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
$
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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
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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
ACESQUALITY.COM | 800.878.1598