September 1st is right around the corner, marking the last date to implement Fannie Mae’s lender quality control updates announced back in March. Issued as a segment of Selling Guide Announcement (SEL-2023-02), the corresponding sections of the Guide were simultaneously updated in an effort to more clearly exemplify differences between full-file and component reviews, as well as communicate enhanced reporting requirements. The intent behind these QC updates is to foster greater efficiencies and improve delivery of timely, accurate data and information acquired as a result of post-closing and prefunding audit and quality control.
What’s changing?
As with any new agency update the overall impact is often more than the specific requirement. This is where having an experienced quality control and audit partner like QC Verify can make a real difference, distilling what operational changes are occurring, determining how these changes impact your specific organization, and adding extra checks and balances, as well as automating processes with our Mortgage Analysis Review Software (MARS), where and when you need them.
QC Verify helps your organization embrace what’s changing versus telling you what we’re changing. Along these lines, here's what Fannie Mae has changed, together with the immediate impact:
Prefunding Quality Control
Update: Maximum prefunding loan reviews must equate to ten percent of the total prior month’s closings, or 750 loans.
Effective September 1: The 10% loan population for the cycle beginning September 1 and ending September 30 must be based on total closed loans in August.
Post-Closing Quality Control
Update: The post-closing quality control review timeframe has been reduced from 120 days to 90 days, and individual component review timeframes have been eliminated.
Effective September 1: The post-closing review cycle beginning on September 1 must be completed by November 30.
What questions should you ask?
In follow up to March’s Selling Guide Announcement, and as is frequently the case, Fannie Mae published an FAQ with their responses to probable questions. As your company reviews their efforts to comply with the September 1st change, here’s an overview of those questions:
Prefunding Recap
Where to start – Each lender must review ten percent of the prior month’s closed loan volume, up to a max of 750 loans. Using the prior month’s closed loan volume as a numeric guide, the lender must pull from files in the origination process for review in the current month. A lender has the option to review more than 750 files based on “quality risk appetite and sampling strategy.”
Statistically valid sample versus 10% requirement – The ten percent requirement cannot be substituted with a statistically valid sample; however, you can use a statistically valid sample as long as it meets the ten percent threshold.
Loan type and channel definition – The ten percent sampling can include both conventional and government loans and the loans can also come from multiple origination channels.
Discretionary review versus targeted review – There is no difference between these types of reviews, they both pertain to a non-random sampling that focuses on loans with a greater likelihood of fraud or propensity toward defects.
Full file review versus component review – A full file review focuses on all aspects of credit and collateral, whereas a component review is more specific in focus, such as reviewing target occupancy or self-employment income.
Prefunding reporting formats – Reporting formats are not dictated by Fannie Mae. They do however require that the report “drives change and improvement” in your organization and necessitate that results are clearly communicated to senior management.
“New” Prefunding Questions
Compliance versus prefunding – Prefunding loan reviews that solely concentrate on compliance do not count toward the prefunding review requirement. These loan reviews fall under post-closing reviews and should encompass federal, state, local law, and regulatory compliance.
Prepurchase loan reviews – Both prefunding and prepurchase loan reviews count toward the minimum ten percent, up to the 750 loan review requirement.
“Complete” loan reviews – Loans are included in the minimum requirement once the loan review is complete. Loans in the review process are not considered.
Post-Closing Recap
Post-closing review cycle – The post-closing 90-day review cycle requires loans to be selected, reviewed, and reported by the end of the third month following the closing month. Reporting to senior management reflects the final step. If a loan closed in January, the file must be reviewed before the end of April.
90-day reviews versus 120-day reviews – The change from a 120-day review cycle to a 90-day review cycle is intended to ensure that defects are identified and addressed in a more timely manner. This also helps confirm that any associated erroneous practices are handled sooner and additional loans are not closed with the same defects.
Securing the 4506-C in a timely fashion – The 90-day review timeframe is inclusive of the 4506-C, which should be submitted as soon as possible on loans where the tax transcripts were not secured during loan processing. Success rates to obtain tax transcripts as well as reverifications should be tracked in an effort to support identification of process gaps and improve reverification performance.
Securing reverifications in a timely fashion – The reverification process remains the same despite a timeline reduction. Reverifications need to be initiated as soon as feasible, with responses received and analyzed within the 90-day review cycle.
How to leverage resources
As always, lenders are tasked with staying abreast of changing regulatory and agency requirements. Seemingly easy at a high level but as technology evolves alongside industry updates, production volatility, and rising costs to originate, ensuring compliance and minimizing risk exposure is becoming more complex.
Your prefunding and post-closing audits can be a tool in this scenario if leveraged appropriately. Begin by focusing your internal resources where they can be best utilized, growing production volume. This is when a third-party QC partner can make a real difference by delivering services that go beyond meeting checklist requirements. QC Verify is unique in this arena. By taking the time to understand the nuances of your business, pros and cons, we’re able to help you traverse industry guidance, and identify errors, misrepresentations, and operational risk early in the process. We stay by your side, identifying potential gaps, coaching as needed, and innovating your QC processes with our proven Mortgage Analysis Review Software (MARS) system.
Feel the difference that partnership can make as new operational and regulatory deadlines approach. Visit QCVerify.com and realize the distinction that an innovative QC provider can offer when the approach is personalized – sophisticated technology with a human touch.