Fannie Mae Updates its Quality Control Self-Assessment Tool
by: Anna DeSimone
April 15, 2014 Fannie Mae announced in its Selling News that the Enterprise had updated its Quality Control Self Assessment Tool. The worksheet tool was first issued in May 2013 as guidance for lenders to manage risk and comply with Fannie Mae’s Selling Guide requirements. To view the earlier worksheet, please refer to my article published May 9, 2013: May 2013 Fannie Mae QC Assessment Tool
The updated guidance includes suggested practices for quality control and has expanded from the original 8 pages to a 9-page Quality Control Self-Assessment worksheet. Highlighted below are some of the topics included in the updated tool. Throughout this article, items marked with an asterisk are requirements of the Selling Guide:
Governance/Authority
Senior Management, CEO and Board of Directors, as applicable, are accountable and actively involved in:
Establishing a methodology for identifying, categorizing and measuring defects and trends against and established target defect rate.*
Monitoring the activities related to identifying the deficiencies in the loan manufacturing process and implementing plans to quickly remediate those deficiencies and underlying issues* as wsell as monitoring the monthly defect rate.
Creating a QC philosophy* (objective/purpose) by which we identify, remediate, and monitor the risks associated with originating good quality loans (e.g. risks such as fraud, repurchase, financial losses, penalties, regulatory, product, and channel, including third-party originations (TPOs).
Ensuring that an independent audit of the QC process is conducted, and if appropriate, establishing an action plan for remediation or policy/procedure changes identified from such an audit.*
Ensuring that the QC reporting structure is independent of the production, underwriting, and closing functions.*
Fannie Mae establishes the minimum requirements for the skill set and expertise of the staff performing the QC file reviews documenting minimum job quailfications.*
All personnel are adequately trained and have sufficient experience relative to the reviews being conducted, including manual underwriting and/or loans processed through any automated underwriting systems utilized.*
Detailed policies and procedures for the QC file review process is provided to all employees who will be involved with the QC file reviews.*
Detailed standard operating procedures-including updates on industry changes, are available to all employees involved with, or affected by, the QC process.
Employees’ participation in training is tracked and monitored.
Training content is current to Fannie Mae investor guidelines and reflects current industry practices.
Defect Rate
Senior management has established and proactively manages to a target defect rate and ensures that:
The institution has a target defect and documented rationale for establishing it.*
The defect rate is reviewed (at least annually*) to ensure it continues to meet our credit risk needs and is aligned with our loss reserve.
The institution also understands the ben3efits and issues associated with:
— reporting a gross defect rate
— reporting a net defect rate
The institution has a set of standards for loan quality, including a methodology for categorizing loan defects based on severity: our highest level of severity is assigned to defect categories that result in the loan not being eligible as delivered to Fannie Mae.*
Fannie Mae provides all of the content below in the worksheet:
An effective way to establish loan quality targets is to model the financial exposure created at a certain defect level. The concept of “zero defects” generally will be considered challenging to achieve and we do not evaluate lenders by a zero-defect rate standard. We expect lenders to set defect rate targets as reasonably low as possible based on a formal cost-benefit analysis of meeting that target. We then expect lenders to demonstrate to them how they are managing loan quality to meet their established target.
The tool includes a Defect Rate Tutorial and states: Having a target defect rate is required for the top severity level (ineligible for delivery to Fannie Mae) and enables the lender to regularly evaluate and measure progress in meeting its loan quality standards. Lower severity levels must be defined by the lender as appropriate for its organization and different target defect rates may be established for different severity levels (if applicable).*
Calculating a defect rate is how you measure against your target defect rate. Some lenders use only a GROSS or NET calculation when determining their monthly defect rate, while others use both. The GROSS defect rate is the defect rate based on the initial findings prior to any rebuttal activity. The NET defect rate is the defect rate based on the final findings after the rebuttal activity. Understanding the root cause of the issues that were resolved during the rebuttal process may provide insight into how the defects can be prevented.
If a loan has both a highest-severity level defect and a lower-severity level defect, only count the loan ONCE-in the highest severity category-in a defect rate calculation.
Please refer to the worksheet for example calculations and more information on QC analysis and remediation.
Pre-Funding Quality Control
Fannie Mae’s prefunding QC/QA process includes both “required” and “recommended” elements. The items below noted with an asterisk are the required elements of a pre-funding program:
A clearly defined pre-funding quality control program that includes QC being conducted when there is sufficient documentation in the file to perform the required review of the data and documemtation.*
Being performed by individuals who have no involvement in the processing and underwriting decision on the loan reviewed.*
Sampling of loans that targets areas identified as having potential for errors, misrepresentation, or fraud.* (such as high LTV ratio, low credit score, defects in prior reviews, originated or processed through various business sources, newly hired personnel or third parties, etc.)
Performing a monthly pre-funding discretionary QC review focusing on higher-risk loans.
A full-file review to confirm that the following documents are present and complete, the data relied upon in making the underwriting decision is accurate, and the underwriting decision is adequately supported:*
o AUS data integrity (including liabilities reconciliation)*
o Employment VVOE*
o SSN*
o Assets*
o Appraisal*
o Income calculation and supporting documentation*
o MI coverage*
Please refer to the worksheet for “highly recommended” processes and controls
The remainder of the worksheet includes detailed information on the following topics:
Post-Closing
Required random samples
Required discretionary samples
Timing of QC reviews
Re-verify Critical Data
Obtain, Compare, Verify, Correct and Maintain
Appraisals
Reporting
Outsourced QC Vendor
Third Party Originations
About the Author
Anna DeSimone is President and Founder of Bankers Advisory, Inc. She can be reached at anna@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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