How to Keep the Focus on Loan Quality in The Face of Regulatory Change

Expert Perspectives: ARMCO’s Director of Compliance, Kacey Olson

Published March 04, 2020

Kacey Olson, Director of Compliance at ARMCO. Kacey’s achievements include spearheading advancements in ARMCO’s ACES Intelligent Questionnaires giving lenders more efficient, simplified tools for achieving the highest level of quality and compliance. Prior to ARMCO, Kacey spent nearly 20 years at EverBank, where she was a Compliance Analyst.

Fannie Mae and FHA both made changes to their respective loan defect taxonomies in Q4 2019. Why are these taxonomies so important?

KO: While Fannie Mae and FHA approach their classification of loan defects differently, they do share a common goal for these taxonomies, which is to identify the root causes of loan quality deficiencies – especially those that may result in eligibility violations. As the only two agencies that have created a taxonomy for the categorization of loan defects, they have essentially set the industry standard in this regard, with many other entities using these respective taxonomies as a guidebook for their own quality control efforts. In addition, these taxonomies offer lenders the opportunity to work with the agencies and GSEs on defects, providing a clear path to filing rebuttals on defects that may be curable. Utilizing these taxonomies in QC reporting enables lenders to assess risks and take pre-emptive measures to mitigate defects, apply corrective actions and appropriately assess those corrective actions. Because of the importance of these taxonomies to overall loan quality and meeting FHA and Fannie Mae guidelines, ARMCO’s compliance team makes it a point to stay on top of all the latest changes to ensure our users are always reporting using the most up-to-date taxonomy.

How can lenders leverage these taxonomies (even if they portfolio all their loans) to manage loan quality?

KO: The way this is applied within our ACES Audit Technology™ platform (and hopefully with everyone else out there in the industry) is every single one of our audit requirements for loan origination processes have a defined taxonomy value based on Fannie Mae’s taxonomy. These categorizations are then uniformly applied across all requirements regardless of origin. That can be federal, state, GSEs or other agency requirements. The reason we apply it across the board is that when our users are doing executive management reporting and trending, they're able to utilize those taxonomy values to identify where they have issues, where they need to take corrective actions as far as policy, procedure, training, etc. and then curable actions at the loan level to really help their bottom line. From a Fannie Mae perspective, lenders are required in their executive reporting to actually report based on this taxonomy, so many of our users have to be able to utilize these values in their reporting as part of their overall QC process to satisfy Fannie Mae requirements. The same goes for FHA, though FHA's taxonomy is limited in scope to only FHA requirements, which is the key difference between the two.

For lenders that aren’t reporting to Fannie Mae or FHA, they are still utilizing these taxonomies to assess their loan quality and see where their pockets of risk might lie. Not only does it allow these lenders to make an apples-to-apples comparison of their loan quality versus their peers using the quarterly ARMCO Mortgage QC Trends Report, but it also simplifies the reporting process for these loans by using pre-defined defect categories with which most lending executives are already familiar.

Speaking of reporting, with the increase in frequency of LAR report under the most recent HMDA changes, what steps can lenders take now to prepare themselves?

KO: This month is the deadline for all financial institutions to submit their HMDA LAR report for the 2019 HMDA reporting year to the CFPB. Normally, lenders have been able to wait till January 1 to the end of February to scrub their LAR data, get it up to par and get it filed. Additionally, beginning January 1 of this year, large financial institutions are required to submit their LAR reports on a quarterly versus yearly basis. With this increase in reporting frequency, the need to validate HMDA data prior to reporting is more critical and lenders will need to do this a lot faster.

ARMCO’s response was to develop a defined set of questionnaires to help lenders test all of the data required in their LAR report for accuracy so that when they submit that complete file, they don't get rejections and kickbacks from the CFPB. By releasing this module into our existing ACES Intelligent Questionnaire feature, lenders can begin incorporating this LAR data review into their general QC process,testing every month.

One of the benefits of using a QC platform to perform this kind of data validation check is the ability to tag taxonomy to some of these deficiencies. As lenders are going through and scrubbing that LAR data and finding these trends and patterns, they can get to a root cause, change the process or procedure that's causing that issue and prevent that from reoccurring.

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