The most recent ACES Risk Management (ARMCO) Mortgage QC Industry report, which covered Q2 of 2016, found that loan defects in the Legal/Regulatory/Compliance category had dropped substantially (from 50 percent down to 34 percent), reversing an upward trend since the implementation of TRID in October 2015.
According to ARMCO Chief Operating Officer Phil McCall, the corrective actions put in place by lenders during the first six months of 2016 were largely responsible for the decline in Legal/Regulatory/Compliance defects in loans.
McCall said defects during the QC process can be classified as informational (or moderate) or the more severe type of critical defects that could make a loan ineligible for sale into the secondary market. While there was a noticeable spike in loan defects immediately following the implementation of TRID, much of it was due to the fact that lenders were treating everything like it was critical in nature because they were concerned over whether or not the loans could be sold into the secondary market later, McCall said.
“There were lots of unknowns,” McCall said. “A huge part of the jump was, ‘We're not sure if this really is going to cause this loan to be nonsaleable or if the investor is going to push it back on us, so we're going to put everything as a critical defect,’ and it was more of a pass/fail. Either you made it or you didn't, and if you failed it was critical. It got to the point of ‘We need to be hypersensitive to make sure we have everything covered.’ So everything was being brought to the surface and lots of defects were being identified.”
Lenders began to look at the remediation process after seeing all the defects and identifying key areas, much of it around data integrity, McCall said. Many of the defects, such as fees not lining up from one company to the next because multiple systems were producing documents, were easy to correct, and as a result lenders have focused more on more defects that actually are critical and not just minor.
“I think that big slice of that correction started happening in Q2, and from what we’re seeing, we expect that to continue to go down and get back to a point of now we're really just dealing with when a disclosure was not done on a timely basis or a fee was not properly predisclosed, or we had a change of circumstance and it did not meet the tolerance levels,” McCall said. “I think that's what we’ll see more of as we get into Q3. Everyone is looking at the bigger pieces—‘We have to make sure these are done on time. We have to make sure our fees are right.’”