Ditch perfection: Embrace your flaws to strengthen your QC processes
The risk – and cost – associated with repurchases is a heavy burden to bear, and quality control (QC) professionals carry that weight daily. Because of this, QC teams strive for perfection, which can be a slippery slope. After all, the concept of perfection is unrealistic. In fact, it can hinder one of the most important aspects of the QC process: discretionary audits in post-closing, which should serve as your eyes and ears into the areas of highest risk within your business. The good news is that there’s no such thing as a flaw in a system where perfection does not exist – instead, look at your discretionary audit findings as opportunities to potentially increase your bottom line. Here’s how.
Not only do the GSEs require lenders to perform random sampling each month, but they also require discretionary audits using criteria that is reflective of the repurchases or indemnifications a lender is seeing. Other high-risk characteristics specific to each lender should also be considered during selection. Here’s the often-misunderstood kicker: if you are completing discretionary audits, and your defect rates are low, you might be doing it wrong. In a world where we historically seek to see low defect rates, the idea that discretionary audits are expected to be high can seem disorienting. And the truth is, there is an industry-wide need for reeducation.
So why do lenders have a hard time establishing proper defect rates for discretionary audits? Optics. Reports that show high defect rates, which might be seen by potential investors, can appear to expose issues. When really, this type of audit is meant to highlight loans with a higher risk for error by design.
The Hidden Value of Loan Sampling
With increasingly tight margins and costly repurchases, lenders are beginning to rethink how they can save money and prevent loss. The good news is that loan sampling is designed to help manage QC efforts down to a level that doesn’t put the lender, the GSEs, or investors at risk, and each type has its place.
We’ve talked extensively about the Power of PrefundTM and how it can help stop risk in its tracks before it costs your business money. But we’ve already established that perfection does not exist, so it’s simply impossible to completely eliminate risk prior to close. Therefore, continuing your QC efforts post-close provides a second chance to further improve your processes long-term. While random post-close sampling seeks a target defect rate typically somewhere around 1-3%, your discretionary post-close floor should be much higher. Get comfortable with this concept, and help educate your entire organization. The high percentage means you understand your business well and are on the right track to mitigate loss.
Your Action Plan for Success
Once you have ironed out the criteria for your discretionary audits and are seeing those desirable higher defect rates, the next – and most important – step is to take corrective actions to remediate what you are seeing. This looks like:
- Perform Root Cause Analysis – It can be easy to see only the surface issues and try to solve for them, but take some time to instead peel back the layers of any recurring themes you are seeing and identify the true source. This allows you to move from a position of constantly reacting to challenges into a world where you are proactively stopping risky trends in their tracks.
- Create an Action Plan – Once you have identified the root cause of your defects, you can create an action plan. This allows you to identify the appropriate parties that need to be engaged in order to fix the issues and rectify for future loans. This project management approach holds all parties accountable and allows for easy tracking of resolutions.
- Prevent Future Risk – As you begin to look at your discretionary audit defects as opportunities for improvement, not only will you prevent future risk, but you will quickly see efficiency gains and a better use of your resources’ time. All of this simply translates into increasing your bottom line.
Finding the Right Partner
Effectively performing random and discretionary loan sampling doesn’t have to be a burden you bear alone. In fact, finding a strategic partner and subject matter expert can take a tremendous amount of pressure off of your business. Our advice? Trust your peers. The power of positive reviews and referrals speaks volumes to how trustworthy and reputable a service provider is. Some key components to look for:
- Robust, high-quality reporting
- Superior loan reviews
- Outstanding customer service
- An experienced and knowledgeable partner with a team staffed by highly qualified professionals who can help complete the reviews, share knowledge on what other lenders and the GSEs are thinking about, and can stand by your side during an audit
As we look to 2024, the phrase once said by Winston Churchill rings truer than ever, “Perfection is the enemy of progress”. Only those who recognize that their flaws carry the most impactful data will truly find organizational synergies capable of reducing risk, while increasing efficiencies. For more information on how QC Ally can help your business, contact us today: