In a market where every dollar matters, revenue retention areas like quality control and compliance are more critical than ever. Thus, keeping abreast of regulatory and investor updates and trends is vital to maintaining loan quality and compliance. Trevor Gauthier, chief executive officer at ACES Quality Management provides us with an update on the latest in QC and compliance.
HousingWire: Revenue retention is undoubtedly at the top of lenders’ concerns in the current market, and quality control plays a critical role in that effort. How are lenders managing loan quality these days?
Trevor Gauthier: Overall, lenders are managing loan quality quite well. While our quarterly Mortgage QC Trends Report did observe two quarters of extremely high, if not historic, critical defects, those occurred in mid- to late 2022 as the industry was dealing with the operational fallout from the market downturn. Once lenders moved past that period of volatility, the overall critical defect rate began trending downward and has continued to do so over the past five quarters. In fact, the critical defect rate for the fourth quarter of 2023 was 1.53%, which ranks amongst the lowest rates we’ve observed since the report’s inception in 2016.
We were fortunate enough to have Duane Gilkison, senior director of loan quality at Fannie Mae, present during our recent ACES ENGAGE conference in Tucson, and our findings seem to be in line with the downward trend in both initial and final defect rates Fannie Mae has observed in the 2023 loan acquisitions from its seller/servicers.
HW: Speaking of Fannie Mae, how are lenders responding to the QC policy updates Fannie issued late last year?
TG: Of all the QC-related updates to the Fannie Mae Selling Guide, the most significant for lenders were the mandatory 10% pre-funding sample review and the truncated timeline for post-closing selection, review, rebuttal and reporting. As Duane noted during his presentation, Fannie’s goal in all of these changes was to enable lenders to identify and remediate defects sooner, and with the advancements in QC auditing software, the team at Fannie felt lenders now had the tools and automation necessary to make that happen.
From our clients’ perspective, many felt that the writing was on the wall, so to speak, in terms of Fannie Mae’s expectations. The most significant issue we heard from clients was the timing of the change. With the market downturn, lenders shrank their operational staff across the board, and QC certainly wasn’t exempt from those cuts. Anytime you’re asked to do more with less, it’s going to create some level of strain, but I think for those that already had technology like ACES in place to automate QC sampling, reviews and reporting, the change was less of a burden than it might otherwise have been
HW: QC and compliance often go hand in hand. What are some of the current compliance issues/trends that could impact loan quality?
TG: One of the cases that our compliance team is watching closely is CFPB v. Townstone Financial, which addresses whether ECOA applies to redlining and other pre-application activity. This case is one of many that exemplifies the broad interpretations of existing rules and regulations the CFPB is using to cite lenders for non-compliance.
We’ve also seen the CFPB take an extraordinarily broad view of what can satisfy the “Abusive” prong of UDAAP via a proposed rule prohibiting charging non-sufficient funds (NSF) fees for declined payment transactions at point-of-sale. While this proposed rule doesn’t apply to mortgage lending specifically, it offers a glimpse into the CFPB’s current thought process and, therefore, is something lenders should pay close attention to moving forward.
Of course, “junk fees” is the latest buzzword out of the CFPB, and the Bureau seems to be taking particular aim at some of the fees charged by mortgage servicers and now lenders. The Bureau recently highlighted 10 specific compliance issues related to mortgage servicing in its Supervisory Highlights, Issue 33 (Spring 2024), four of which involved what it deemed as improper charging of fees. But most recently, the Bureau announced a Request for Information (RFI) into “Junk Fees in Mortgage Closing Costs.”
These are just a few of the compliance trends we’re tracking. For those interested in a deeper dive into these topics and others, like Fair Lending, I’d encourage you to watch the latest installment of our QC Now webinar series with our EVP of Compliance Amanda Phillips and Ballard Spahr Partner Richard Andreano.
Given the current landscape, what resources are available to lenders to better manage loan quality and ensure compliance?
TG: Fannie Mae offers numerous training and education resources to help lenders improve loan quality, which lenders can find online through its Loan Quality Learning Center. In addition, I’d also direct lenders to Fannie’s Beyond the Guide and Quality Insider publications, which feature a ton of insight, findings and best practices. Even though we have a vested interest in this area, ACES has always been committed to supporting all lenders – not just our customers – in their efforts to improve loan quality and mitigate risk and compliance issues. The Resources section on our website provides a wealth of free resources, including links to our quarterly Mortgage QC Industry Trends Report, on-demand webinar library and Compliance NewsHub.
Trevor Gauthier is the chief executive officer at ACES Quality Management.
