During the high-volume mortgage years of the past decade, many credit unions invested heavily in member-facing technology like digital loan application portals for borrowers and other innovations — while back office processes often took a back seat. The ongoing originations slowdown presents an opportunity for credit unions and loan servicers to examine their critical regulatory compliance and records maintenance processes and consider technology investments that can position them for better efficiency, not just in mortgage origination but in all lending product lines.
Credit Union Journal spoke with Amanda Philips, executive vice president of compliance at ACES Quality Management, about why down cycles are an ideal time for credit unions to shore up their compliance and quality control processes. At a time when mortgage margins across the industry are razor thin, investing in QC auditing and reporting technology can increase productivity, reduce expenses and bolster revenue in other lines of business.
Credit Union Journal: Credit unions are seeing a slump in mortgage originations as home sales are down by more than a third from a year ago. Does loan quality become even more important in a soft market, and does strong quality control give credit unions more business options?
Amanda Phillips: If your loan quality is excellent, you'll have plenty of opportunities to sell to eager investors on the secondary market. A strong QC review process helps your institution weather the downturn by reducing pushback and keeping that revenue stream going.
If your loan quality is sliding, the opposite is true. Investors will not accept loans that contain critical defects, thus requiring you to buy back the loan. If you normally sell 100% of your loans, chances are you are not equipped to hold that loan in portfolio until it is seasoned enough to be sold, thus forcing you to sell them on what we call "scratch and dent," for a lesser value to an off-market servicer. That's why loan quality has a tremendous impact on potential revenue.
CUJ: Are some credit unions adapting to this soft origination market by bolstering other revenue, such as loan servicing? Do you see this trend continuing?
AP: Many credit unions that are already in the business of servicing loans are indeed diversifying their revenue sources by picking up mortgage servicing rights to help them weather this storm. However, for those that weren't already engaged in loan servicing, this is a tough time to pick up that kind of acumen. Becoming a servicer is costly, as it requires getting compliance procedures in place, bringing on a software program or hiring a sub-servicer, and completing due diligence.
Outside of mortgages, credit unions are seeing tremendous pick-up in other areas of consumer lending, such as auto loans, and the revenue gains they're making on those products can help offset the decline in volume and profitability from mortgage originations.
CUJ: What types of technology investments are most important to support and maximize credit unions' revenue from their lending operations?
AP: Having a robust QC process in place protects the integrity of the loans coming through your pipeline, which helps protect revenue in a down market. The key is to manage risk in your lending operations through having visibility into your quality trends and an efficient process to maintain compliance with regulatory changes.
You can leverage QC and auditing technology to perform the auditing on your servicing portfolio. Doing audits manually is very labor- and time-intensive and requires a lot of headcount. But, with just a few good analysts and a really good auditing platform, you can find a lot of efficiencies while maintaining the quality of your portfolio.
For credit unions that do loan servicing, it's important to be a true partner with your servicing platform vendors. By working in close partnership with the vendor, you can ensure that you're utilizing the servicing platform to the fullest. They can help you find efficiencies across the board and bring down costs.
CUJ: Is this a good time for credit unions to invest in lending quality control technology?
AP: Absolutely! During the boom years, credit unions were apt to prioritize investments in front-office technology and tended to be slower to adopt technology in the QC and auditing space. Many institutions are still using some manual processes and have not yet taken on key technology to automate their processes.
If you already have technology providers in place, consider where you are with those vendors. If you're locked into a multi-year contract, your best approach is to partner with that vendor and optimize that technology to its full performance. Investigate whether there are additional features you can leverage within the technology you have. The goal is to find ways for your people to work smarter to reduce risks by automating repetitive tasks.
CUJ: What steps can credit unions take to improve their quality control auditing and reporting?
AP: First, it's time to get out of Excel spreadsheets. I love my spreadsheets — but when I can, I get rid of them. Many credit unions have outgrown their spreadsheet-driven review processes and are still seeking an audit review platform. Manually auditing on spreadsheets and creating reports is very time consuming. If you're slow to deliver that data to the key decision-makers, you're probably going to be slow to implement policy changes as well. That backs up the entire life cycle of the compliance system, hindering you from moving forward.
With a compliance management system, you gain visibility into the reporting around your auditing and quality control across all of your lines of business, allowing you to quickly see where there are risks, where there are failures, and what are the mitigation plans and remediation steps. By adopting a good quality management and control software, like
A platform like ACES replaces manual input with automated sampling using criteria that you specify. You can speed loan review while reducing defects through the use of preset question sets, or you have the ability to customize questionnaires according to your needs. You eliminate risks faster, and that improves the quality of your portfolio.
CUJ: Do many credit unions still rely on Excel and manual processes?
AP: Excel is a hard habit to break. During the years when there was so much mortgage volume coming in, there was an urgent need to focus on closing those loans. Sometimes, the urgent overtakes the important. Now that we have a moment, we can take a breath and look at the things on the back burner. We can think strategically about our quality control and compliance and make a business case for investing in processes that reduce risks and expenses.
My sense is that, while many independent mortgage banks have converted their manual processes, a lot of credit unions are still using theirs and haven't yet found their technology in the quality control and auditing space. This business will always need humans, but the key is to leverage technology along with your internal experts to reduce risks while still providing a great member experience.
CU: What technology platforms can assist credit unions that are dealing with higher-than-normal volume in other consumer loans, such as auto loans?
AP: The past few quarters have seen consumers shopping around for more favorable interest rates on auto loans and looking to credit unions. That's great, since it has helped credit unions increase their overall share of the auto loan market, but the higher volume also adds to the workload of already-overtaxed loan processing teams.
The beauty of ACES is that credit unions can leverage the platform to automate QC reviews across the enterprise, not just in mortgage originations and servicing. With ACES, you can drill into your consumer lending quality control processes and let team members easily share their findings. By monitoring key data and metrics, and having the ability to collaborate securely, your team will be able to quickly review audit activity, remediate defects and manage the correction process.
CUJ: How can credit unions prepare for and adapt to emerging regulatory requirements? How can quality control and compliance review platforms help them be ready for audit requests?
AP: Your audit review platform makes it much easier for your team to stay on top of regulatory changes from agencies like the FDIC, CFPB and the GSEs. They can better ensure that policies and procedures are in place to handle new regulatory requirements, compared to using manual processes that are more likely to allow errors to slip through the cracks.
With a good QC technology platform, credit unions can adapt quickly to maintain loan quality and mitigate risks related to emerging regulatory requirements. For example, federal agencies have been paying close attention recently to issues such as properly assisting consumers in exiting COVID-related mortgage forbearances. Other hotspots include interacting with borrowers with limited English proficiency and the FHFA's requirements for loan servicers to maintain HMDA data like the borrower's age, race and preferred language. This technology helps ensure that the right data and audit steps are in place in your compliance process.
ACES has a team of compliance professionals dedicated to ensuring our clients stay up-to-date on federal and state regulations. In addition to publishing 3,600 changes and additions to
