Fannie Mae Issues Quality Control Self-Assessment Tool

• May 10, 2013
• Anna DeSimone

by: Anna DeSimone

May 9, 2013 Fannie Mae issued guidance for lenders to manage risk and comply with Fannie Mae’s Selling Guide requirements. The guidance includes highly suggested practices for quality control and includes an 8-page Quality Control Self-Assessment worksheet.   With increased focus on QC during the manufacturing process, Fannie Mae has published additional guidance “Beyond the Guide” and is offering self-paced training and live web seminars.    

The Quality Control Self-Assessment worksheet includes checklists that are structured into the following 10 segments outlined below. Please note that this article includes key topics and that the worksheet should be carefully reviewed for complete information pertaining to the lender’s quality assurance responsibility.
 
 1.  Governance/Authority

Senior Management, CEO and Board of Directors, as applicable, are accountable and actively involved in:

Establishing and driving to a target defect rate

Monitoring the monthly defect rate, issues identified, and remediation activity

Creating a QC philosophy to identify, remediate, and monitor the risks associated with originating good quality loans

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

Overseeing the process of underwriting approval authority and authority levels

Ensuring that the QC reporting structure is independent of the production, underwriting, and closing functions.

Providing appropriate resources to the QC function that will enable adherence to required timelines

2.  Training

The lender has a robust training program that develops the core competencies of the origination and QC staff associated with originating and evaluating good quality loans.  The program ensures that:

All QC personnel performing loan reviews are experienced and tenured in origination and underwriting

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 the lender’s investor guidelines and reflects current industry practices

3.  Defect Rate

A target defect is established for gross and net defects

A set of standards for loan quality including a severity rating system and defect/error thresholds

Review at least annually the target defect rate to ensure it continues to meet credit risk needs

Note:  the worksheet includes a detailed Defect Rate Tutorial with illustrations of gross and net calculations

4.  Pre-Funding

Lenders has a clearly defined pre-funding quality control program

The program is being managed or performed by someone other than a party to loan originations sampling of loans with characteristics related to defects identified in prior reviews

Program includes performing a monthly pre-funding discretionary QC loan review focusing on higher-risk loans, in addition to the monthly random/statistical sample

Steps include validation/verification of AUS data integrity, employment, SSN, MI coverage, assets, appraisal review

Steps include a full re-underwrite of sampled loans including a re-calculation of income, assets and liabilities (reconcile 1003 with credit report)

Steps include fraud checks using industry tools and vendors; obtaining IRS tax transcripts prior to underwriting, validating the condo project meets FNMA requirements and ensuring eligibility documentation is retained;

A process to identify the root cause of the identified defects and system hard core stops to ensure that loans do not close with defects

Use of Fannie Mae tools such as UCDP and Early Check to ensure accurate delivery data

Open line of communication between business unites and post-closing staff

Remediation process to correct defects prior to close and a process to re-test loans identified with defects prior to closing the loan

5.  Post-Closing

The lender must ensure that the post-closing QC plan includes the following:

A minimum 10% Random Sample or a Valid Statistical Sample

Samples are representative of the lender’s originations (book of business) including size, production channels, geographic areas of operation, specialty products/programs and Early Payment Defaults (EPD)

A separate monthly discretionary sample focusing on loans with higher-risk characteristics including unique underwriting/processing/appraisal techniques, lender personnel, patterns identified in other reviews, TPOs, higher-risk property types (leaseholds, co-ops, manufactured homes)

Timing of Reviews

Sampling loans within 30 days of closing

Completing the review within 60 days of the sample selection

Finalizing reports to senior management within 30 days of completed reviews

Completing the overall QC cycle within 120 days (Fannie Mae recommends a 60-90 day QC cycle)

Re-verify Critical Data

Employment/income directly with the source of the original documentation

Obtain the IRS Tax Transcripts (if not obtained prior to closing)

Assets: attempt to reverify directly with the source of the original documentation

Credit: new in-file credit report from a different credit reporting agency; each credit reference listed on the report for non-traditional credit

Accuracy and integrity of the AUS information used to make the lending decision

Compare supporting documentation to the AUS  data integrity including:  borrower/co-borrower income, employment, employment type, assets, property type, SSN, income, address, loan terms, type and purpose

Obtain, Compare, Verify, Correct and Maintain

Occupancy check for primary residences and second homes

Social Security Number validation with the SS Administration if SSN discrepancy is not resolved at origination

Review potential re flag messages found on the AUS or alerts created by other sources

Review manually underwritten loans for compliance with FNMA guidelines and eligibility criteria

Review closing documents for completeness, accuracy with all underwriting and eligibility requirements

Correction of material errors if found and updating and resubmission of affected documents

Notification to Fannie Mae if loan is determined to be ineligible or has AUS data errors

Notification to Fannie Mae within 30 days of discovery during the QC process of misrepresentation

Maintain QC records for minimum of 3 years after loan closing

6.  Appraisals

Ensuring that all loans the lender originates comply with the provisions of the Appraiser Independence Requirements (AIR) and are validated through the post-close QC process

Completing a desk review on 90% of the loans selected for a QC review

Conducting a field review by an appraiser not affiliated with the original appraisal on 10% of the loans selected for a QC review

When utilizing an appraisal management company (AMC) ensure that the AMC is complying with the AIR provisions

Confirm that the AMC uses appraisers that have a current license, are in good standing, and have the proper insurance

Track appraisal defects by appraisal company and appraiser

Utilize industry tools to score the appraisals received from AMCs

Review the AMC’s policies and procedures annually

Require the AMC to have a process to review each appraisal for accuracy prior to providing it to lender

Ordering an AVM report to validate/support the appraised value

Keeping the appraisal review team separate from the underwriting team

Providing an appraisal review protocol based on the results of the appraisal tools or appraised value

Ensuring staff is trained to use and understand the appraisal tools/AVM reports that are utilized

Utilizing Fannie Mae’s appraisal quality feedback, including loan-specific reports and messages from UCDP and aggregated (trend) reports available via Message Manager, to identify and remediate
appraisal quality issues  

7.  Reporting

Reports are shared with senior management, business units and pre- and post-funding QC staff within 30 days after completion of the review to be used in determining the root cause of identified defects.  The lender’s monthly reports show:

Defects found in the pre-funding QC process

Defects found in the post-funding QC process

Defect rate for each severity rating  (e.g. Significant, Moderate, Low) 

Separation of underwriting/credit findings with compliance finding and defect rate

Gross defect rate  (and net rate if applicable)

Defects identified by Branch, Originator, Underwriter, Processor, Funder, Closer and TPO

Defect rate trending over time

Root cause trending by categories and sub-categories (income-miscalculation or income-unverified)

Loan level details

8.  Action Planning

Action plan/corrective action/remediation of all identified defects including: Defect, Remediation, Outcome/resolution, Source of finding, Implementation date, Re-test, Root cause and Controls

Remediation or resolution achieved

Remediation/resolution not achieved, next steps

Defects and outcome/resolution reported to senior management

9.  QC Vendor

The lender is fully accountable for the work performed by its contractors.  If using a QC vendor the lender:

Understands that a contract for services is not a substitute for the lender’s own proprietary QC procedures

Review the QC vendor’s policies and procedures annually

Conduct ongoing dialogue with the QC vendor on a regular basis (no less than quarterly)

Validate the vendor’s monthly QC findings, including testing a percentage of the “no finding” results, prior to the final report being presented to management within the required 120-day timeframe (inclusive of rebuttals).

Have a process to verify that the QC vendor:

– follows Fannie Mae QC requirements and meets the required QC review timeframes

– uses an agreed-upon severity rating system and definitions

– captures a gross defect rate, not just the number of exceptions

– Has a separate fraud investigation team or notifies lender when fraud is identified

– follows requirements for managing the severity rate, including not changing the initial finding

10.  Third Party Originations
 
The lender must have a process for managing the TPO (broker/correspondent) business to ensure good quality originations which include:

Reviewing loans from correspondents prior to purchase

Reviewing a representative sample of the mortgage loans received from the TPO at least once annually

Conducting discretionary reviews of the TPO’s production

Rigorously managing the TPO approval and oversight process

Ensuring the TPO has a current license

Maintaining a TPO scorecard that includes QC results, pull-through rate, number of EPDs and repurchases

Validating the experience of TPO origination and QC staff

Reviewing the TPO’s QC policies and procedures annually and ensuring they meet Fannie Mae requirements

Continual monitoring TPO compliance through internet searches, FHA compare ratio, GSA, LDP lists and HUD Neighborhood Watch


About the Author:
Anna DeSimone is President and Founder of Bankers Advisory, Inc.

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