QC risks are shifting: Fraud, insurance, and compliance take center stage

Traditional QC risks are declining, but lenders now face mounting exposures in fraud, insurance gaps and compliance volatility.

The mortgage industry’s quality control risk landscape is shifting dramatically. Traditional defect categories such as income and employment and credit are seeing historic declines, while once-marginal issues like insurance gaps and fraud are now taking center stage. For lenders navigating this evolution, agility and insight are critical. Data from ACES Quality Management’s latest QC Industry Trends Report, along with insights shared by Fannie Mae, underscore how vital it is for QC strategies to adapt to emerging threats.

ACES Mortgage QC Industry Trends Report covering the fourth quarter of 2024 and full calendar year showed the critical defect rate fell to 1.16%, marking the second-lowest level recorded since the report began. This industry-wide improvement was largely driven by substantial reductions in the income and employment category, which dropped by 35.5% quarter over quarter. For the first time in more than three years, this long-standing category is no longer the most prevalent driver of defects. But as some risks recede, new ones are taking shape.

Legal/Regulatory/Compliance defects surged to become the leading defect category in the fourth quarter. This increase is particularly concerning given the category’s history of volatility, especially during regulatory shifts such as TRID implementation. Today, under the Trump administration’s evolving regulatory posture, lenders face increased uncertainty. Conflicting guidance and shifting agency priorities have made it unclear which rules remain in effect and which have been deprioritized or restructured. This ambiguity leaves many lenders in a reactive stance, heightening their vulnerability to compliance failures.

At the same time, insurance-related defects, which historically held under 1% share, remained elevated throughout 2024. These issues are tied to rising premiums and reduced coverage availability in disaster-prone regions like California and Florida. As more insurers exit high-risk markets, borrowers are struggling to find or afford sufficient hazard insurance. These gaps directly affect loan eligibility and investor compliance, leaving lenders exposed. With natural disasters becoming more frequent and the insurance landscape fragmented, predicting where QC exposure will emerge next becomes increasingly difficult.

Fraud-related risks are becoming more pronounced. Fannie Mae’s post-purchase reviews continue to flag misrepresentation, especially of occupancy and income, as one of the top categories of significant defects. Often, these red flags are easy to detect when appropriate tools are used. For example, properties listed for rent online during underwriting may conflict with stated occupancy intent. Incomes derived from unverifiable employment or fabricated rental income have also become more common. Without a data-driven, real-time QC framework, many of these issues can go unnoticed until they trigger costly repurchase demands.

Compounding these emerging threats is a notable shift in transaction mix. In Q4 2024, refinance loans saw a 29% increase in QC review share but accounted for a 53.57% spike in defect share. This disproportionate rise suggests many lenders have not adequately adjusted their QC reviews to account for the specific risks of refinance transactions. As borrower profiles grow more complex and documentation becomes more layered, lenders must recalibrate review strategies accordingly.

ACES Quality Management clients are well-equipped to navigate this increasingly complex and dynamic environment. As risks shift from traditional defect areas to more nuanced compliance and operational exposures, ACES delivers the tools lenders need to remain agile and proactive. The ACES Quality Management & Control® software platform offers real-time benchmarking, automated defect categorization and workflow tools aligned with agency taxonomies, helping lenders stay ahead of changing risk profiles.

“We really value ACES,” said Helen Law, senior vice president of quality control at Planet Home Lending. “Their oversight of all investor, GSE, federal and state requirements and keeping us up to date on changes has really helped us tremendously when it comes time for Fannie Mae, Freddie Mac or HUD audits. ACES allows us to easily extract all reporting, perform trending analysis and the AMQ’s ensure we remain in compliance with all guidelines.”

ACES also supports lenders with tools that dramatically improve QC team productivity and response times. By streamlining workflows, accelerating audit cycles, and enabling rapid exception resolution, ACES helps lenders move beyond manual processes to build a more agile and effective QC operation. These capabilities ensure audit readiness, support calibration alignment and empower lenders to keep pace with growing complexity and review volume.

“We used to be in about a three-day time span for initial audits before ACES, and now we’re down to about a day,” said Patrick Smith, senior director of operations administration at Arizona Financial Credit Union. “As far as when the exceptions come back for resolution, we’re within about a day time frame as well, which is a reduction of really three to five days.”

In today’s market, agility isn’t optional. It’s essential. The risk profile of a loan pipeline can change quickly, and relying on legacy QC frameworks leaves lenders vulnerable to undetected defects and repurchase exposure. ACES helps lenders turn insight into action, enabling them to recalibrate faster and smarter.

As 2025 unfolds, quality control leaders must rethink their approach. It’s time to move beyond static review plans and toward dynamic, intelligence-driven QC strategies. With ACES as a partner, lenders gain not only the tools to detect change but the insight to act on it.