QC Independent Contractors and Conflicts of Interest

OCC Terminates B2B & IC Relationship Recently, Business to Business (B2B) and Independent Contractors (IC) that specialize in mortgage quality control and compliance; due diligence, and loan audit reviews just had their cages raddled with the recent action by the OCC that required the termination of a B2B IC relationship with one of the mortgage industries largest mortgage servicer. The OCC felt like the IC was not at an arm’s length distance from the work it was providing with the large mortgage servicer and the smaller mortgage servicer where a B2B relationship was established between the smaller mortgage servicer and the larger mortgage servicer.

So, what does the OCC’s force termination mean for ICs who provide similar type of services throughout the mortgage banking industry and what does the OCC action mean to mortgage bankers that engage the services of ICs that provide quality control and compliance?

The OCC’s action may be the new drama unfolding in the B2B IC’s sphere of influence and the mortgage banking institutions. Currently, the Mortgage Bankers Administration and select workgroups subcommittees are working to establish standards for vetting ICs that provide foreclosure support and consulting services that would legitimize IC’s credentials and credibility for B2B relationships. The new industry standard for ICs within the industry and set the parameters for ICs to compete on an equal footing.

Those B2B ICs that have been through procurement and vendor management approval know the demands and costs of business infrastructure that is required to be considered as a financial institution vendor. Many of the financial institution’s vendor requirements are too demanding, unmanageable, and costly for most small businesses. In many cases, this eliminates small businesses that qualify as veteran, minority, and small business that qualify as disadvantaged. This unfortunate situation drives the financial institutions to B2B ICs that are other than small business and usually have an existing client base that is like kind to most financial institutions’ vendor requirements. Because of the feasibility of vendor approval for a few large IC, there are mortgage quality control IC that are providing services that are in conflict with some operation models and B2B relationships between two or more financial institutions.

Avoiding Conflict by Asking the Correct Questions

• Is the mortgage IC providing underwriting, pre-funding quality control and post-closing quality mortgage loan audits within the same B2B relationship? If multiple discipline functions are being performed by the same IC, this could be a conflict of interest. One may consider the same logic applies by prohibiting loan officers and processors from underwriting loans just as a QC company should not perform underwriting, pre-funding QC and post-closing QC audit on the very same loans that were cleared prior to closing. What would a mortgage bank think if the QC provider was finding loan defects or not finding loan defects in the post-closing QC audit if the QC provider was performing QC on itself?

• Is the IC providing mortgage post-closing quality control loan audit reviews for mortgage banks and providing services such as mortgage underwriting and pre-funding quality control for a second mortgage bank in which the two mortgage banks are established in a B2B relationship? If so, this could be a conflict of interest. Is it possible for mortgage bank who intended to hire an IC to perform post-closing mortgage loan reviews intends to have the same IC who perform the underwriting and, or, the pre- funding QC to be the reviewer of the loans selected for post- closing QC audits?

• Is the IC assisting in the prosecuting mortgage repurchase claims for mortgage finance institutions against mortgage banks where B2B relationships are established between the mortgage finance institution and the mortgage bank? If so, this could be a conflict of interest. Is it possible, with all the repurchase claims and repurchase defense between GSEs, mortgage investors and mortgage bankers as well as mortgage insurers that every one of these institutions would take great offense if an IC who provides underwriting, pre-funding QC, or post-closing QC for mortgage bankers would also help in the prosecution of mortgage claims against existing clients. This scenario exists and IC QC vendors are putting processes in place to be able to assist in the prosecution of mortgage claims on clients and potential clients.

Many of these large mortgage institutions require IC swear to secrecy of the B2B relationship in their respective contracts preventing ICs from disclosing B2B relationships. Perhaps there should be transparency by mortgage institutions that hire or want to hire ICs. With transparency, mortgage bankers are able to determine, in the vendor approval process, if there is a potential conflict of interest based on services provided and business relationships by QC vendors.

If oversight agencies were to continue the pursuit and investigate B2B vendor relations, there will be more government forced terminations. Time will tell if IC QC vendors will disclose B2B relationships that may jeopardize potential contracts, or if the mortgage institutions will continue to risk bad press as a result of discovery of B2B conflicts of interest by an oversight agency? The culmination of market demands for variety of services offered by ICs and ICs chasing market demands to expand offerings could be a formula to potential conflicts of interest if ICs are not vetted properly. Mortgage bankers must understand the services offered by B2B ICs and understand how other B2B relationships offered by ICs may adversely affect business operation models.