Thursday, August 8, 2013

FNMA QC Plan Requirement - Seller's Guide Section D Revision

FNMA has updated its Seller's Guide effective 1/1/2014 in its July 30, 2013 announcement.  FNMA's quality control guidance has grown more specific since reaching the saturation tipping point on loan buybacks.  Its new corporate philosophy hinges on the concept of "we told you so," instead of "buy this loan back."

The updated seller's guide's section dealing with quality control begins at page 1145 and extends to 1183 for a total of 38 pages.  If you expect more than basic guidelines from this section, you should manage your expectations down.  The requirements are quite general and still require the lender to make additional efforts above and beyond the stated requirements in order to ensure capturing deficiencies. Considering that our Quality Control Procedures are over 100 pages long, when all exhibits are included, industry best practices are still a better benchmark for your QC program than any single investor's idea of a plan.

Major New Requirements

While the announcement (FNMA Seller's Guide Update Announcement here) lists three pages of updates and clarifications, there are really only a few major changes, and these are not so much changes to industry best practices, but added responsibilities for sellers/originators that FNMA hopes will increase transparency in lender's processes. Effective 1/1/2014:

  • You must provide monthly reports to FNMA as to your quality control results, findings and remediation. 
  • You must report any defect resulting in an unsalable loan 
  • You must establish target defect rates identifying what threshold will trigger your company taking corrective action beyond the loan level remediation.  This includes identifying process, personnel or product changes.
  • You can no longer use another 3rd party to review your 3rd party reviewer.  Vendor reviews MUST be conducted internally.

We have provided updated policies and procedures to insert into your quality control plans's Updates and Downloads page.

A cautionary note of interest:  FNMA recognizes some of the QC technology providers by name, and encourages lenders to use these technologies to AUGMENT their internal procedures.  They clearly state that these measures, by themselves, do not meet requirements.  FNMA wants lenders to take an active responsibility for ensuring quality, not delegate it.

It's In There

This matrix shows the changes FNMA has made to its QC plan requirements and links them to the section of the quality control plan we have updated.
This chart links the FNMA requirements to where they should exist within an industry
standard quality control plan. customers receive these updates
as part of their plans.
While an update from Fannie Mae, or any GSE, prompts a flurry of attention, please note that FNMA has stated many of the changes announced represent "clarifications."  For customers of, your plans already include these requirements as they represent industry best practices.  The elements that are not currently in our plans are those in which FNMA has requested specific verbiage acknowledging the reps and warrants of sellers/lenders.

Solution Template - Lenders Must STILL Determine Their Own Percentages and Procedures

We have provided a template procedure, which includes the development of reports to use in evaluating your QC reviews for patterns and identifying when targets/tolerances have been exceeded.  We recommend using your LOS for capturing this data, as you can drill further down into the loan file information, and use the utilities included from most major platforms for ordering, tracking and reporting on re-verifications and conditions.

What is Your Target?

The best indication of your target defect rate is not some arbitrary computation based on industry statistics.  You must examine your own experience.  Break the results from your past audits down into their components.  Do you have a lot of clerical errors? (4506 incorrectly completed, UDAP not submitted)  What percentage of your loans get kicked back in pre-purchase reviews from your investors?  Is it documentation, compliance, financial issues?  Have you had any fraud, misrepresentations or substantial changes that made loans ineligible?  These are the questions that should make your target defect rate obvious.

Mistakes happen, but if you embrace this process your company will come to grips with the idea of process improvement and you will benefit, not only in improved loan sale activity, but in productivity as redundant mistakes get worked out of your production systems.

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