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AI: A Potential Cure for Loan Defects

Blog Ai Loan Defects

Defects can prevent loans from being funded, insured or sold. Here’s how AI can help prevent defects and keep loans on track.

By Steve Butler, Founder & President, AI Foundry

Minor defects can be tolerated in some industries and products, but defects in loans can cause delays in funding and lead to adverse pricing adjustments. They can also prevent loans from being insured or sold. And, these defects cause strain in the relationship between the sellers of loans and the investors who buy them.

This is such an important issue that Aces Risk Management (ARMCO) tracks the rate of defects across the industry each quarter to see if quality assurance (and accuracy) is getting better or worse over time, and this is an important benchmark for lenders to measure their operations. The important question is: How do we reduce loan defects? The answer: AI. In fact, removing loan defects is the central purpose of AI-driven, automated loan processing.

The Challenge of Loan Defects

What exactly are loan defects?  ARMCO defines a critical (loan) defect as “a defect that would result in the loan being uninsurable or ineligible for sale.” ARMCO’s quarterly report on “Mortgage QC Industry Trends” tracks loan defects in great detail, using Fannie Mae’s loan defect taxonomy. Examples of a loan defect include expired or incomplete appraisals, a social security number discrepancy, missing or defective credit reports, misrepresented income, or other inaccurate or missing information.

The key takeaway: there is definitely room for improvement when it comes to loan defects.

Smaller Staffs = More Errors

First, let’s look at a potential cause: When the mortgage industry hit a downturn in 2018, lenders responded with downsizing and staff reductions. The mortgage industry’s reliance on human capital for data entry and quality control became a major reason for significant loan defect problems. There were not enough humans to go around, and the remaining ones became overworked, which led to more errors. How can this be fixed? If a “boom and bust” cycle of hiring and later reducing the workforce to follow the market’s ups and downs is not an option, what is a better alternative?

AI-Based Automation to the Rescue

Investors and correspondents need to move to purpose-built technology that is designed to minimize loan defects and enable continuous process improvement, consistent execution and repeatable (positive) outcomes.

At AI Foundry, our Agile Mortgages Cognitive Robots can automate the process of identifying, verifying, validating and flagging defects during the loan origination process. Because AI-based cognitive robots can do this work on a constant basis without fatigue, we can reduce errors and increase productivity. Loan officers, processors and underwriters can take immediate corrective actions on any identified defect conditions, fixing problems early in the process so that loans can keep moving forward. And, our cognitive robots automate closing and post-closing checklists, as well as signature verification. The end result? Automation and business intelligence that expedites the origination, closing and post-closing process without defects in the loan.

In all, while loan defect rates may fluctuate based on market conditions, loan volumes and available human capital, we can improve accuracy and reduce defects by using AI to automate the monitoring and verifying of information at key points throughout the loan process. As I mentioned earlier, removing loan defects is the central purpose of AI-driven, automated loan processing, and our technology removes defects and keeps loans moving ahead smoothly. This benefits lenders and borrowers through improved efficiency, reduced costs and a better overall experience.

Request a demonstration of what Cognitive Business Automation can do for your organization, get in touch today.