Quality Control Audits: Real-World Case Studies

The following is an excerpt from Chapter 4 of The Mortgage Professional's Handbook:


by Alvin Wali, CEO, Alliance International Corporation


Our industry has become much more quality conscious since the financial crisis. It would have been very interesting to compare actual case studies from 10 years ago to the current time. The general findings would have probably pointed to a much more lax environment, disregard for QC, and a greater focus on revenue growth compared to risk mitigation. It is safe to say that many of the companies that did not place an importance on QC are no longer in business. The premise is not that a lack of QC was the only cause of a downfall, but it significantly contributed to the demise. With the disintegration of major financial institutions, we would expect the survivors to have learned their lessons. But, unfortunately, many institutions still are operating on unstable financial “tectonic plates.” What follows are three real-world examples of companies and their QC strategies. Names have been modified to protect the innocent.

Let us start with Big Bank. This institution is quite profitable, has good management, and relatively good systems. The QC strategy is good, not great. CFPB would check off most of the QC audit box. But Big Bank has not derived the full potential of its QC strategy. It may be an indication of a larger issue, but the process and systems are disjointed and there is a lack of transparency.

The pre-funding and post-close audit areas are distinctly separate and report to two different senior executives. This unintentionally results in slow or no communications between the two departments, and eventually between the stakeholders. Team members do not have a clear vision, and do not derive the benefits of easy interaction. This is the perfect storm for an “us vs. them” mentality which can further degrade the efficiency and impact of the QC team.

Another major issue with Big Bank is the systems. There are a lot of systems and sub-systems, yet a “black market” of Access databases exists as a patchwork. Anytime a sub-process is created, we have to ask what the original question was. The combination of the systems create a tremendous amount of data, but the underlying code is not clearly documented and thus not clearly understood. This has the potential for a lot of false-negatives. The most important action for Big Bank is to evaluate the entire QC strategy with a fresh set of eyes. It would be very beneficial to bring in subject-matter-experts (SMEs) from Sales, IT, Operations, and other stakeholders. They need to ask if the reports and underlying data is correct, timely and useful. They also need to ask if the QC process is the best it can be.

Regional Mortgage Company was a more complex case. While this entity was much smaller than Big Bank, it suffered from a lot more issues. Larger institutions tend to suffer from a bit of bureaucracy and slow adaption to the necessary changes, while smaller entities are expected to be much more nimble and efficient, but this was certainly not the case with Regional Mortgage.

The vision and direction of most successful companies is set at the top. In order for QC to be an important aspect of a company strategy, senior management must champion it. Regional Mortgage was focused on revenue growth and cost cutting, and QC was squashed in the middle of those two efforts.

Senior management did not have involvement in most QC matters except for early payment defaults and buy backs. This is an indication of a reactive approach. Mid-level managers were reluctant to bring up any issues and when they did it was too late. The QC audit cycle time was just below 120 days in most months. Reporting was another area that could have been vastly improved through communication and stakeholder involvement.

The high turnover also contributed to a lack of ownership and lack of a relational basis for the QC department and the Field to work on. The most concerning issue was the quality of the investor files. QC scores were in the 3-4 range on a lot of audits, and the monthly trend was far above the target. If someone could overlook all of the prior issues, it was very concerning to see the way the investor files were compiled.

Yes, Regional Mortgage has issues with its QC strategy. It is indicative of a much larger organizational issue. There must be a larger strategic approach that takes into considerations such as QC and ties it all into one holistic approach.

Thomas Bank is a great example of how a QC program should run. Thomas Bank has a number of locations in a particular state. While it has a long pedigree, it is very receptive to new ideas that balance revenue growth with risk mitigation. Thomas Bank takes very calculated risks. They have clear strategies that are consistently reviewed.

Thomas Bank does not have complicated systems. Most of their systems seamlessly talk to one another. The data is audited and produces strong reports on which good decisions are made. Thomas Bank understands which reports serve them best and works with an external firm to create, modify and discuss the reports. They take a proactive approach to all aspects of the QC process. During a CFPB audit prep consultation engagement it became very clear that Thomas Bank’s employees clearly know the QC process and how they fit into the overall strategy. This indicates that all stakeholders are being kept in the loop. All aspects of the QC process is well documented promoting transparency.

The size of a company should not determine its commitment to its quality control program. Ultimately it is the importance that leadership places on QC.

Read the rest of this chapter in The Mortgage Professional's Handbook!

Alvin Wali serves as CEO at Alliance International Corporation, a FinTech company specializing in managed services for the mortgage industry. He has successfully lead initiatives leveraging disruptive technology to support one of the most expeditious and accurate processing platforms in the industry. Alvin has 15 years of banking experience with leadership roles at Citibank, Fujitsu and Bank of America. He successfully oversaw areas in audit, finance, accounting, asset management, wires, PMO and systems implementation. Alvin lead globally dispersed teams in Europe and Asia, working across time zones and cultures.

Alvin also serves on the board of The Nari Project, a Clinton Global Initiative supported non-profit. Nari provides crisis kits to victims of domestic abuse in America, India, Bangladesh and Vietnam. Alvin is passionate about social business and has promoted profit commitments from Alliance to Nari and introduced paid volunteer days off for all employees to give time to any cause of their choice.