Blog post originally posted on the MetaSource Mortgage Blog

For the mortgage industry, 2022 must have felt a bit like whiplash: from the chaos of record volume and staffing shortages in 2021 to plummeting originations and layoffs just a year later. And mortgage quality control was not immune to the effects of such see-sawing industry challenges.

While “closing disclosure tolerance defects” held the first spot in the MetaSource Team’s top QC findings list – as it consistently has for years, our analysis revealed a troubling pattern in the rise of defects that most closely correlate to repurchase risk. In 2022, four such defect categories jumped in the rankings.

This findings report provides details behind those numbers, along with some tips for how you can prevent findings – and repurchase risks – in 2023.

Top QC Findings for 2022

Here is the complete list of our top 15 mortgage QC findings for 2022, including all loan types and both regulatory and agency findings:

1. Closing Disclosure – Defective – Tolerance
2. Product Parameter – Points and Fees
3. Income Documentation – Aged
4. Income Not Documented – Other
5. Closing Disclosure Defective – Calculating Cash to Close
6. Insufficient Assets to Close
7. Closing Disclosure – Defective
8. Other Application / Processing Documentation – Loan Estimate – Timing Violation
9. Other Application / Processing Documentation – Intent to Proceed
10. Incorrect Income Calculation – Other
11. DU or AUS Findings Report – Missing or Defective
12. Closing Disclosure – Timing Violation
13. Undisclosed Liability
14. TILA Finance Charge Violation
15. Property Insurance Not Documented – Missing or Defective

Documentation Challenges: The Mortgage QC Equivalent of “Noise”

As the MetaSource Team predicted in our 2021 QC Findings Report, closing disclosure tolerance defects topped the list in 2022 amid a documentation-trouble streak that includes six of the last seven years.

“One thing we see year-over-year is the constant waste of time spent chasing (missing) documents,” said MetaSource Senior Director of Mortgage Services Brady Meadows.

Many documentation issues are the mortgage QC equivalent of “noise,” Meadows said. They aren’t considered genuine business threats, but are, instead, seen as a persistent background irritation that signifies inefficiency. Nevertheless, they almost certainly come with a price tag.

And some documentation issues are much “louder” – and cause much more financial harm – than others. Take income documentation aged defects as an example. They often result in repurchase demands, making them a major problem for lenders.

Download the full 2022 QC Findings Report to learn about the top defects that result in repurchase demands and how to reduce findings and risk in 2023.

Document challenges continued to be a leading cause of QC trouble for mortgage servicers in 2021, a year in which record high mortgage levels exacerbated the effects of process shortcomings.

It was a problem that left servicers unable to substantiate a wide array of process requirements, from documenting timely follow-ups to customer inquiries to missing disclosures on service transfer letters. In fact, documentation lapses made up 9 of the top 10 findings identified in MetaSource’s annual analysis of servicing QC findings.

This findings report discusses what the top 10 findings were, why documentation remains a main source of difficulty, and how to overcome document challenges and ensure compliance.

Document Management: A “Daunting Task” for Mortgage Servicers
Our 2021 analysis shows that missing documents left servicers unable to provide proof that they met requirements. In many cases, servicers’ underlying processes were fully compliant, but the supporting records were insufficient or inaccessible at the time of the audit.

Why was this the case? MetaSource’s QC Manager John Morales said it best. “Establishing and maintaining adequate document management processes can be a daunting task,” he said.

In some cases, Morales said, the documents required to substantiate compliance were notated in the servicer’s records, but the original document image, which can be difficult to retrieve, was not available at the loan level.

According to Morales, many servicers relied on notations and codes as proof that requirements were met. Unfortunately, this led to negative outcomes.

“Reliance on codes and notations alone to substantiate work completed can open the door to findings where a conservative interpretation of a guideline requires physical proof of the underlying document,” Morales said.

For example, customer inquiry receipt dates are considered questionable when sent without a date stamp. The same is true for electronically provided payment receipt dates and notations of sent breaches when copies aren’t available.

In other cases, mandatory documents were retrieved and stored but were purged after a liquidation or service transfer before audits were submitted for review. This, too, resulted in a lack of required documentation and, therefore, findings.

Top Servicing QC Findings for 2021

Here is the list of our top mortgage servicing QC findings for 2021:

1. Incorrect set-up and timely premium payment of taxes, insurance, and mortgage
   insurance
2. Failure to provide proof of payment within 24 hours of receipt due to
   inability to prove receipt date via various methods of payment acceptance (e.g.,
   online, phone, and lockbox)
3. Missing accounting histories where initial loan set-ups are completed after the first
   payment was submitted and now second payment is due.Download the full report to see the complete list of top servicing QC findings, learn why overcoming document shortcomings is more important than ever, and discover how to ensure compliance in 2022.

Staff shortages, office closings, and high volumes created ongoing disruption for the mortgage industry in 2021.

And, based on MetaSource’s annual analysis of third-party QA reviews, some MERS processes suffered as a result.  

Overall, our analysis showed that the top three areas of MERS compliance challenges fell along familiar themes. We also discovered that while the overall exception rate increased from 11% in 2020 to 19% in 2021, some notable improvements were made.

This report discusses why these improvements occurred, details surrounding what MERS Members struggled with the most, and best practices for overcoming these struggles in the future.

Top MERS QA Audit Findings for 2021

Here are the MERS QA challenges that Members struggled with most in 2021:

The Challenges of Maintaining Detailed, Up-to-Date Policies & Procedures

Ensuring that internal policies are thorough and up-to-date is a perennial struggle for many MERS Members. But it was heightened in 2021 when additional difficulties, including staffing shortages, left some servicers without the MERS support they needed. Many servicers were left to rely on staff members who were unfamiliar with MERS requirements and the level of detail necessary to meet current policy and procedure expectations.

Other servicers fell short of MERS requirements for written policies and procedures as their monthly volumes swelled and, for the first time ever, pushed them over the 1,000-mortgage identification number (MIN) mark. MERS Members over this MIN mark as of March 31 are required to obtain a third-party review, which includes a thorough review of MERS Members’ operational policies and procedures in preparation for the MERS eAnnual report due each year by December 31. Those new to this MIN volume level last year were left subject to monthly reconciliation requirements and third-party reviews for the first time. Similar to those experiencing staffing shortages, these servicers were unfamiliar with the requirements and failed to provide adequate written internal policies and procedures.

This unfamiliarity undoubtedly led to an increase in policy and procedure-related challenges and a rise in the overall exception rate. “About 90% of the Members I reviewed last year did not have detailed procedures,” said Rachel Pylant, MetaSource Director of MERS Services.

The Areas that Showed Improvement

While more Members struggled to meet written internal policy and procedure requirements last year, there were signs of improvement in other areas.

Download the full report to learn what these areas of improvement were, the main reasons for the improvements, and the best practices for ensuring MERS compliance in 2022.

In a year in which record mortgage volumes collided with staffing shortages and ongoing economic volatility, mortgage quality control difficulties remained mostly the same as years prior. However, there were some new challenges in 2021.

This findings report digs into those new challenges, provides MetaSource’s top 15 findings for the year, and offers advice on how you can avoid findings in 2022.

Top QC Findings for 2021

Here is the complete list of our top 15 mortgage QC findings for 2021, including all loan types and both regulatory and agency findings:

#1 Finding: Still a Continuous Trend

The finding “closing disclosure tolerance defects” tops the list, as it has in five of the last six years. Even so, there were signs of a worsening trend in 2021, claiming over 15% of all MetaSource significant findings, compared to around 13% in 2020.

Why is this the case?

MetaSource Senior Director of Mortgage Services, Brady Meadows provided some insight: “As best we can tell, this is because lenders were so busy trying to keep up in 2021, that documentation took a back seat.” Meadows explained that many lenders did not fail to adhere to tolerance regulations, but rather failed to provide MetaSource with the required documentation.

Documentation issues were also prevalent in MetaSource’s analysis of top findings by Fannie Mae category. Loan package documentation was by far the largest Fannie Mae category of defects, accounting for more than 60% of the findings.

Income Documentation: A Source of Difficulty for Lenders in 2021

There was a steep increase in the number of income documentation aged defects, with 43% more significant findings related to documenting borrower incomes than in the previous year – pushing income documentation defects to 3rd in ranking in 2021, up from 10th on our 2020 list.

Download the full report to learn why this increase occurred, what other findings moved up the list in 2021, and how you can minimize findings in 2022.