Sharon Reichhardt, EVP of Operations at ARMCO. Sharon has over 27 years experience in the mortgage industry. She has presented at numerous industry related conferences and is a subject matter expert in the field of quality control. Sharon is a 2017 Housing Wire Insiders award recipient, and most recently named one of the 2019 HousingWire Tech Trendsetters.
What are some perennial quality control issues that mortgage servicers are continuously trying to address?
SR: Servicers are always going to have to deal with the fallout from loans that were not originated properly or were originated using poor underwriting standards. We saw this with a lot of the FHA Streamline Refinance and some other, similar products – invariably, you're going to see increases in delinquencies, more issues regarding straw buyers, etc. That’s always going to be there.
Furthermore, lapses in control on the origination side inevitably make their way down to servicing, forcing lenders to eat or repurchase loans because of one failure that was not taken care of upstream. Of course, it's one thing if the loans are servicing-released, as there's not much you can do about those, but if you are servicing or have a sub-servicer, then you need to make sure you're up to date on all of the findings that are on the lending side and truly doing what I consider risk-based testing (because testing 10% of your loans just randomly is not going to give you everything that you need) to ensure that any risk or lack of controls are being shored up.
For me, it's really all risk-based. You need to make sure you identify those pockets of risk, and if that comes from the origination side, then so be it. You're constantly going to be re-evaluating where those risks are, but then you need to have the data and the audit steps in place to make sure that you're covering those things. It is a constant recalibration on the servicing side.
One of the common themes in servicing for the last couple of years has been disaster planning. How do these types of events impact servicing QC?
SR: This is really where servicing QC departments need to be more aware of not only what's happening on the lending side, but also what's happening out in the world, because these events are eventually going to impact your organization.
Natural disasters have really taken center stage for servicers in the disaster planning area, but there are other issues, such as mass layoffs in a particular industry/area, government shut-downs or even interest rate drops, that are going to have an impact on your loans. You need to stay on top of these kinds of events and ensure that you’re ready with whatever targeted audits you may need because you're going to start seeing increases in fraud, delinquencies, abandoned homes, foreclosures, etc. By getting ahead of these events rather than reacting after the fact and tying in feedback from your agency reps and investors, you hopefully will come out better on the other end. Also, being more proactive in your loss mitigation efforts can help avoid the worst-case scenario of foreclosure.
Conversely, some events may create portfolio retention opportunities for servicers. For example, if a particular market sees a rapid increase in interest, servicers can perhaps take advantage of refinances in this market because property values are going to increase. With these changes, the impact isn’t always negative, but being aware of the make-up of your portfolio helps you manage the impact to your organization, whether it’s positive or negative. You really have to look out and look up to make sure that you've got everything covered in the event one of these events takes place.
How can servicers use technology to stay on top of QC?
SR: From a servicing perspective, you've got so much data at your fingertips. It's really knowing how to mine that data and identify where those opportunities are. On the flip side, there's also risk involved. It’s not enough to randomly sample a bunch of loans in a flood zone, for example. You have to know where your risk lies and audit to that. Technology helps you use your data to make sure you're identifying those populations that have a higher potential for risk.
The first step in any servicing QC audit is looking for those risk-based items. Using the flood example, you’re going to be looking for loans with no insurance, loans that are under-insured, or loans with force-placed insurance as these are all risks. Having a perfect audit result with zero errors found is impossible. There's got to be errors somewhere in the servicing process. Something failed. There's a lack of control somewhere. But if your results are always 100% great, then you are not really diving into those pockets of potential risk. By automating the loan selection process and leveraging intelligent questionnaires, you can zero in on these pockets of higher risk and audit to that risk to ensure your organization is properly protected.
In addition, technology helps create a streamlined and consistent audit process, allowing QC teams to focus the majority of their efforts on high-need areas while still meeting regulatory and investor requirements. For example, questionnaires play a critical role in the QC audit process. However, not all questions are applicable to every audit scenario, and if your QC team is presented with questions that don’t apply, you significantly increase your chances of having inconsistent responses. This always draws attention during a regulatory audit because it indicates that you’re not consistently applying your QC procedures. With technology, you can use your data to filter out any unnecessary questions, which improves both internal efficiency and the accuracy of your audit results while eliminating inconsistencies in your audit process.
Ultimately, there are inherent risks in every single facet of the servicing process. Ideally, your risk management team has already identified those risks, and your internal audit team is making sure the proper processes and procedures are in place to address those risks. From there, it's really up to the QC team from a transactional standpoint to make sure that your organization really is doing what you say you’re doing and that you are mitigating the risks in every facet. Without technology, this can become an overwhelming burden, and as a result, some areas of risk may be overlooked or ignored entirely.
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