More agency guideline changes may be forthcoming in 2010, but the current quality control guidelines for Fannie Mae, Freddie Mac, and FHA are similar. We have compiled a very general summary of these guidelines, mostly in the context of single family. For complete details and rule exceptions, refer to HUD 4060.1 chapter 7, Fannie Mae Single Family Selling Guide section D1, and Freddie Mac Single-Family Seller/Servicer Guide chapter 48.
Sampling
A large part of your quality control program is performing quality control reviews (audits). The general rule for Fannie Mae, Freddie Mac, and FHA is to audit a random 10% selection of your closed loan files. This 10% sampling needs to reflect an accurate representation of all your loans, which means including files from different underwriters, appraisers, etc. In addition to this 10%, FHA also requires reviews for all loans going into early payment default.
Independence
To avoid any conflict of interest, Fannie Mae, Freddie Mac, and FHA all require the staff performing your quality control to be independent of the processes they’re reviewing (such as origination, production, underwriting, and closing). This means that if you choose to perform your quality control in-house, you should have a separate department dedicated to quality control. However, you must ensure that the staff is properly trained to perform quality control audits.
Alternatively, you can outsource your quality control audits to a third party, such as Mortgage Compliance Advisors, LLC. For some organizations, this may be more cost effective than staffing and training a separate quality control department. If you choose to outsource, HUD requires that you have a written agreement with your third party. Furthermore, you are responsible to ensure that the third party is meeting the agency guidelines.
Timeliness
Fannie Mae, Freddie Mac, and FHA want to make sure that you are frequently completing your quality control audits, as outlined in your quality control plan. The specifics vary among the agencies, but the principle of timeliness is the same.
FHA guidelines:
- Audit monthly, if closing more than 15 loans per month
- Audit quarterly, if closing 15 or fewer loans per month
.
Fannie Mae guidelines:
- Audit monthly
Freddie Mac guidelines:
- No specified time – every loan must have chance of selection for audit within 90 days of Note Date
Re-Verifications
Part of the quality control review includes re-verifying documentation. With a few exceptions, the requirements are essentially the same for Fannie Mae, Freddie Mac, and FHA. Some very general items to be re-verified include:
1. Credit report – For each loan under review, you need to order a new credit report from a different source than the original, to compare the two. For the exceptions to this rule, refer to the appropriate handbook or guide.
2. Income, employment, and asset information (such as source of funds) – This re-verified information should be compared to the original source of documentation.
3. Appraisal – For 10% of the loans selected for the QC audit, you need to perform a field review. The remaining 90% require appraisal desk reviews (except for FHA streamline refinances and HUD REO sales).
4. Underwriting decision – Make sure to review the accuracy and quality of the information used to support the lending decision.
After the Audit
Once the quality control audits for a specific period are complete, findings from the file reviews should be reported to your company’s management. Management should document and take any necessary actions to ensure compliance. After reporting to management, FHA requires you to retain your quality control reports and the follow-up for two years. For Fannie Mae and Freddie Mac, you should retain them for three years. You do not need to report to HUD, Fannie Mae, or Freddie Mac unless there is evidence of fraud or serious violations.
For more information about quality control guidelines or to get started with quality control file audits, visit http://www.mortgagecomplianceadvisors.com/
