In this month’s issue, we have two features on the topic of quality control (QC), contributed by two of the top technology vendors in the space - Cogent QC and LoanLogics. Although each article takes a different approach to the topic - the Cogent QC article is focused on Fannie and Freddie’s QC requirements while the LoanLogics article is focused on compliance with the Consumer Financial Protection Bureau’s (CFPB) new qualified mortgage (QM) rules - both make the point that, despite the headaches and high cost of compliance, lenders stand to benefit, operationally and profit-wise, from improving their QC processes. So, it’s not just about compliance.

The recent changes to Fannie and Freddie’s QC requirements, as well as the CFPB’s QM rules, mean lenders basically have no choice but to revamp their QC programs to make them more robust and effective. Perhaps the biggest change is that QC will no longer take place at the end of the process - or after the loan has been sold. Rather, lenders must now implement QC upon origination to ensure that quality is maintained throughout the entire pre-close process. This significant change comes at a high cost - lenders have had to invest in new technology, people and training to make “pre-closing QC” happen. But as both features in this month’s issue point out, the high cost of having to buy back loans or getting fined by the CFPB for QM violations is far more onerous.

The new regulations have, in effect, raised the bar for QC - and as both articles point out, that’s a good thing. As Les Parker of LoanLogics states in his article, lenders stand to benefit from improved QC processes, as they can reduce the time spent in originating a loan, as well as the average number of days required to fund a loan. “This mitigates the lender’s risk while reducing its costs in the process - without sacrificing quality or capital,” he says. And, as Kaan Etem of Cogent QC points out, “The more efficiently a lender can ensure that its product is high quality, the better the profit margins.” The key is to figure out a way to turn QC into a profit center as opposed to a cost center.

It will be interesting to see, over the next year, which lenders end up in hot water with the CFPB as a result of a lack of appropriate QC measures - and more importantly, which aspects of QC prove most risky. The CFPB and the government-sponsored enterprises haven’t prescribed how lenders should go about formulating their QC programs - that largely depends on the type of lender, its philosophy on QC and compliance, and its book of business. As Etem states, all lenders will want to originate good-quality loans at a reasonable cost - but their definitions of “good quality” and “reasonable cost” will differ. What’s more, each will have a different appetite for risk.

So, despite the new regulatory framework, there will continue to be varying degrees of QC proficiency across the industry - and it will take time for lenders to refine their QC processes to the point where they are considered “standard” business practices to produce “risk-free” loans.

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