![]() Failure costs can be classified into prevention costs and appraisal costs. The costs of producing good quality are called control costs and are associated with a quality assurance (QA) protocol. There are also costs incurred from overburdened audit department personnel and employee turnover. The reasons for these costs include rework needed on closed loans to bring them back to compliance, loan buybacks, concessions or penalties due to sub-standard loan quality, costs of resolving borrower, investor or MI complaints, losses incurred due to the need of sale of the loan in the distressed or ‘scratch and dent’ market (quality downgrading), etc. These costs are typically associated with production, including the cost of lost effort and loan pipeline loss due to loans falling through for not meeting quality, rework needed to bring the loan back to required quality levels, missing of loan deadlines due to quality issues needing corrections, costs of downtime or other production delays, etc.Įxternal Failure Costs are incurred after a loan has closed or been sold. Internal Failure Costs are incurred before a loan has closed or been sold. ![]() This article will focus on the cost of quality concerns for mortgage loan originators and how to utilize the cost of quality measurements to establish a Zero Defects loan quality program. Failure Costs are related to two types of failures: internal and external. Companies regulated by agencies such as the Bureau of Consumer Financial Protection (BCFP) average failure costs between $2.2 million to $39.2 million ( The True Cost of Compliance with Data Protection Regulations, 2017) in total. Research conducted on the cost of quality estimates that failures cost companies in any industry an average of 25 to 40 percent of their annual revenue. Knowing the difference between the two and applying methods to measure for each category is the key to reducing the cost of quality and achieving higher profits.Ĭosts of producing poor quality are called failure costs. There are two categories to determine the Cost of Loan Quality, the costs associated with producing a poor-quality loan, and the post-production costs of a poor quality loan. The term “ doing it right the first time” carries significant weight with Mortgage Originators concerned about the cost of Loan Quality.
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