Published on October 20, 2023
Written by Brock Miller
The Cost of Quality (COQ) Principle
The COQ principle is based on the idea that there are costs associated with both good and bad quality. These costs can be divided into two main categories: prevention costs and appraisal costs, and internal and external failure costs.
Prevention costs are the costs associated with preventing defects from occurring in the first place. These costs can include quality planning, training, and process improvement. Appraisal costs are the costs associated with detecting defects after they have occurred. These costs can include inspection, testing, and monitoring.
Internal failure costs are the costs associated with defects that are caught before they reach the customer. These costs can include rework, scrap, and re-inspection. External failure costs are the costs associated with defects that are not caught before they reach the customer. These costs can include warranty claims, product returns, and lost business.
In the context of the mortgage industry, the COQ principle can be applied to both the origination process as well as the servicing process. Prevention costs include quality planning, employee training, and process improvement initiatives that aim to prevent errors from occurring in the first place. Appraisal costs include pre-funding reviews, post-closing audits, and quality control checks to ensure loans meet regulatory and investor requirements.
Internal failure costs include the cost of rework and correcting errors that are identified during the quality control process. External failure costs include investor repurchase demands, loss of investor and borrower confidence, and regulatory penalties.
Mortgage Quality Control (QC)
Mortgage quality control has a direct impact on a mortgage lender's overall costs and quality. By implementing robust quality control processes, mortgage lenders can identify and correct defects early in the process, which can reduce the likelihood of downstream errors and lower the overall cost of quality. For example, a mortgage lender that invests in training and development programs for its loan originators and processors may reduce the number of errors and omissions in the origination process, which can reduce appraisal, internal failure, and external failure costs.
In addition to the cost reduction aspect, mortgage quality control also holds the potential to significantly enhance overall borrower satisfaction. By leveraging mortgage QC as a tool for continuous improvement, lenders can eliminate defects and bolster their standing with investors, regulators, and borrowers alike, translating into more business opportunities and heightened profitability.
The COQ principle is an important concept in quality management that can help mortgage lenders and servicers minimize costs and improve the quality of their services. By focusing on prevention and appraisal costs, as well as internal and external failure costs, mortgage lenders and servicers can identify areas for improvement and implement quality control processes to minimize COQ.
Mortgage quality control, in this regard, is a critical instrument in minimizing COQ in mortgage lending. Through mortgage quality control, lenders can identify and rectify errors early in the lending process, effectively averting the escalation of costs. Ultimately, mortgage quality control can help lenders deliver high-quality services to customers while minimizing costs and improving profitability.
Questions? If you have additional questions about QC or COQ, contact Brock at email@example.com.