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Quality Assurance – A Coordinated Approach to Risk Management in the Default Industry

Published in Servicing Management, February 2007

By Robert Klein

Quality Assurance can be defined as a planned and systematic pattern of actions necessary to provide adequate confidence that a product or service optimally fulfills customers’ expectations. As the Default Services industry has matured, we have seen a diligent focus on the completeness and comprehensiveness of quality assurance processes and procedures.? Compliance with investor guidelines has been the main driver of these quality initiatives however the industry has made great strides in utilizing quality control techniques to safeguard their client interests.? Increasingly, we have seen a collaborative approach to quality processes and procedures as field servicer’s, loan servicer’s, and investors (HUD, VA, FNMA, and Freddie Mac) have coordinated their approaches to ensure consistent quality of efforts.?

This spirit of cooperation was never more evident than at the Third Annual Property Preservation Conference held in Washington D.C. in November 2006.?? The Conference theme, “It’s About Time!”? highlighted the renewed partnerships within the industry as the attendees focused on long term goals and opportunities in streamlining the conveyance process, thus saving investors, servicers, and M&M contractor’s time and money.? This collaboration led to proposed resolutions and the establishment of focus groups to cooperatively work with the investors on reducing the inefficiencies in the current processes and improving the quality of work efforts.

Field Service companies are typically the first line of defense for the default service industries quality assurance efforts.? The primary goal is to assure that all contractors working with Field Service companies are thoroughly educated about and compliant with the industry and client requirements, and that their quality of work is consistent and sound.? Contractors are the eyes and ears of the Field Service companies.? Therefore, it is imperative that contractors deploy quality assurance techniques to ensure that work is performed competently, comprehensively, and proper supporting documentation is available.? From a contractor standpoint, quality assurance efforts include:

• Field quality efforts include maintaining adequate equipment (ladders, air compressors, generators, etc.) to accurately and comprehensively complete the duties they are contracted to perform.
• Use of digital cameras to provide photo documentation of the before, during, and after status of the work performed.
• Utilization of office quality assurance efforts to ensure work order updates are timely and thorough and are adequately supported by documentation
• Increased utilization of GPS and handheld inspection tools to ensure that not only are their employees physically visiting the property,? but are comprehensively completing and gathering the proper inspection data

Field Service companies conduct comprehensive quality assurance efforts as well. In addition to investor guidelines,? Field Service companies must also deploy quality assurance techniques to ensure they are meeting client and service level agreement requirements.? Quality Assurance efforts common to experienced field service companies include, but are not limited to:

• Comprehensive vendor recruiting and training policies and procedures designed to ensure that recruitment is properly managed and resultant work products are consistent and in accordance with client requirements
• Increasing use of technology allowing for process “scripting” that provides a roadmap for the contractor in the field to gather sufficient and complete evidential matter including photo documentation
• The use of Contractor Report Cards and follow up procedures to ensure remediation of quality deficiencies
• Comprehensive review procedures designed to ensure the adequacy and reasonableness of submitted bids
• Comprehensive in house industry training to ensure that the in house personnel are properly trained and have access to the latest investor guidelines
• Completion of random quality control inspections.? These inspections are typically performed after the inspector has completed their inspection and are deigned to determine whether or not the inspection was a true representation of the physical condition of the property at the time the inspection took place.
• Assignment of “phantom” inspections to ensure that field inspectors are actually visiting properties and reporting accurate information.
• The completion of interior inspections to ensure early detection of issues that if not detected and mitigated, could lead to a material loss to the value of the property.?
• Critical path timelines and exception reporting established and consistently monitored to ensure timely completion of activities
• Internal quality control audits designed to ensure that adequate photo documentation is available to evidence the work performed and an audit trail is maintained that evidences all work performed
• Use of non-performance and demand letter issues to identify quality deficiencies and implement timely corrective action to prevent future occurrence
• Pre Conveyance inspections designed to document issues at the time of conveyance in order to ensure the minimization of reconveyances.

Loan servicers have also implemented quality assurance measures designed to assure compliance with investors and the mortgagee’s own origination or servicing requirements.? These activities are designed to protect the mortgagee and investors from unacceptable risk, guard against errors, omissions and fraud, and assure swift and appropriate corrective action is implemented.? In this regard, the servicers have implemented quality assurance activities such as:

• Utilization of Vendor Report Cards based on a representative sample of work orders performed designed to quality review work activities.
• The assignment of High Risk Field Officers to work proactively with field service vendors and municipalities to ensure compliance and timely remediation of code issues
• The increasing use of Service Level Agreements (SLA’s) that provide for financial disincentives for breakdowns in quality service
• Utilization of automated invoicing applications to properly ensure that claims for insurance benefits are accurately prepared, properly calculated, fully supported, and submitted in a timely manner on a loan level detail

Investors have also renewed their focus on quality assurance and have proactively worked with servicers and field service companies in a collaborative manner.? At the Property Preservation Conference in November 2006, HUD identified their “top ten” ways to save time and improve efficiencies.? As an illustration of their focus on quality assurance, these included:

• A recommendation that the industry take advantage of voluntary pre conveyance property inspections to minimize reconveyance risk
• Ensure that quality efforts include the submission of a timely HUD-27011 form, and that all non surchargeable damage is properly documented
• Their representation that “It’s all about Quality Control” when providing a comprehensive mortgagee/servicer audit trail.? HUD commented that servicers must perform periodic quality control audits to ensure that preservation and protection requirements are consistently met.

The Veterans Administration also announced strategies to improve efficiencies and quality at the Conference.? VA stated that they are now taking actions to address the servicers’ concerns of consolidation of cost schedules, streamlining and automation of claim payments, making information available online, instituting incentive plans for servicers, and implementing post-claim audits. Fannie Mae and Freddie Mac have also stepped up their quality assurance activities in accordance with the new industry focus. Both agencies have recently created a central office and email address for processing P&P requests nationwide.? These central offices track all bid requests by type and amount, making the reporting and auditing of data more efficient. Additionally, Fannie Mae has developed a servicing guide intended to assist the servicer to make quality decisions on their behalf.

In summary, the Default Industry has made tremendous strides in improving the quality of their work effort and has been working collaboratively to coordinate efforts.? A comprehensive quality assurance plan and process means cost savings to loan servicers, field service companies and ultimately the investors.? It should be apparent that if you cannot measure the quality of your efforts, you cannot improve it.? Industry quality assurance efforts need to focus on continuous business process improvement in an ongoing effort to enhance our products, services and processes.? However, these efforts cannot be undertaken in a vacuum and the industry must continue to collaborate on quality measures if we are to be successful.? The establishment of solid Quality Assurance plans will reinforce the investors confidence in loan servicing and result in renewed cooperation for all involved in the Industry.