The importance of QC in preparing for the secondary market
by Alok Bansal
Lenders always want to maintain a good level of liquidity across their portfolio. This means that once loans are funded, they will sell these portfolios to investors and the secondary market to bring back the capital in their business. This is only possible when investors do not see any risk in the portfolio. If the portfolio has many bad loans, then the lenders get stuck with these loans.
To reduce the risk of having bad loans in their portfolio, a lot of lenders resort to a specialized pre-funding Quality check. This is to ensure that any anomalies that were not caught by an underwriter are caught here, before funding the loan.
If you can have a comprehensive checklist at the pre-funding level, a checklist that you can make mandatory as a part of your process and a checklist that can be customized for different locations, different user groups, then you can ensure that your risk in funding bad loans is minimized. There are quite a few details in the underwriting process that need to be thoroughly checked and verified before being cleared for funding. For instance:
- Any missing information in the documents submitted by the borrower
- Credit issues, problems in credit history
- Lack of evidence of funding capacity
- Discrepancies in tax documents submitted
- Evidence of stable employment ensures borrower’s capacity to repay loan
- Fraudulent income declaration
And a few other gray areas where the underwriters need to use their wits and expertise to take decisions about the borrower’s eligibility for loan approval.
Due to the stringent policies set up by Fannie Mae, Freddie Mac and other regulatory bodies, it has become necessary for mortgage lenders to have an effective and efficient quality control process in place. Apart from regulatory fines and damage to reputation, bad loans can also lead to potentially incurring foreclosure costs as well as having to sell the property at unreasonable price. These are some of the risks that can be avoided or minimized by having a robust pre-funding QC process in place
Some underwriters may not have thoroughly checked the borrower’s application or some may have willingly ignored a few inconsistencies to get the loan cleared at the earliest. Such errors can be easily caught in the pre-funding quality control process and the application can be rejected on those grounds.
Lenders need to implement strict and comprehensive QC within their systems so that there is no escape for fraudulent agents or operators. They cannot proceed and approve a loan funding without meeting all the criteria specified for loan funding. In such cases, the borrower has to ensure all the errors are rectified and submit according to standard guidelines.
Lending companies often spend large amount of time and efforts during the pre-funding QC process as there is a lot of paperwork involved. Paper intensive documentation makes the entire process lengthy and slow and increases the span between loan application and closing. With a comprehensive QC checklist that can be customized, based on requirements, lenders are able to complete the process more quickly and efficiently. They can reduce their operational costs and increase their margins with a quick turnaround.
Maintain standard procedures
Larger mortgage lending companies are typically spread out across various cities and states, where each region may have its own way of operating. Although they may work differently, the pre-funding procedures should remain consistent across all areas.
For example, if a borrower has been denied a mortgage in one state due to certain inconsistencies in his application, the same rules should apply to any other state where he may re-submit that application. Otherwise despite having a faulty application, he may still get approved for a loan all because there were slightly lesser number of checks in a different region. This is one of the reasons that number of bad loans increases, and lenders have to liquidate their assets to overcome these losses.
Checklist can be embedded in the lender’s platform directly to ensure uniform usage. Thus, the same QC checklist can be used by every analyst, irrespective of the areas they operate in to maintain consistency. Lenders want increased clarity and transparency in the process so that any anomalies can be known right away and addressed promptly. They want to implement quality checks across their locations in a uniform way, so that there is no subjectivity in the way QC is run across locations and different people groups.
A fully digital QC process integrated within the lender’s system enables collaboration between the lender, underwriter and borrower. This integration helps faster processing of loans, enhances customer experience and drives down operating costs due to increased efficiency. Thus, lenders can price their services/products more competitively and expand their market share much faster.
A comprehensive QC platform provides the benefit of automation, reducing human errors significantly. It also helps to verify a variety of risks and use that as a standard mechanism across different users across different locations.
Visionet offers a Digital QC platform, which is completely customizable. It ensures that every analyst can follow the same QC process across the globe. For more information on Digital QC, click here