Selling Guide

Published June 5, 2018

D2-1-04: Identifying and Remedying Origination Defects Under the Remedies Framework (08/30/2016)

This topic describes the process that Fannie Mae will follow to identify defects and allow corrections and remedies for loans covered by the remedies framework, including:

Definitions of Remedy and Correction

The actions that constitute a remedy or a correction for loans covered by the remedies framework are described below.

A “remedy” is an action elected by Fannie Mae to resolve a significant defect pursuant to the Lender Contract in effect at the time of loan purchase. (See A2-3.2-03, Remedies Framework, for additional information.)

A “correction” is an action taken by a lender (typically through delivery of documentation or information to Fannie Mae) that demonstrates that a significant defect

  • did not, in fact, exist at the time of loan purchase or securitization; or

  • has been corrected in the time frame and manner specified in the Lender Contract such that the defect is no longer considered by Fannie Mae to be a significant defect.

One example of a correction is a “de minimis correction,” which is a minor amount not to exceed $500 (or such higher amount as the lender and Fannie Mae may agree) that, when remitted, refunded, or otherwise provided, corrects or otherwise resolves an identified significant defect. However, a “de minimis correction” cannot be made

  • when the correction would result in a specific required minimum borrower contribution not being met, or

  • to correct a violation of Fannie Mae’s Charter requirements.

Another example of a correction is the acquisition of required insurance.

Overview of Process

The steps that Fannie Mae and lenders will follow for mortgage loans covered by the remedies framework to identify, correct, appeal, and remedy defects are described below.

Step 1—Identification of Findings, PALs, and Significant Defects

After a full-file quality control review is completed, Fannie Mae will designate any defect(s) as a finding, a PAL, or a significant defect. As a reminder, the scope of the full-file quality control review remains the same for performing loans and non-performing loans.

Note: Fannie Mae also checks mortgage loans for data discrepancies (which could be independent of a full-file quality control review) that may result in the assessment of an LLPA.

  • If Fannie Mae designates a defect as a finding, a correction or remedy will not be required. However, a data update may be required.

  • If Fannie Mae designates a defect as resulting in a PAL, the lender must pay the applicable LLPA that should have been paid when the mortgage loan was purchased by Fannie Mae had the true and accurate facts about the mortgage loan been known at the time of purchase.

    • Fannie Mae may not demand repurchase of a PAL and the lender may not voluntarily repurchase a PAL.

  • If Fannie Mae identifies a significant defect, Fannie Mae will require repurchase of the mortgage loan or may offer the lender a repurchase alternative.

Step 2—Correcting Certain Significant Defects

During the appeal and impasse processes, a lender has the right to provide a correction of any significant defect in the specified time frame and in the manner required by the Lender Contract. Any additional documentation or information that the lender provides is subject to the same standard of quality control review as the initial mortgage file documentation.

In the event that the Lender Contract does not specify the time frame and manner required for the correction of a particular significant defect, Fannie Mae shall determine if the significant defect has been corrected. There may be times when the determination of whether or not a defect has been corrected cannot be determined by Fannie Mae, but rather needs to be determined by the purchaser of an acquired property, its title insurer or the investor of the purchaser’s mortgage loan. For example, the determination of whether there has been a correction of a certain title defect may hinge on whether the purchaser of the acquired property is willing to pay full market value for the subject property, given the title defect and the steps taken to attempt to correct the title defect.

The documentation submitted to correct a significant defect must be based on information or data that either:

  • was available at the time of underwriting (and no later than the note date ), or

  • covers the time of underwriting so long as such evidence meets the applicable documentation requirements set forth in the Lender Contract.

Note: Lenders have the ability to correct defects during the appeal and impasse processes related to property, flood, or mortgage insurance.

If the lender does not repurchase the loan or perform any repurchase alternative in accordance with the Lender Contract, the lender continues to have the obligation to correct any significant defect in accordance with the Lender Contract.

Step 3—Fannie Mae Review of Lender Response and Mortgage Loan Reassessment

During the appeal and impasse processes, Fannie Mae will conduct a mortgage loan reassessment by reviewing any corrections submitted by the lender in accordance with the applicable Lender Contract in order to determine whether a significant defect still exists.

If, following the reassessment, Fannie Mae determines that

  • the lender submitted documentation and/or information or took all necessary steps to correct all significant defects in accordance with the Lender Contract, Fannie Mae will rescind or close out, as applicable, the demand.

  • the lender corrected some, but not all, of the significant defects that had been identified on a mortgage loan, Fannie Mae will reaffirm the demand and the lender must comply with the demand on a timely basis.

  • all significant defects were corrected but any remaining defects now cause the mortgage loan to be a PAL, or the loan is now determined to be a PAL, the lender must pay Fannie Mae the LLPA that should have been paid when the mortgage loan was purchased by Fannie Mae had the true and accurate facts about the mortgage loan been known at the time of purchase.

  • it cannot determine if all significant defects were corrected because the decision is up to the purchaser of the acquired property, Fannie Mae may defer its determination until the subject property has been placed on the market in order to obtain feedback on the marketability of the title of the subject property.

At any time during the appeals process, a lender has the right to propose a repurchase alternative following the identification of a significant defect. Fannie Mae will in good faith consider and respond to the lender’s proposed repurchase alternative.

Fannie Mae may offer or decline to offer the lender 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.

Step 4—Range of Possible Outcomes

As described in A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility, certain loans may be eligible for enforcement relief under Version 2 of the framework based on the satisfactory conclusion of a full-file quality control review. The designation of a defect and the loan’s status as corrected or remedied will determine whether a loan is eligible for enforcement relief, as detailed below.

Finding: If the loan has had a full-file quality control review completed with only findings discovered, the loan is eligible for enforcement relief subject to any life-of-loan representations and warranties. If a loan has not had a full-file quality control review, it may still receive relief through other provisions under the framework.

PAL: If the PAL has had a full-file quality control review completed without the identification of any significant defects, the loan will receive enforcement relief subject to any life-of-loan representations and warranties, when the lender pays the LLPA. Loans that have not had a full-file quality control review, will not receive representation and warranty enforcement relief, even upon the payment of an LLPA, but may still receive relief through other provisions under the framework.

A lender may appeal a PAL designation. The appeals process for a PAL will result in one of the following outcomes:

  • rescission of the request for the payment of the LLPA, or

  • payment of the LLPA.

Significant Defect: If the loan with a significant defect has had a full-file quality control review, it will receive enforcement relief if

  • all significant defects have been corrected; or

  • a repurchase alternative has been offered and accepted, and fully executed and completed by the lender in compliance with any related terms, including the expiration of all applicable time frames.

The appeal process for mortgage loans with significant defects may result in a range of outcomes, including:

  • rescission or close out, as appropriate, of the demand because all significant defects have been corrected;

  • a deferred demand in the event that Fannie Mae cannot determine whether or not there has been a correction because the purchaser of the subject property or its title company or investor is the real party in interest to make the decision as to whether a title defect has been corrected;

  • agreement on a repurchase alternative; or

  • the lender fulfills the demand.

If a repurchase alternative is offered on a loan with a significant defect, the lender can conclude that a full-file quality control review has been completed. However, if a repurchase alternative is offered on a loan where a lender self-reports a defect, the lender cannot conclude that a full-file quality control review has occurred nor is representation and warranty relief granted.

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-2015–12 November 3, 2015