An effective QC program is a key component of the lender’s overall control environment. The QC program defines the lender’s standards for loan quality, establishes processes designed to achieve those standards, and mitigates risks associated with the lender’s origination processes. Fannie Mae requires the lender to develop and implement a QC program that provides a structure for identifying the deficiencies in the loan manufacturing process and for implementing plans to quickly remediate those deficiencies and underlying issues. The lender’s QC program must include a documented QC plan that outlines requirements for validating that loans are originated in accordance with its established policies and procedures and
the loans comply with applicable federal, state, and local laws and regulations;
the loans comply with the Selling Guide, all related contractual terms and agreements, and are in all respects eligible for delivery to Fannie Mae; and
the QC plan must guard against fraud, negligence, errors, and omissions by officers, employees, contractors (whether or not involved in the origination of the mortgage loans), brokers, borrowers, marketing partners, and others involved in the mortgage process.
Lenders that fail to maintain an effective QC program will be in breach of their contractual obligations with Fannie Mae.
The lender’s QC program must include a documented QC plan that establishes standards for quality and incorporates systems and processes for achieving those standards. The QC plan, at a minimum, must contain the following information.
|✓||QC Plan Requirements|
|Quality standards and measures: a general overview of the lender’s QC philosophy, plan objectives, and identification of the specific risks the lender intends to measure, monitor, and manage|
|Procedures: detailed operating and reporting procedures for all employees involved in or affected by the QC process|
|QC file review process: a process for performing prefunding and post-closing QC file
reviews, including at a minimum, a process for
|Sample selection process: a process for identifying a representative sample of loans
for QC file reviews using both random and discretionary selection processes that includes
|Reporting: written procedures for reporting the results of the QC file reviews, including
|Vendor review: a process for reviewing the QC work performed by the lender’s third-party vendors|
|File retention: a process for maintaining for three years records of QC findings and reports, loan files reviewed, and all related documentation, including chronicling the location of such records|
|Audit: an audit process to ensure that the lender’s QC processes and procedures are followed by the QC staff and that its assessments and conclusions are recorded and consistently applied|
The lender is responsible for the development and maintenance of standards for loan quality and for the establishment of processes designed to achieve those standards. To evaluate and measure loan quality standards effectively, the lender must establish a methodology for identifying, categorizing, and measuring defects and trends against an established target defect rate.
At a minimum, the lender must identify any loans with a defect (loans not in compliance with the Selling Guide or other related contractual terms and agreements) and establish a methodology by which all loans with identified defects can be categorized based on the severity of the defect. The lender must define the severity levels appropriate to its organization and reporting needs, however, the highest level of severity must be assigned to those loans with defects resulting in the loan not being eligible as delivered to Fannie Mae.
The lender must also establish target defect rates for its organization, reflecting its quality standards and goals. The establishment of a target defect rate is based on the lender’s post-closing random QC sample and enables the lender to regularly evaluate and measure progress in meeting its loan quality standards. Different target defect rates may be established for different severity levels; however, at a minimum a target defect rate must be established for the lender’s highest level of severity.
A target defect rate must be established that is as reasonably low as possible. Once the targets are set, performance against the targets must be measured at least quarterly and reported to management. The target defect rate(s) must be evaluated and if necessary reset at least annually. The lender must document the rationale for establishing the target rate(s). Fannie Mae may assess how the lender’s chosen target defect rate affects Fannie Mae’s risk and may provide input on a more appropriate target.
As part of its QC program, the lender must establish processes to evaluate and monitor the overall quality of mortgage production through prefunding and post-closing reviews. The purpose of performing a loan file review is to assess loan quality and eligibility and to confirm that the underwriting decision is well justified. Loan file reviews must include, at a minimum, an assessment of
compliance with Fannie Mae requirements by confirming that
the loan meets eligibility and underwriting requirements,
the underwriting decision is adequately supported and all documentation required to support the decision is contained in the file, and
the loan is secured by a property that provides acceptable collateral; and
compliance with all federal, state, and local laws and regulations. (For additional information, see A3-2-01, Compliance With Laws.)
When the lender’s loan file review identifies discrepancies between the data and/or information that was used in the underwriting decision and the data or information verified through the QC process, the lender must reassess the underwriting decision based on the newly verified information to determine whether the loan remains eligible as delivered to Fannie Mae.
Example: the loan would be considered to be ineligible as delivered in a case when the lender’s review of the settlement statement reveals that the borrower received cash back at closing in an amount that exceeds the limit for limited cash-out refinances, but the loan was underwritten and delivered to Fannie Mae as a limited cash-out refinance.
If the lender determines that the mortgage loan was not eligible as delivered, the lender must advise Fannie Mae of these findings via the Lender Self-Report Mailbox (see E-1-03, List of Contacts). For additional information, see D1-3-06, Lender Post-Closing Quality Control Reporting, Record Retention, and Audit; and D1-3-03, Lender Post-Closing Quality Control Review of Data Integrity.
The lender’s QC process must include mechanisms for monitoring the quality of work performed by employees, contractors, vendors, and other third-parties involved in loan origination, property appraisal, processing, underwriting, appraisal review, and closing functions.
The lender must establish and document a process for identifying a representative sample of loans for QC file reviews for both prefunding and post-closing QC. While utilizing discretionary file selections for prefunding QC is appropriate, the post-closing QC process must include both random and discretionary file selections. The lender must assess and understand the holistic risk inherent in its origination processes when determining the appropriate selection methodology and sample size for its prefunding and post-closing discretionary QC sampling.
When considering elements to target for prefunding or post-closing discretionary reviews, the lender should consider risks inherent in its processes as well as errors or defects identified through prior reviews. For example, if the lender identifies a particular source of business as high-risk, it may decide to conduct reviews on a sample of those mortgage originations. Similarly, reviews may be used to target a specific underwriting component (for example, income calculation, asset verification) that has exhibited defect trends, or to assess areas that pose unique or elevated risks for the lender or investor, such as loans with delinquencies shortly after origination.
To be effective, the sampling methodology for discretionary review types must be flexible and fluid enough to target loans with higher potential for risk and to be able to adjust as these risks change over time. Prefunding and post-closing discretionary review selection methodologies must be regularly re-evaluated to ensure their effectiveness, and may change frequently as a result of findings from prior reviews or changes in the lender's product mix, staffing, sources of business, or other risk factors.
When the lender sells mortgage loans originated by a third party to Fannie Mae, the lender’s QC process must include additional steps to monitor the quality of third-party originations. At a minimum, the lender’s QC selection process must include a representative sample of the mortgage loans received from the third-party originator to ensure that those originations meet the lender’s standards for loan quality. Review cycles must be structured to ensure that transactions originated by each third-party originator are reviewed at least once annually.
For information on managing third-party originations, see A3-3-01, Outsourcing of Mortgage Processing and Third-Party Originations; for information on prefunding QC review selections, see D1-2-01, Lender Prefunding Quality Control Review Process; and for information on post-closing QC review selections, see D1-3-01, Lender Post-Closing Quality Control Review Process.
QC reports are a critical component of the QC program. They enable management to evaluate and monitor the quality of the lender’s loan origination process and to identify specific loans and/or broad based systemic, procedural, or operational issues that need to be addressed or remedied to reduce the lender’s defect rate and improve loan quality. When trends are identified through the review process, the lender must establish an action plan for specific corrective action to be taken, including the expected resolution and the time frames for implementation.
The lender must report on the results of both prefunding and post-closing QC file reviews to senior management on no less than a monthly basis. For information on prefunding reporting requirements, see D1-2-01, Lender Prefunding Quality Control Review Process; for information on post-closing reporting requirements, see D1-3-06, Lender Post-Closing Quality Control Reporting, Record Retention, and Audit.
The table below provides references to the Announcements that have been issued that are related to this topic.