Make Sure You Don’t Confuse Quality Control Reviews with a Regulatory Compliance Review
Written by: Bill Dolan, CMB, AMP
Lenders today should realize that quality control and compliance audits are critical to ensure that both your investors and your regulators are satisfied.
Though both assess the accuracy of your loan files, realize that these two functions do not overlap.
Quality control reviews drive the accuracy of your underwriting in conformity with investor guidelines, mortgage compliance reviews determine your conformity with applicable consumer protection laws in conformance with regulations prescribed by your regulators and examiners.
By taking your eye off the ball in both quality control and compliance reviews, you run the risk of unresolved errors, as well as investor and regulatory scrutiny, inefficiencies, time delays and costly buybacks.
As mentioned, quality control audits are a requirement of your investors, confirming that loans sold have met their underwriting guidelines. Investors can and will require proof of these reviews being conducted by you or a 3rd party quality control vendor and completed at both the pre-funding and post-closing phases. And keep in mind that although these reviews can be completed by internal staff, they MUST BE Totally Independent of the loan process. And at a minimum, a 10 percent (in addition to a discretionary sample) of originated loans must be tested against the investor’s guidelines during the post-closing quality control review.
Most post-closing quality control reviews consist of verifications of underwriting standards with a very minimal review of regulatory compliance requirements. There is also a field review appraisal required for 10 percent of the sample selected as well. And tax transcripts are also required on all loans selected for post-closing quality control reviews, depending on your investor along with a post-closing credit report as well.
This not only provides your investor with the insurance that you the lender are meeting their requirements, but just as important, it allows you the opportunity to identify recurring errors and weaknesses allowing you to provide necessary training to your staff.
Many investors today have moved away from the quarterly or longer type of quality control reviews. Investors want to see errors resolved as quickly as possible, eliminating potential systemic errors that can lead to unfavorable pricing, loans being unsaleable, or loans being required to be repurchased.
One common misinterpretation that many lenders do not realize is that quality control reviews include compliance. Though there are portions of the quality control review that touch upon regulatory compliance topics, only limited areas specific to the file being audited are covered. Compliance topics covered in the review consist of ensuring joint intent was properly documented, confirming timing requirements of initial disclosures were met, comparing APR values to determine if they were in tolerance and confirming the right-of-recission was properly obtained.
After all, compliance reviews/audits target whether your institution is complying with federal consumer protection.
Compliance reviews are frequently based on the compliance risk assessment that you have developed. The risk assessment takes into consideration the risk of noncompliance with applicable regulations based on inherent risk factors and the quality of internal controls. The more risk that is involved, the more frequent and thorough the compliance audit must be.
While quality control reviews touch on a few aspects of regulatory compliance, realize that some high-risk calculations and completion of disclosures are not included in a quality control review.
Can your organization afford to be only half-way covered?
Today, cost-cutting is essential to all community banks and credit unions. Do you really need 40 hours per week full-time staff to perform pre-funding, post-closing, appraisal reviews or QC compliance reviews based on current volumes? Can you better utilize these employees in far better areas of your institution?
Let SCA’s control environment not only provide these and other types of services, reducing your audit and compliance burden, with centralized audit evidence, testing and reporting, automating your QC and Compliance review process, providing far greater transparency, collaboration, accuracy, and assurance.
With budget and strategic planning just around the corner for 2024’, contact Bill Dolan, Director at: (6170 694-2617 or email Bill at: Wdolan@scapartnering.com to learn more about the consulting services in the areas of Compliance, Outsourcing, Technology, Servicing, Staffing and Asset Purchases and Sales.
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