ARMCO: Loan Defect Rate Dropped In Second Quarter

Posted by Patrick Barnard on December 06, 2016 No Comments

About 1.63% of all loan files included “critical” defects in the second quarter – down from a peak of 1.92% in the first quarter, according to ARMCO’s QC Trends report, which analyzes loan data passing through the firm’s ACES Analytics benchmarking software.

Still, critical defects were higher than they were in the third quarter of 2015, when 0.77% of all files had critical defects.

A critical loan defect is one that would likely preclude a loan from funding under the current regulations and agency requirements. However, there is no standard definition of what a critical loan defect is. ARMCO uses the Fannie Mae loan defect taxonomy, along with its own analysis of data captured by the ACES Analytics benchmarking system, to arrive at the findings of its QC report.

The second-quarter report finds that defects in the “legal/regulatory/compliance” category continued to decrease; however, this category remains the largest, with about 34% of all defects fitting into this category.

The report also finds that “credit-related” defects increased significantly compared with the first quarter. Defects related to assets were up 172%, defects related to borrower/mortgage eligibility were up 162%, defects related to credit were up 91%, and defects related to income/employment were up 69%.

Defects related to the TILA-RESPA Integrated Disclosures (TRID) rule were down slightly compared with the first quarter.

“While TRID-related defects are still driving the majority of legal/regulatory/compliance defects, we’re seeing a decline in defects in this category as a result of corrective action planning lenders undertook through the first six months of 2016,” says Phil McCall, chief operating officer for ARMCO, in a statement. “As lenders determine the most effective strategies for addressing TRID-related defects, we expect to see this category decline further.”

Loan package documentation defects increased slightly and accounted for 26.7% of reported defects versus 26.4% in the first quarter.

“Given the magnitude of compliance-related defects lenders were facing in the first quarter, it’s not surprising to see upticks in other areas,” says Avi Naider, CEO for ARMCO. “Now that lenders have begun to get a handle on their TRID-related defects, they should have more capacity to address those credit-related defects. Thus, we should see those categories normalize in the third quarter.”

To view the full report, click here.

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