An Industry Reacts
Lenders have been feeling the heat from the GSEs’ ever-changing polices since the housing market bubble burst in 2008, and their responses so far have been a mix of strategic adjustments and rapid learning. This hasn’t been easy, particularly during the most recent downturn. Not only does the average lender have fewer people dealing with more responsibilities, but while right-sizing, they also may have lost a considerable amount of institutional knowledge and experience, which can create operational gaps that put them at increased risk.
Clients that I’ve been advising are already revising their strategies, typically by doubling down on new technologies and services that both ensure the smooth running of their loan production processes while enhancing loan quality. Yet it’s clear that many lenders have not yet fully harnessed the potential of these tools. Automation and AI are still significantly underutilized in our industry, particularly when it comes to certain areas of loan production such as borrower employment and income verifications. This makes data cross-referencing for compliance with the GSEs’ new guidelines a formidable task, and auditing in prefunding QC a must.
Moreover, most third-party loan QC providers have also been stretched thin, because they too have had to right-size their operations with the market. For example, it is prudent to ensure your vendor is ready to comply with the new Fannie Mae QC requirements, which became effective Sept. 1. This is yet another major roadblock for lenders trying to meet the new 90-day turnaround requirement for performing post-close audits, curing defects, and devising plans to prevent future issues — not to mention meeting the minimum requirement for prefunding reviews.
Yet an increased attention to loan quality isn’t important only to those selling loans to Fannie Mae and Freddie Mac. All investors are amplifying their focus on this area. If you don’t sell loans to Fannie Mae, it is still a good idea to get insights into loan quality sooner to address systemic issues and keep your closed loans sold, regardless of investor. Because loan quality has increasingly become an industry-wide concern, lenders that find themselves lacking the resources and support to ensure compliance need to get busy finding them.
Assuming the average lender isn’t in the financial position to recruit and hire more compliance staff, the best strategic move is to identify and collaborate with partners that possess the expertise, resources, and cutting-edge technologies a lender needs to ensure Fannie and Freddie compliance. The right ally is one that can facilitate comprehensive post-close, pre-close and loan component reviews while tailoring their focus to GSE-specific guidelines.
Lenders can start by being proactive about understanding whether and how their existing QC partners plan to help them meet Fannie Mae’s expedited 90-day window and evaluating the available technologies and tools their vendor has at their disposal. For example, does the vendor have a way of evaluating high risk loan characteristics prior to closing? Can they validate loan file data before conducting post-close audits? And with more investors concerned over loan quality, how customizable is their technology when it comes to detecting defects for all loan products?
This analysis should include a vendor’s staff resources, too. A worthy partner should have already adapted their workforce structure to ensure their clients can not only meet but exceed the GSEs’ requirements and deadlines for both pre-close and post-close audits.
Automated technologies that have been machine-trained on large libraries of loan documents, preferably billions of them, can help to validate the quality of loan file data prior to audit review. The true magic unfolds when applying business rules to accurately identify conditions and ensure defects aren’t missed. And in cases where these technologies hit a roadblock or need auditor review, a lender’s partner should also be able to deploy human experts to assist in the process.
Many lenders I work with have already experienced the benefits of this synergy. Leveraging AI-enabled document processing, data extraction, automated auditing, and reporting coupled with human expertise results in an enhanced level of quality and a reduction in loan file touches. Whether performing QC in-house or outsourcing, I’ve seen lenders be able to reduce their costs by a whopping 35% to 50%.
That being said, it’s critical to choose a partner that is not only capable of supporting a lender’s loan quality processes but is also consistently scrutinizing its own operations and making iterative process improvements, so the gains in ROI improve over time. The best partner, for example, should be able to support dynamic, real-time reporting that facilitates the lender’s ability to monitor defect rates and create an effective action plan for improving the quality of their loan files.