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ARMCO’s Mortgage QC Industry Trends Report Reveals Swings in Loan Defects

NationalMortgageProfessional.com
Mar 08, 2017

ACES Risk Management (ARMCO), the leading provider of financial quality control and compliance software, announced that it has released its ARMCO Mortgage QC Industry Trends report for the third quarter of 2016. Using the Fannie Mae loan defect taxonomy, the report analyzes post-closing quality control data from loan files and findings captured by the ACES Analytics benchmarking system. Meaningful information contained in the report provides the industry with insight into the current state of loan quality nationwide.
 
The report notes a continuing downward trend in the critical defect rate, which dropped to 1.27 percent after reaching a high of 1.92 percent in Q1 of 2016. This reflects a 28.3 percent drop in Q3 of 2016, following a 17.8 percent drop in Q2 of 2016, providing an overall drop of just over 46 percent from the high of 1.92 percent from Q2 of 2016. 
 
“During the past nine months, investors and lenders have been able to clarify the impact of TRID-related errors on their operations and fine-tune the associated risks–both short and long term,” said Phil McCall, COO of ARMCO.
 
An analysis of top-ranking defect categories for 2016 highlights Legal/Regulatory/Compliance as an ongoing leading problem area. In fact, the number of total defects associated with the Legal/Regulatory/Compliance category spiked by more than 14 percent in the quarter covered by the report. However, the critical defects within that same category dropped to a 12-month low, comprising 22.69 percent of all critical defects. Changes in lender severity ratings related to TRID are the cause of this decrease, as explained in detail in the report.
 
Comprising 32.5 percent of all reported defects, Loan Package Documentation comes in as the second highest defect category and is still an ongoing issue within the entire lending process. While this category is known to be problematic across the industry, these defects are generally curable and rarely affect loan salability.
 
Notably, critical defects associated with Income/Employment led all categories for “Credit Related Defects.” The miscalculation of income was the primary reason reported with critical defects in this category.
 
“The findings in the Q3 Mortgage QC Industry Trends report demonstrate that while the industry as a whole is making progress in mitigating loan defects, there are still recurring trouble areas that must be addressed,” said Avi Naider, CEO of ARMCO. “At the same time, as we passed the one year anniversary of the implementation date for TRID, it’s fascinating to see a complex picture emerging among our lender base: Essentially, TRID defects still represent a large percentage of overall defects. Yet, lenders are concluding that minor TRID defects do not impact the salability of their loans based on their experience in the marketplace.”
 
The report also notes that Fannie Mae has provided considerable guidance to lenders as to how defects are reported for “Credit Related Defects” and what causes a defect, the risk associated with a defect, and how to report these defects under a standardized platform. To date, no similar guidance has been provided by the Consumer Financial Protection Bureau (CFPB) regarding TRID. Ultimately, the report concludes, the CFPB should consider offering guidance and establishing standards pertaining to TRID defects, to avoid deviations in reporting.
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