Selling Guide

Published June 5, 2018

The Remedies Framework

The origination defect and remedies framework (“the remedies framework”) expands upon certain provisions related to the representation and warranties framework. The remedies framework relates specifically to the categorization of defects, lender corrections of those defects, and available remedies when defects are identified, including alternatives to repurchase.

The remedies framework applies to whole loans purchased, and mortgage loans delivered into MBS with pool issue dates on or after January 1, 2016. See D2-1-03, Outcomes of Fannie Mae QC Reviews, and D2-1-04, Identifying and Remedying Origination Defects Under the Remedies Framework, for additional information about the remedies framework.

Alternatives to Mortgage Loan Repurchases

In certain circumstances, Fannie Mae may provide the lender with an alternative to the immediate repurchase of a mortgage loan that does not meet Fannie Mae's requirements.

For loans subject to the remedies framework, Fannie Mae may consider a loan with a significant defect for a repurchase alternative depending on Fannie Mae’s commercially reasonable determination that the loan is retainable. Fannie Mae will determine whether the loan is retainable based on the lender’s counterparty status and whether the loan was an acceptable investment at the time of purchase. In this context, the lender’s counterparty status is Fannie Mae’s assessment of the lender’s financial capacity, which could determine which remedy Fannie Mae will offer to the lender.

For any loan offered a repurchase alternative, Fannie Mae will notify the lender in writing of the type and terms of the repurchase alternative. The alternatives may include, but are not limited to, any one or more of the following, as determined by Fannie Mae in its discretion.

Repurchase Alternatives for Performing Loans Repurchase Alternatives for Non-performing Loans
  • Pricing adjustment—the assessment by Fannie Mae and payment by the lender of a guaranty fee adjustment, risk fee, or additional loan-level price adjustment with respect to the mortgage.

  • Recourse—an agreement by the lender to provide recourse for the life of the loan or for some other specified period of time.

  • Collateralized recourse—recourse as described above, with respect to which the lender's obligation is secured by a specified collateral account.

  • Indemnification—an agreement by the lender to indemnify, defend, and hold Fannie Mae harmless from any losses incurred by Fannie Mae relating to the mortgage.

  • Collateralized indemnification—indemnification as described above, with respect to which the lender's obligation is secured by a specified collateral account.

  • Collateralized or uncollateralized mortgage insurance stand-in agreement—for certain loans acquired by Fannie Mae on or after July 1, 2014, the payment by the lender to Fannie Mae for the full mortgage insurance benefit amount that would have been payable under the original rescinded mortgage insurance policy if the loan liquidates.

  • Make-whole payment—the amount that a party responsible for a breach of a selling representation or warranty or a servicing breach must pay Fannie Mae so that Fannie Mae does not incur a loss on the mortgage or the property.

  • Split loss or loss share—an agreement between Fannie Mae and the lender to each pay a specified proportion of the losses that have arisen or may arise in the future relating to the mortgage.

  • Loss reimbursement—an agreement by the lender to reimburse Fannie Mae for specified losses relating to the mortgage.

Note: If Fannie Mae offers a repurchase alternative after a demand has been issued, the lender has the option to immediately repurchase the loan instead of accepting the repurchase alternative.

Conditions to Mortgage Loan Repurchase Alternatives

Certain repurchase alternatives may be available only to a lender that is in good standing with Fannie Mae, is in a strong financial condition acceptable to Fannie Mae, and otherwise satisfies Fannie Mae's eligibility criteria. (If the servicing of a mortgage has been transferred to a lender other than the one that sold the mortgage loan to Fannie Mae, eligibility for this benefit will be based on an evaluation of the servicer.)

For loans subject to the remedies framework, Fannie Mae may offer or decline to offer certain repurchase alternatives based on the lender’s counterparty status, to the extent there are future obligations required as part of the repurchase alternative.

Other factors to be considered by Fannie Mae may include, but are not limited to, the failure to maintain a quality loan origination process and the lender’s ability and willingness to comply with other provisions of the Lender Contract. In determining a lender's (or servicer's) eligibility for this repurchase alternative, Fannie Mae will evaluate the following:

  • the quality of the mortgages the lender sells to (or services for) Fannie Mae, as measured by comparing the delinquency rates for comparable portfolios;

  • the quality of the servicing performance, as measured by the lender's loss mitigation activities; and

  • the overall financial strength of the lender, as reflected in the lender's annual financial statements and any other periodic financial reports the lender submits to Fannie Mae.

Fannie Mae also will periodically assess the lender's ongoing underwriting performance and contingent repurchase exposure (the lender's repurchase risk exposure in relation to its financial ability). When appropriate, Fannie Mae may change the lender's eligibility status for a repurchase alternative.

Note: The MI stand-in repurchase alternative may be available, provided the lender and the mortgage loan meet certain eligibility criteria. Fannie Mae will provide lenders with information on how to initiate a discussion about this repurchase alternative upon notification that mortgage insurance has been rescinded and is the only defect identified.

Appeal Process

A lender may submit a written appeal of a “demand,” which is defined as any request issued by Fannie Mae to a responsible party to provide a specific remedy as provided in the Lender Contract. (See A2-3.2-01, Loan Repurchases and Make Whole Payments Requested by Fannie Mae, for additional information on loan repurchase and make whole payment demands.)

The “appeal process” includes both the first and second appeals available to the responsible party under the conditions described in the following table. The responsible party’s ability to participate in the appeal, impasse, management escalation and Independent Dispute Resolution processes cannot be assigned to another party, such as an insurance company. Note that the responsible party may provide a correction of an alleged significant defect at any time during the appeal process.

Detailed information about the requirements for each step in the appeal process may be found in Appeal and Independent Dispute Resolution Processes posted on Fannie Mae’s website, which is incorporated by reference.

Appeal Process Lender Action Fannie Mae Action
First Appeal:

A lender may submit a written appeal of a demand.

The lender must submit an appeal in writing within 60 days of receiving a demand.

Note: Fannie Mae, in its discretion, may identify a shorter or longer appeal period in the demand based on circumstances at the time.

Fannie Mae must respond in writing to the lender’s appeal within 60 days of its receipt.
Second Appeal:

If the first appeal is denied and the lender has additional material information, the lender may choose to submit a second appeal.

The lender must submit a second appeal in writing within 15 days of receiving a denial of the first appeal. Fannie Mae must respond in writing to the lender’s second appeal within 60 days of its receipt.

Impasse and Management Escalation Processes

At the conclusion of the first or second appeal, if the lender wishes to challenge the existence of the defect identified in the demand, the lender may initiate the impasse process. If Fannie Mae reaffirms the demand during the impasse process, the lender may continue the challenge as provided by the management escalation process.

The steps in the impasse and management escalation processes are described in the following table. Detailed information about the requirements for each step may be found in Appeal and Independent Dispute Resolution Processes posted on Fannie Mae’s website, which is incorporated by reference.

Impasse and Management Escalation Processes Lender Action Fannie Mae Action
Impasse:

If, at the conclusion of the first or second appeal, the lender wishes to challenge the existence of the defect, it must initiate the impasse process.

The lender must initiate the impasse process in writing within 15 days of receiving Fannie Mae’s denial of the first or second appeal. Fannie Mae and the lender will have 30 days in which to attempt to resolve the dispute, unless both parties agree to a longer time period.
Management Escalation:

At the end of the impasse process, if Fannie Mae reaffirmed the demand and the lender wishes to continue to dispute the existence of the defect, the lender must initiate the management escalation process.

The lender must initiate the management escalation process in writing within 15 days of conclusion of the impasse process by notifying its Fannie Mae officer contact of its intention to initiate management escalation.

If, at the end of the management escalation process, Fannie Mae reaffirmed the demand, the lender may initiate the Independent Dispute Resolution Process

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Within 30 days of receipt of the lender’s initiation of the management escalation process, Fannie Mae must involve an officer outside of the quality control group in a review of the dispute.

Fannie Mae and the lender will have 30 days in which to attempt to resolve the dispute, unless both parties agree to a longer time period.

Independent Dispute Resolution (IDR) Process

The IDR process is available for disputes that are not resolved through the appeal, impasse, or management escalation processes. The IDR process is available provided the preconditions to each step have been followed and the parties have not filed litigation to attempt to address the dispute. IDR is available to lenders that have not been suspended, disqualified, or terminated by Fannie Mae, and that have complied with any prior IDR award or demand made by Fannie Mae (as applicable). The IDR process shall be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1 et. Seq.

The IDR process addresses loan-level demands and whether alleged breach(es) by the responsible party of its representations and warranties, or duties or responsibilities as provided under the Lender Contract exist at the time IDR commences. The IDR process may be used for

  • demands relating to a breach of a selling representation, warranty, duty or responsibility, involving whole loans purchased, and mortgage loans delivered into MBS with pool issue dates on and after January 1, 2016; and

  • demands relating to servicing remedies issued on and after December 1, 2016.

The IDR process cannot be used to resolve the suspension, disqualification, or termination of a lender. Nor may the IDR process be used if a lender receives a formal notice of default from Fannie Mae.

A neutral third party, selected by the IDR program administrator, will determine whether the alleged breach(es) existed at the time IDR commenced based on case file packages and subject matter expert reports submitted in writing by both parties. The neutral party’s decision will be final and binding upon the lender and Fannie Mae.

Lender Initiation of IDR. If Fannie Mae reaffirms the demand at the end of the management escalation process, the lender will have 15 days to initiate the IDR by completing and submitting an executed Retainer Agreement located on Fannie Mae’s website to the Fannie Mae officer involved in the management escalation process and to the program administrator, as described in the Appeal and Independent Dispute Resolution Processes.

If Fannie Mae has not received the lender’s fully completed and executed Retainer Agreement within 15 days of the end of the management escalation period, the lender will have no further right to appeal the existence of the defect in the demand, including the commencement of IDR, and will be obligated to comply with the terms of the demand.

If the lender has not initiated the IDR process by the 15-day deadline or complied with the demand, Fannie Mae shall have the option of either initiating the IDR process within 6 months of the end of the management escalation period or pursuing other remedies.

For additional information about the details of the IDR process, see Appeal and Independent Dispute Resolution Processes posted on Fannie Mae’s website.

Related Announcements

The table below provides references to the Announcements that have been issued that are related to this topic.

Announcements Issue Date
Announcement SEL-2016–07 August 30, 2016
Announcement SEL-2016–02 February 23, 2016
Announcement SEL-2015–12 November 3, 2015
Announcement SEL-2014–07 June 24, 2014
Announcement SEL-2013–03 April 9, 2013