 2012-22 Bulletin and letter of Oct. 19, 2012, require lenders to develop and maintain a QC program that defines standards for loan quality and establish processes designed to achieve those standards throughout the entire origination book of business.
The program must include the reporting of results of quality reviews to the lender's management in each area of the business, as well as the senior management. It then becomes these managers' responsibility to address the problems from a process perspective rather than on a case-by-case basis.
Lenders slow to adopt new QC programs
Lenders have been slow to respond to these new requirements. In my discussions with clients and colleagues, I'm finding they are overwhelmed with the number and frequency of changes being issued. In addition, while management may support these changes, they are slow to provide the necessary funding...