Quality Control as a Profit Center
By
Charles W. Sewright, CMA
President & CEO
Quest Advisors, Inc.
Many in mortgage lending view Quality Control as a cost center that is simply a cost of doing business. But, when properly implemented and managed, Quality Control can be a profit center. A deep dive into Quality Control can lead to profit improvement opportunities throughout the mortgage manufacturing process, if time and effort is spent looking for them.
The goal of every mortgage lender is to produce saleable and profitable loans; however, it’s easy to miss the opportunity to realize additional profit, or reduced cost, when one views Quality Control only as an auditing function geared to be the “rules enforcement officer†in one’s organization. Lenders sometimes tell me that they have a quality control program because it is required by the GSEs, FHA, VA, USDA, and correspondent aggregators in order to sell their originated loans. From that perspective, it would seem to make sense that to protect their bottom line, they would focus on the minimum required quality control functions at the lowest cost possible. But is this the best way to maximize profit? I invite lenders to reframe their perspective on the relationship of Quality Control to their bottom line, to shift away from viewing Quality Control as a cost center, and to consider its role as a profit center. Certainly, there is investment associated with practicing strong Quality Control, but it pays dividends when it identifies costly, unintended loan manufacturing gaps. Identifying these gaps which can occur in even the most well-managed mortgage manufacturing processes can create opportunity for increased profitability if they are researched for cause and then corrected.
When lenders expand their quality control activity beyond the bare minimum required, they are able to identify potential patterns of inefficiencies or errors that contribute to the overall costs associated with selling loans to investors. Rather than reacting to individual loan issues, these lenders focus on using Quality Control as an opportunity to improve the mortgage manufacturing process and overall loan quality. They shift from a reactionary stance towards loan production and adopt a proactive, even innovative, approach that allows them to tap into cost savings that endure over time.
A simple example: Some errors or omissions, such as missing documents, are often considered minor issues that are easily corrected after being discovered during a post-closing Quality Control review. In fact, some lenders believe that these types of errors are so easily remediated that the findings should not even be cited as defects because the loans were “fixed.†While it is true that such errors can be corrected to make the loans salable by finding the missing document(s), a bigger opportunity exists to take a holistic approach that could lead to long-term cost savings. “Fixing†the loans in question is a reactive approach that must be repeated on a loan-by-loan basis over and over again. Rather than repairing the error for every individual loan as it arises, finding the root cause of the defects and permanently correcting them eliminates costly repeated rework of the same manufacturing defect loan after loan.
Some errors are a much bigger deal. For a higher-stakes example, let’s consider the case in which a debt is inadvertently omitted from a debt-to-income (DTI) calculation, resulting in a higher DTI ratio. This could occur through improper calculation methods or a lack of current guideline awareness, the consequences of which could be costly. If the corrected DTI ratio were to fall outside the investor guidelines, the loan could become non-saleable to the intended GSE or aggregator, which could then lead to the sale of the defective loan at a discount. Even worse, if in addition, the DTI were to exceed the CFPB regulatory Qualified Mortgage (QM) requirement, the lender would be mandated to retain a 5% interest in the loan if it were successfully sold into the secondary market. Considering an average loan amount of $300,000, the retention liability required of the lender would be $15,000. When these errors are discovered, lenders are in a very vulnerable position. Is this a single case? Or are other loans hiding in their pipeline with the same defect? Again, finding the root cause of the error is crucial. Navigating the everchanging landscape of guidelines and regulations can be difficult. Vigilance is key. Installing functions to ensure they are up-to-date, with corresponding team communication and training, is a vital aspect of proactive quality control.
While always realizing Zero Defects is not practical, a goal of striving for Zero Defects is. Such a goal requires buy-in and involvement of the entire organization from start to finish. To begin such a process of improvement, everyone involved must view Quality Control as a contributing profit center, rather than just a cost center. Then, the Quality Control process can be valued throughout the organization as a strategy to identify opportunities to make the loan manufacturing process better and more profitable. Leaders in lending companies that are successful at making this shift communicate to their team members throughout the organization that the passion for superior quality assurance comes from the top. They make it clear that this is not a theoretical expectation, but is the company’s way of operating as the “new normal,†organizationally and financially, with resources provided to support such an effort. It is made clear that superior quality is a passionate goal expected of everyone in the company, not just of those in the Quality Control department.
Superior Quality Control requires expertise and time to conduct a thorough and more sophisticated file review than the “bare minimum†can accomplish to identify all defects, minor or significant. It requires reporting systems that provide actionable information for staff and management and analytics that can help identify the root cause of an error or omission. Then, corrective action can be taken to improve the manufacturing process and address staff skillsets through training to avoid such costly errors in the future. In this environment, the focus is on finding solutions and investing in the team through professional development, rather than casting blame. Identifying such correctable errors and process inefficiencies leads to improvements that eliminate recurring rework efforts which may be required before a closed and funded loan can be sold. Such improvements can shorten the length of time a loan sits unpurchased in a costly warehouse line, where time is money. They can also lead to lower repurchase demand and required indemnification. The result: an improved manufacturing process and increased employee retention that leads to enhanced and ongoing profitability.
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