Loan quality control is again top of mind for lenders, partially due to the wave of loan-repurchase requests from Fannie Mae and Freddie Mac earlier this year. Higher loan volumes in 2020 and 2021 led to proportionally more repurchase requests, and the industry is taking another look at their risk mitigation strategies as a result.
“It’s fair to say that the industry routinely has, especially since the 2008 credit crisis, been focused on risk,” said Kristin Broadley, chief innovation officer at QC Ally. “It never hurts to reassess, and I think having the repurchases come through at volume helped people hone in and focus on it. I think everyone’s aware that defect rates are up and people are committed as an industry to making sure that they’re originating good loans.”
Fannie Mae’s new QC pre-fund requirements
New Fannie Mae QC prefunding requirements have provided another reason for lenders to reassess their quality control and risk mitigation strategies. The prefunding requirements, announced in March, will become active as of September 1, 2023.
According to Fannie Mae, the goal of these new prefunding requirements is to “enhance loan quality, reduce credit risk, and safeguard the overall stability of the lender, Fannie Mae, and the overall mortgage market.”
The new requirements mean lenders must complete a minimum number of prefunding QC reviews each month. The review must be conducted by people with no involvement in the processing and underwriting decision of the loan being reviewed. And the lender’s loan selections must equal, at minimum, the lesser of either 10% of the prior month’s total number of loans originated or acquired, or a total of 750 loans.
“Fannie Mae is focusing on what we at QC Ally like to call the ‘Power of Prefund,’ and that is that if you move your QC into your origination, you can get much more strategic when it comes to remediating defects in real time and identifying trends,” Broadley said. “When you have a prefund review that’s structured to identify opportunities, efficiencies and defects in real time, it’s an instantaneous ability to identify and remediate trends before you incur liability, because that loan has not closed yet.”
Prefund reviews also allow lenders to work benchmarking, strategic quality assurance selections and component reviews into their origination process. This means executive leaders can gain confidence about the certainty and quality of their manufacturing process.
“The ability to qualify folks and feel confident in how you’re qualifying them all stems from having certainty around your manufacturing process, and QC and QA in the prefund space gets you there faster,” Broadley said.
Are you prepared?
With so little time until the September 1st effective date, lenders should already have taken action to prepare for the changes, including:
Taking a look at how the rules will impact their current QC policy and procedure
Determining how they want to structure their prefund reviews and whether they want to handle those reviews internally or externally
Creating a review cadence in order to have robust governance and monitoring in the prefund space
In terms of whether to perform a component review or full-file review, the most efficient strategy is to do a mix of both, if possible, Broadley said.
In a component review, you isolate a qualifying characteristic of the loan file to sample for review. Because the component review focuses on a single piece of the origination process, it’s very efficient and effective when the sample is structured correctly.
A full-file review is a bit more robust and requires more resources but gives you a holistic look at your loan file and process. It can allow you to test an underwriter or LO or give you a statistical sample of your overall production for any given month.
“If you blend both the full file to understand how your manufacturing process is being facilitated overarchingly, you can then leverage those component reviews for the loan characteristics that you find risky,” Broadley said. “Then, you really have a holistic look at the health of your manufacturing process.”
Leveraging a third-party QC expert
The main challenge of these new QC prefund requirements will be scale, as 10% of the previous closed month production or up to 750 loans can be a lot. Because of the resource scarcity and right-sizing of the industry from a production perspective, it can be difficult to allocate the right number of resources to handle these requirements. Many lenders may turn to a third-party QC firm to facilitate the reviews.
That’s where QC Ally can step in to help. The firm is made up of subject matter experts on QC, review and audit, and its team can help update policy and procedures, work out a governance and monitoring program and help with the QC audits themselves.
Additionally, working with QC Ally adds a variable cost versus a fixed cost to a lender’s process.
“If you want to scale responsibly — and this market will change, it is a cyclical market — it’s hard to add good resources quickly,” Broadley said. “Going to a subject matter [expert] in any single area allows you to scale and facilitate those things that you have to do without adding cost or risk to your bottom line.”
To learn more about working with QC Ally, visit https://qcally.com/.
