Hugo Quintana is an Implementation specialist at ACES Quality Management and former ACES client.
Why should servicing be a priority for Financial Institutions?
HQ: Origination outlooks for 2022 have increasingly declined given the changes in rates and recent macroeconomic factors resulting in volatility in the market. Fannie Mae’s projected single-family mortgage origination volume has dropped from $3 trillion to $2.8 trillion. For comparison, total origination volume in 2021 reached $4.5 trillion. Fannie also expects a 7.4% decline in home sales for 2022, followed by a 9.7% reduction in 2023. As a result, margins are expected to be lean throughout 2022 as origination activity dwindles and per-loan profitability declines.
Thus, Financial Institutions may need to rely more heavily on their servicing revenue to carry them through the current down cycle. To confidently rely on that revenue, however, Financial Institutions must be able to assess the integrity of their servicing portfolios and ensure servicing staff strictly and consistently adhere to all relevant servicing rules, guidelines and regulations.
How can Financial Institutions maintain the quality of their servicing assets?
HQ: More often than not, a Financial Institutions compliance department is heavily dependent on human resources hours and spreadsheets. While this method may enable lenders to get by, it’s unsustainable and inefficient. Consider breaking servicing into three separate lines of defense – quality assurance, quality control and internal audit:
- #1 Quality Assurance: The quality assurance (QA) department is typically part of the operations team, and its purpose is to conduct in-line reviews to identify issues or compliance errors as early as possible. Thus, the QA team typically tests more granular loan samples, ideally daily, to identify these issues or errors. It also reviews loan populations that may be affected by policy and procedure changes to ensure those changes were followed. As the first line of defense, the QA team must be able to quickly and easily communicate exceptions, reports, test results and training analyses to all relevant internal departments within the organization, such as loss mitigation, foreclosure and bankruptcy.
- #2 Quality Control: The quality control (QC) team lives within the compliance and risk department of the organization. It ensures all operational and servicing practices have been executed in compliance with investor, state and federal regulations and requirements. Typically, the QC team tests a portion of the entire servicing portfolio for testing monthly using either stratified or statistical sampling to gather a broad cross-section of loans, though this department is often called on to conduct ad hoc testing as requested by executive management or other internal departments. For example, the QC team will also run more targeted testing for loans that hit certain milestones in the loss mitigation/foreclosure process to determine if regulatory requirements related to borrower communication and timing of actions were followed. Much like the QA team, communication and reporting capabilities are must-haves for the QC team, as it holds primary responsibilities for reporting findings to both executive management and regulatory entities, such as the CFPB, state regulators, etc.
- #3 Internal Audit: The internal audit department should be independent, objective and risk-based. As an independent entity, the internal audit department reports directly to the board of directors. An effective internal audit department needs to understand what QA and QC audit software looks like, how it works and how to pull records and reports. The internal audit department tests QC and QA report findings to identify gaps. Overall, the internal audit team has the capacity and view for servicers to get to the root cause of findings. Hallmarks of a risk-based internal audit department are the ability and authority to suggest and require enhancements to the QA and QC testing policies and procedures. Thus, the internal audit team must be able to communicate with and access reports and findings from the QA and QC teams while also maintaining its independence from those departments.
How can Financial Institutions leverage ACES for all three lines of defense?
HQ: Using ACES, Financial Institutions can support all three lines of defense while controlling costs, improving audit throughput and accuracy, producing reports in record time, communicating efficiently and sharing trending results with internal departments and regulators. Lenders utilizing ACES have seen double-digit increases in both productivity and loan quality. In fact, QC departments are often able to shrink in size because of the reduced need for highly-manual reviews. Click here to view our customer success stories.