MReport May 2022

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26 | M R EP O RT FEATURE increased its focus on quality control (QC). In fact, it recently released a memo informing lend- ers that it is time to double down on QC best practices. It tells lenders to perform checks such as monitoring their performance carefully and performing regular checks on third parties, revisit- ing QC practices, incorporating controls and reviews that promote fair lending principals, and more. This comes as Freddie Mac said it discovered an increase in critical defect rates in 2019 and 2020 as lenders struggled to meet the rising demand for origina- tions. It acknowledged much of the increase in defect rates could have been related to changes in incomes, temporary unemploy- ment, and other factors that made it difficult to evaluate income stability. "Loan quality defect rates increased among some lend- ers during 2020, underscoring the need for a more reliable QC process amid increasing mortgage volumes, changing agency require- ments, and remote work," Freddie Mac said in its memo. "The goal: To avoid costly repurchases and defaults as well as lessen the threat to communities from foreclosure." The GSE said that lenders must learn to navigate the balance of meeting demand without sacrific- ing quality. In the year ahead, QC will remain critical as lenders continue to assess borrowers' financial situations that will be different due to the pandemic and deal with potential fallout from QC errors they missed in the past year when demand was high. To ensure lenders are perform- ing at their best state, technology will become critical to success as the GSEs turn their eye to quality control. From Vicious to Virtuous: Reinventing the Cycle A s lenders look to get to bor- rower surety more quickly, and reduce costly cycle time, this has traditionally meant hiring more people to work throughout the process. However, this grows costly and can increase the likeli- hood for error, particularly when more layers of people are added to QC of other's work. When searching for quality, the only way to achieve it is to remove the sluggishness, subjectivity, and inconsistencies associated with stacking people in the process. Ideally, lenders can incorpo- rate a layer of AI that can make the complex, intuitive decisions that require expertise and sound judgement with no human assist. Using such a technology platform, underwriters can improve pro- ductivity, concentrate on difficult scenarios, and know the quality of every loan is exceptional. Using technology also cuts back on origination cycle times. Lenders who leverage technology that automates the assessment of borrower assets and income are seeing a three- to five-day reduc- tion in their loan origination cycle times while also reducing risk, according to Freddie Mac. But who's guarding the guards? If we learned anything from the 2008 meltdown, it's that we lacked a robust loan-level audit trail. While the income used to qualify could be identified, the metadata and information was not aggregated, without which it's impossible to understand the entire history of the underwrite or justification for the lending decisions made. Get Busy Growing, or Get Busy Dying A dapting AI into the lending cycle also helps cut down on loan cycle time by allowing lenders to get a full conditional approval at POS. This offers value in two ways: it makes your LO much more competitive and it reduces fallout. Additionally, conditional approval at POS strengthens your borrower relative to cash buyers—a very attractive distinction to have in the current competitive market. Retaining top LOs requires you make them as competitive as possible. Another layer of value that technology will add is address- ing the growing talent gap in the industry as veteran players retire. Increasingly we'll see teams struggle to replace talent retiring. A recent report from the employ- ment site, Zippia found that the average age of Loan Officers is 40+ years old, which represents 64% of the population. Here's the challenge this dynamic creates. On the one hand, finding talent is hard. We are seeing this phenom- enon play out across industries. On the other hand, getting new employees up to speed with what an industry veteran knows and does is a challenge. Naturally, it's likely that, as loan officers age out, they will look to sell their business. Tech shouldn't require all new onboarding; instead, it should be a seamless transition in the event of M&A. Technology can be what keeps lenders profitable even as demand dies down, or enable them to scale up and handle more origina- tions as demand rises. Unlike new staff that needs to be trained and checked, tech can help ensure QC by using data in its decision- making and leaving a traceable trail of its decisions. As regulators and even the GSEs become increasingly atten- tive to errors, and loan repurchas- es rise, having a strong technology partner can help make or break a lender's future in the mortgage industry. Freddie Mac announced that now is the time to focus on QC, which can only be done by removing human error from the equation—or by removing humans altogether. Underwriters can use technology to perform the quick, simple tasks that slow them down, enabling them to easily scale their workflow to meet the market demand without sacrificing quality. With Freddie Mac predict- ing demand could remain high, and emphasizing that a focus on QC is critical, lenders should examine their current processes and technology. If a focus on QC is lacking coming off last year's boom in originations, now is the time to invest in the right technol- ogy that could keep your business from crashing. The bottom line is that lenders must embrace technology as a way to deliver constant quality on a cost-effective basis. Lenders shouldn't react to the next hous- ing market disaster to pivot; it's crucial to make quality in your operations shine today. With the right tech, lenders can be assured that, regardless of which direc- tion the market takes—up, down, sideways—loan quality remains constant. SARA KNOCHEL is the CEO, Data & Analytics, for Candor Technology. If we learned anything from the 2008 meltdown, it's that we lacked a robust, loan-level audit trail.

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