With the emphasis being placed on increasing loan production and capturing more business, it’s extremely important that lenders to not forget about loan quality and compliance.
Maybe I’m preaching to the choir here. But, if we’ve learned anything from the 2008 debacle, it’s that loan quality and compliance are paramount to a lender’s success.
Manufacturing a quality loan is more important today than ever. With fewer opportunities available, a lender must make every loan count.
The pricing, the product, and the processing must all result in a quality product that will sell and perform as expected, without the risk of repurchase.
A culture of quality starts at the top; at the very highest level. Management must set the bar high for loan quality and compliance, indicating that nothing less will be accepted.
It’s not good enough to almost meet secondary market guidelines or comply with legal disclosure requirements. Loans must be done right. Otherwise, there will be consequences.
The culture must ensure that the company and all the employees view quality control as a key factor in measuring the company’s overall performance. That it is just as important as products, pricing, and production.
QC should contribute toward the company’s measurement of operating efficiencies, cost controls, and profitability.
A well-functioning QC program will benefit a lender by quickly identifying individual loan defects, patterns, practices, and trends in improper loan handling or violations.
This approach will uncover areas where training may be required. It can also identify bottlenecks and delays where process improvement can increase staff productivity and move loans along to the closing more quickly.
To do this, lenders should first establish their target defect rate to minimize financial risk. Then, put policies and procedures in place to do everything possible to hit the bullseye.
Keep in mind that a 5% target on 100 loans is only 5 defects. While the same target for 1,000 loans increases exposure to 50 defects. Not so good.
The pre and post close reviews, whether done in-house or outsourced, should identify defects and bring them to the attention of management. Once identified, action plans need to be in place to track what’s done toward correction, elimination, and the training that is needed to ensure that such defects will not reoccur in the future.
Remember, it’s not just the defects found on the loans being audited that are of concern. A defect found on one loan may be indicative of problems that may exist on other loans in the pipeline.
You may need to expand the scope of the audit to identify additional loans for review. You can’t be too careful.
So, the real QC stands for Quality Culture. Be sure you have a quality control plan that meets and satisfies that culture.