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by James Robinson, President, Cogent Economics
Copyright 2002-2008 Cogent Economics. All Rights Reserved.
Click here to download this file in Word Document format.

Does Quality Control Add Value in the Mortgage Industry?

The proposition that better quality means higher profit margins has been well accepted in some industries, such as auto and electronics, for a number of decades.  But it’s really only in the last ten years that the principles of quality control have been applied to financial services, by leading companies such as G.E., Citibank, Chase and others – many of them Cogent clients. Now, the mortgage industry as a whole is waking up to the fact that quality matters, and that properly managing it can mean the difference between success and failure.

There are several reasons for this.  First, the processes involved in mortgage origination and servicing are extraordinarily complex, and no two lenders do things in the same way.  Second, although consolidation and technology are slowly making it more uniform, the industry remains very fragmented and localized.  And as lenders acquire and consolidate, maintaining effective QC can be even more challenging, as new channels, products and locations multiply the number of different processes to control.

When you look at industry statistics on average cost per loan, you find significant differences among top originators and servicers, even when they are of a similar size and product mix.  In our experience at Cogent, in over a decade of helping lenders to monitor and improve quality, we’ve found that much of this disparity can be explained by differences in the effectiveness of quality control.  The high potential costs of poor quality – including inefficiency, re-work, price discounts, higher credit losses, repurchases, indemnifications, claim denials, and increased audit and regulatory risk – mean that effective quality control is essential to cost control, and hence to profitability.

What is the Goal of Quality Control?

In the mortgage industry, as in other industries, the goal of quality control is to ensure that company and customer requirements are met.  This means ensuring that things are done right the first time, according to investor, insurer, and regulatory guidelines, in each origination and servicing function from loan application to loan payoff.

Lenders need effective quality control for both short and long term cost control:

1.       To minimize the current costs of defects, which may be reflected in higher rejects, repurchases, claim denials, re-work, and/or price discounts; and

2.       To minimize the risk of future costs due to poor portfolio performance and/or non-compliance.

Quality is important not only to investors, insurers and regulators, but to consumers as well.  So lenders who differentiate themselves by having better quality control can achieve not only cost reductions, better market pricing, and regulatory advantages, but also better customer response and retention.

Immediate Cost Savings

Immediate cost savings can be realized by improving the efficiency of the QC process itself, by minimizing sample sizes and improving employee productivity.  Savings from reduced sample sizes can be calculated by assigning a cost per review of $100 to $150 per loan, depending on the scope.  For example:

Increased productivity per QC employee due to more efficient workflow can also result in significant cost savings. Many Cogent clients experience productivity increases of 50% or more.  These two sources of immediate cost savings can be translated into FTE reduction, into greater coverage of risks, or a combination of the two.

Longer Term Value

The full value from improving quality control is realized over the longer term, as better operational quality results in lower overall cost per loan, streamlined regulatory exams, and better investor pricing.

Since each lender's origination and servicing processes are unique, so are their opportunities to improve quality. But both short term efficiencies and long term quality improvements are possible for most lenders, and these improvements can have a significant, measurable financial impact.

The key to realizing this value is establishing an effective quality control program, using the best people, the best QC methodology and the best technology available.

What Do CogentQC™ Systems Provide?