The lender must maintain and implement a written prefunding QC plan that outlines requirements for reviewing a sample of its loans prior to closing or, in the case of loans acquired from a delegated third party, prior to acquisition. The lender must have documented procedures that include, at a minimum, the following elements:
timing of the prefunding QC reviews,
loan selection process,
verification of data and documents, and
The lender’s prefunding QC process should operate independent of the lender’s production department, if practical. At a minimum, prefunding QC must be conducted by individuals who have no involvement in the processing and underwriting decision of the loan being reviewed.
The lender’s prefunding QC plan must be designed in a manner that supports its ability to identify and address defects prior to closing a loan. The results of prefunding loan file reviews provide important and timely feedback to the origination staff to allow the lender to identify loans with defects (such as analysis or calculation errors, inaccurate data, or inadequate documentation) prior to closing and prevent the lender from delivering ineligible loans to Fannie Mae.
The lender’s prefunding QC plan must contain requirements for full reviews of loan files and analysis of data and documents prior to funding. As a supplement to the required full file reviews, the lender may choose to make targeted loan selections designed to focus solely on a specific element of the loan or underwriting component (for example, income and employment, assets, credit, or property). These targeted reviews may be completed without performing a full file QC review.
Fannie Mae encourages lenders to implement independent control points throughout the production lifecycle, such as internal and third-party data and analytical tools. Fannie Mae’s own research indicates that these tools can be effective aids in identifying errors and inconsistencies early in the origination process. However, the isolated use of such tools is not a substitute for full file reviews that are a critical component of a comprehensive prefunding QC process.
Prefunding QC reviews must be conducted early enough in the origination process to allow adequate time to make loan selections, complete the reviews, and properly inform the loan production organization so that corrections and/or revisions can be made prior to loan closing. Fannie Mae requires reviews to be done when there is sufficient documentation in the file to perform the required review of data and documents described in Verification of Data and Documents, below.
The lender must establish and document a process for selecting loans for its prefunding QC reviews. The process must take into account the lender’s assessment of the risks inherent in its origination processes, business sources and volume, and product mix, and must be reviewed regularly to ensure that the sample selected, including sample size, is appropriate.
Loans selected for prefunding QC reviews must target areas that the lender identifies as having a higher potential for errors, misrepresentation, or fraud. Targeted areas may include the following:
loans with characteristics or circumstances related to errors or defects identified in prior prefunding and post-closing review results;
loans with complex income calculations (for example, rental income, self-employed, and short history of receipt of income);
loans requiring the use of non-standard processing or underwriting guidelines (for example, delayed financing, multiple financed properties, assets used as income, or manual reserve calculations);
loans secured by properties located in areas with high delinquency rates or areas experiencing rapid increases or decreases in property values;
loans with multiple layers of credit risk, such as high LTV ratios, low credit scores, or high DTI ratios;
loans originated or processed through various business sources, a particular branch office, staff person, contractor, third-party originator, or appraiser;
loans originated or processed by newly hired loan officers, processors, appraisers, or other personnel or third parties involved in the loan origination process; and
loans for which the feedback or results from third-party tools indicate potential areas of concern.
The prefunding QC process must include a review of, at a minimum, the following data and documents to ensure the documents are present and complete, and that the data relied upon in making the underwriting decision is accurate:
data entered into an automated underwriting system;
borrower(s)’ Social Security number(s);
income calculations and supporting documentation;
employment documentation, including verbal verification of employment;
assets needed to close or meet reserve requirements;
appraisal, if applicable; and
documentation of adequate mortgage insurance coverage.
For loans with income or assets validated by the DU validation service, the lender is not required to re-calculate the validated income or assets as part of its prefunding QC review.
For all loans, including those with validated income, employment, or assets, the lender must continue to ensure the information it enters in DU is appropriate based on its review and investigation of any inconsistent or contradictory information in the loan file and the verification report.
Lenders must establish and implement a process to report defects identified in the prefunding reviews. The process must include
monthly reporting to senior management,
communicating to the parties responsible for resolving the defects, and
documenting the resolution of the defects.
At a minimum, the reports must
describe the sample selection,
include defect trending information, and
summarize the results into a summary report of all prefunding QC findings.
The table below provides references to the Announcements that have been issued that are related to this topic.