Fannie Mae Clarifies Pre-funding Credit & Re-underwriting Rules for LQI
by Anna DeSimone
On August 13, 2010 Fannie Mae issued SEL-2010-11: Undisclosed Liabilities and Re-underwriting Requirements. Since the announcement of the Loan Quality Initiative, Fannie Mae has updated its policy related to undisclosed liabilities to reiterate that lenders must determine that “all debts of the borrower incurred or closed up to and concurrent with the closing are disclosed on the final loan application and included in the qualification for the subject mortgage loan.”
Fannie Mae has not changed the policy as it relates to credit reports. Credit documents, including the credit report, are valid for 90 days from the date of the report and may not be older than 90 days at time of closing. It is the lender’s responsibility to develop and implement its own business processes to support compliance with LQI. Fannie Mae expects lenders to have an established process in place to facilitate borrower disclosure of changes in financial circumstances throughout the origination process as well as a pre-funding quality control process to increase the likelihood of discovery of undisclosed debts, particularly other mortgages.
Requirement of Pre-Closing Updated Credit Reports
An unintended consequence of Announcement SEL-2010-01 was the misinterpretation by some lenders that Fannie Mae was implementing a new requirement that the borrower be re-qualified up until closing. Therefore, many lenders believed this required a new credit report just before the closing of the loan. This was not Fannie Mae’s intent, and as previously stated, the intent was and continues to be to reinforce lenders’ existing representations and warranties outlined in the Selling Guide.
Re-underwriting Requirements
As a result of feedback Fannie Mae has received regarding Announcement SEL-2010-01, Fannie Mae has re-evaluated the Announcement and is providing the following updated requirements. The requirements address when a lender has to re-underwrite a mortgage loan after the underwriting decision has been made up to and concurrent with loan closing for both Desktop Underwriter® and manually underwritten mortgage loans, and includes a new re-underwriting tolerance for manually underwritten loans and simplification and expansion of the DU resubmission policy. The following concepts are used in the Announcement:
Changes to debts or income: Additional debt(s) or a reduction in income that are disclosed by the borrower or discovered by the lender through the lender’s normal processes and controls
Debt-to-income (DTI) ratio tolerance: Additional debts and/or reduced income that cause the DTI ratio to exceed 45%, or that cause the DTI ratio to increase by 3 percentage points or more
Re-underwriting: When re-underwriting is required, it means loan case files must be resubmitted to DU with updated information; and for manually underwritten loans, a comprehensive risk and eligibility assessment is performed
Applying the Re-underwriting Criteria
The following steps are required if the borrower discloses or the lender discovers additional debt(s) and/or reduced income after the underwriting decision was made up to and concurrent with loan closing:
1. The lender must document the additional debt(s) and reduced income in accordance with existing Selling Guide documentation requirements.
For each additional debt, the lender must verify the unpaid balance, the terms of repayment, and the borrowers payment history (if applicable) by obtaining documentation from the borrower or creditor.
For income, the lender must verify the income the borrower receives based on updated documentation.
Note: The lender is not required to obtain a new credit report to verify the additional debt(s).
2. If there is new subordinate debt on the subject property, the mortgage loan must be re-underwritten.
3. The lender must recalculate the DTI ratio based on the changes to debts and income noted above. (For DU loan case files, the DTI ratio should be recalculated outside of DU.)
4. If the recalculated DTI ratio exceeds 45%:
DU loan case files: The online loan application must be updated with the new information and the loan case file must be re-underwritten through DU. DU offers flexibilities in the maximum allowable DTI ratio for loan case files with strong compensating factors, and for DU Refi Plus™ loan case files.
Manually underwritten loans: Unless other factors have changed that have a positive impact on the DTI ratio (e.g., increased income), no re-underwriting is required because the loan is not eligible for delivery to Fannie Mae.
5. If the recalculated DTI ratio does not exceed 45%, but it increases by 3 percentage points or more, the mortgage loan must be re-underwritten (or resubmitted) with the updated data to determine if the loan is still eligible for delivery.
6. The final loan application signed by the borrower must include all income and debts verified, disclosed, or identified during the mortgage process.
7. Upon delivery to Fannie Mae, the lender must deliver the qualifying monthly income and expense amounts that are on the final loan application.
Loan Quality Initiative Summary
On February 26, 2010, Fannie Mae issued Lender Letter LL-2010-03, An Introduction to Fannie Mae’s Loan Quality Initiative which established new standards for loans originated after July 1, 2010. For a detailed outline of LQI requirements, refer to our April 6, 2010 article at www.bankersadvisory.com/page/menu_0/8644.html. Key points to the pre-funding requirements of LQI are listed:
• Confirmation of each borrower’s identity prior to the extension of credit
• Verification that all borrowers have a valid and accurate Social Security number or Individual Taxpayer Identification Number
• Desktop Underwriter® Potential Red Flag messages
• Confirmation that all parties to the mortgage transaction meet certain qualifications
• Determination that all borrower’s debts are included in the qualification for the mortgage loan
• Identification of the property unit number
• Calculating LTV ratios
• Manual underwriting of DU Refer with Caution loans
Bankers Advisory has authored policy and procedure manuals sold by All Regs, the MBA of America, the Federal Reserve Bank of Boston and other industry trade groups. Our guides are considered the most comprehensive in the industry and cover all aspects of origination, approval, funding, secondary market and quality control. Our Red Flags Plan and the Lender Agency Quality Control Plan (recently updated with Fannie Mae LQI) are two of AllReg’s best-selling policy manual templates.
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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