QC File Review Overview

© 2018 Fannie Mae Single Family Selling Guide

As part of its QC program, the lender must establish processes to evaluate and monitor the overall quality of mortgage production through prefunding and post-closing reviews. The purpose of performing a loan file review is to assess loan quality and eligibility and to confirm that the underwriting decision is well justified. Loan file reviews must include, at a minimum, an assessment of

• compliance with Fannie Mae requirements by confirming that
  • the loan meets eligibility and underwriting requirements,
  • the underwriting decision is adequately supported and all documentation required to support the decision is contained in the file, and
  • the loan is secured by a property that provides acceptable collateral; and
• compliance with all federal, state, and local laws and regulations. (For additional information, see A3-2-01, Compliance With Laws (08/20/2013).)

When the lender’s loan file review identifies discrepancies between the data and/or information that was used in the underwriting decision and the data or information verified through the QC process, the lender must reassess the underwriting decision based on the newly verified information to determine whether the loan remains eligible as delivered to Fannie Mae.

Example: the loan would be considered to be ineligible as delivered in a case when the lender’s review of the HUD-1 Settlement Statement reveals that the borrower received cash back at closing in an amount that exceeds the limit for limited cash-out refinances, but the loan was underwritten and delivered to Fannie Mae as a limited cash-out refinance.

If the lender determines that the mortgage loan was not eligible as delivered, the lender must advise Fannie Mae of these findings via the Lender Self-Report Mailbox (see E-1-03, List of Contacts (07/30/2013)). For additional information, see D1-3-06, Lender Post-Closing Quality Control Reporting, Record Retention, and Audit (07/30/2013); and D1-3-03, Lender Post-Closing Quality Control Review of Data Integrity (07/30/2013).

Selection of Loans for QC Review

The lender’s QC process must include mechanisms for monitoring the quality of work performed by employees, contractors, vendors, and other third-parties involved in loan origination, property appraisal, processing, underwriting, appraisal review, and closing functions.

The lender must establish and document a process for identifying a representative sample of loans for QC file reviews for both prefunding and post-closing QC. While utilizing discretionary file selections for prefunding QC is appropriate, the post-closing QC process must include both random and discretionary file selections. The lender must assess and understand the holistic risk inherent in its origination processes when determining the appropriate selection methodology and sample size for its prefunding and post-closing discretionary QC sampling.

When considering elements to target for prefunding or post-closing discretionary reviews, the lender should consider risks inherent in its processes as well as errors or defects identified through prior reviews. For example, if the lender identifies a particular source of business as high-risk, it may decide to conduct reviews on a sample of those mortgage originations. Similarly, reviews may be used to target a specific underwriting component (for example, income calculation, asset verification) that has exhibited defect trends, or to assess areas that pose unique or elevated risks for the lender or investor, such as loans with delinquencies shortly after origination.

To be effective, the sampling methodology for discretionary review types must be flexible and fluid enough to target loans with higher potential for risk and to be able to adjust as these risks change over time. Prefunding and post-closing discretionary review selection methodologies must be regularly re-evaluated to ensure their effectiveness, and may change frequently as a result of findings from prior reviews or changes in the lender's product mix, staffing, sources of business, or other risk factors.

When the lender sells mortgage loans originated by a third party to Fannie Mae, the lender’s QC process must include additional steps to monitor the quality of third-party originations. At a minimum, the lender’s QC selection process must include a representative sample of the mortgage loans received from the third-party originator to ensure that those originations meet the lender’s standards for loan quality. Review cycles must be structured to ensure that transactions originated by each third-party originator are reviewed at least once annually.

For information on managing third-party originations, see A3-3-01, Outsourcing of Mortgage Processing and Third-Party Originations (07/26/2011); for information on prefunding QC review selections, see D1-2-01, Lender Prefunding Quality Control Review Process (07/30/2013); and for information on post-closing QC review selections, see D1-3-01, Lender Post-Closing Quality Control Review Process (07/30/2013).

Reporting and Remediation

QC reports are a critical component of the QC program. They enable management to evaluate and monitor the quality of the lender’s loan origination process and to identify specific loans and/or broad based systemic, procedural, or operational issues that need to be addressed or remedied to reduce the lender’s defect rate and improve loan quality. When trends are identified through the review process, the lender must establish an action plan for specific corrective action to be taken, including the expected resolution and the time frames for implementation.

The lender must report on the results of both prefunding and post-closing QC file reviews to senior management on no less than a monthly basis. For information on prefunding reporting requirements, see D1-2-01, Lender Prefunding Quality Control Review Process; for information on post-closing reporting requirements, see D1-3-06, Lender Post-Closing Quality Control Reporting, Record Retention, and Audit (07/30/2013).