Executive Guide: Profit Retention Strategies for Quality Control Operations

EXECUTIVE GUIDE Profit Retention Strategies for Quality Control Operations Financial institutions improve loan manufacturing, lower defects and increase earnings through QC automation

EXECUTIVE SUMMARY Today’s mortgage lending landscape is unlike anything we’ve previously experienced. From the sudden shift to remote working, lenders were exposed to greater risk in the form of early payment defaults, rising critical defects and a wide range of manufacturing defects. As a result, lenders are absorbing a backbreaking amount of increased compliance and regulatory costs, and a QC program’s inability to contribute to lowering costs literally means lower profit margins for the lender.

Top Strategic QC Challenges

Meeting defect rate targets

Optimizing the QC function’s productivity and impact

Preparing for internal and external audits

Keeping up with GSE and regulatory requirements

CRITICAL DEFECT RATE

Q1 2020

Q2 2020

Q3 2020

Q4 2020

SOURCE: Q4 2020 ACES Mortgage QC Trends Report

EARLY PAYMENT DEFAULT PERCENTAGE

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

SOURCE: Q1 2021 ACES Mortgage QC Trends Report

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THE COST OF REPURCHASES AND DEFECTS QC’S CONTRIBUTION TO THE BOTTOM LINE ACES Quality Management estimates that every significant defect costs a lender, on average, almost 7% of the loan amount, and on non-performing loans, that number is even higher.

CASE STUDY – COST ANALYSIS (1 year)

COST OF DEFECT

5

HOURS

1000 Defects found within a year across all loans

Estimated time to review/remediate one defect

COST OF REPURCHASE

10

Repurchases within the year

$

500K (average cost of a repurchase at $50,000)

$

500K Cost to rework 1000 defects for that year

EXPONENTIAL Cost of customer dissatisfaction

Moderate defects, or manufacturing defects, usually don’t result in a repurchase on a specific loan but always involve costly rework, delays and a poor customer experience. Not addressing moderate defects leads to repeated mistakes and/or repurchases on future loans. ACES sees lenders’ QC units reporting up to a 10% moderate defect rate, and our models suggest each moderate defect subtracts 5% of the loan balance from profit margins.

An effective and profitable QC investment provides returns well beyond the actual file reviews. In fact, it’s an immediate source of actionable business intelligence that improves the bottom line.

Realized Results Only ACES Quality Management, the pillar of next generation risk management, improves and preserves profits.

Conduct Audits Faster

Through Automation

ACES client reported completing audits

40 FASTER %

Improve Analyst Productivity Lower Your Per File Cost $

40

Before ACES

Before ACES

With ACES

With ACES

$

80

$

120

$

160

165/File

$

10/File

$

4

4

CREATING QC OPERATIONS THAT DRIVE INCREASED PROFITABILITY

According to the MBA’s latest quarterly report, the cost to originate a loan is nearing $8,000; a cost that many in the industry feel cannot last. Documentation errors continue to plague the industry, with lenders sending loans back through underwriting five or six times due to faulty or errant documentation, and loan originators continue to command a premium in the market.

Forward-thinking lenders realize investing in QC as a real-time feedback mechanism drives continuous improvement to both revenue and cost.

Shifting the mindset from QC as a “no news is good news” role to a powerful, proactive source of improvement may separate profit winners and losers.

COST TO ORIGINATE $10000 $8000 $6000 $4000 $2000 $0

Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020

SOURCE: Mortgage Bankers Association Quarterly Mortgage Bankers Performance Report

HIDDEN RISKS OF USING “OTHER” QUALITY CONTROL METHODS

HIGH RISK

MODERATE RISK

In-House Manual Process

Outsourced Provider

“Other Auditing Software”

• Time Consuming • High Error-Rate • High Risk Defects

• • •

• Inflexible Technology • Inadequate Compliance Tools • Unresponsive Customer Support

Hidden Costly Fees Delayed Remediation No Control Over QC Process

QC Technology’s Return On Investment ACES Quality Management is the leading supplier of QC technology for a reason. Only ACES Quality Management & Control SoftwareTM enables lenders to evaluate the data required to identify and capture the accuracy and productivity of loan creation.

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“THE POSSIBILITIES ARE ENDLESS. ACES CAN MAKE ANY PROCESS FASTER, MORE EFFICIENT, MORE COMPLIANT AND RELIABLE.” CYNDI CLOUSE AVP, Quality Control Bay Equity

Rather than sampling and reporting on repurchase and compliance, the more advanced reporting tools from ACES can be mined for endless insight into company operations. ACES partners with a lender’s QC team to generate improvement ideas, gather market intel, stop overkill and prevent mistakes.

An optimized and targeted QC function also drives ROI that would be the envy of any capital project. ACES harnesses file review data that opens a window not only into defects, but also into how effectively an entire business operates.

ACES’ Two Strategic Components:

Ensuring a compliance and control environment that meets

regulatory standards and prevents catastrophic loss from

excessive repurchases; and

1 2

A one-of-a-kind source of business intelligence into how loans are being manufactured driving continuous improvement across the enterprise.

Track productivity across your entire team

Report shows defects by underwriter, which can help improve performance and enforce a culture of quality.

“THE ACES SOLUTION HAS ENABLED US TO INCREASE THE NUMBER OF TRANSACTIONS WE REVIEW IN QA AND QC BY MORE THAN 500% WITHOUT AN INCREASE IN STAFF. CHOOSING ACES AS OUR PARTNER WAS A TRUE SUCCESS STORY FOR FAY SERVICING.” HOWARD COHEN Chief Risk and Compliance Officer Fay Servicing

8

Analyses of All Loan Exceptions by Category

Defect rate trend reporting helps management identify loan quality issues and ultimately drive down defects.

Report shows defect exceptions by category, which can assist with action planning and remediation.

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WHAT ACES CLIENTS HAVE TO SAY

“ACES managed questionnaires have saved our underwriters on average 25-30 minutes per audit.”

SHANNON LATIMER Quality Control System Manager TIAA

“Our auditors are able to do 1-2 additional files a day. That has been great for our production numbers.”

KAYE SMITH Lead Senior Quality Control Analyst PRIMELENDING

OVER

50

% OF THE

TOP 50 LENDERS TOP

TOP

TOP

TOP

1 3 2 5 3 5 3 5 OF THE

OF THE

OF THE

OF THE

CREDIT UNIONS

COMMERCIAL BANKS

SERVICERS

INDEPENDENT MORTGAGE LENDERS

RELY ON ACES

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FLEXIBLE AUDIT TECHNOLOGY

CUSTOMERCENTRIC APPROACH

BUILT FOR THE ENTERPRISE

IMPROVE PRODUCTIVITY, EFFICIENCY AND QUALITY WHILE CONTROLLING COST

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