Checking Contract Employees against Exclusionary Lists
If we utilize outsourced service providers, such as contract underwriters and processors, are we required to check them against exclusionary lists?
Checking a contract underwriter or processor against exclusionary lists is certainly a best practice. However, it may not always be feasible to do – particularly if the lender is not made aware of the individual contract underwriter’s/processor’s name by the third party service provider that employs them. Below is a summary of Agency guidelines on this issue.
- Fannie Mae indicates in its Selling Guide Chapter A3-3 that effective management procedures for third-party originations include review of the third-party originator’s hiring procedure for checking all employees involved in the origination of loans (including application through closing) against: (i) the U.S. General Services Administration Excluded Parties List, (ii) the HUD Limited Denial of Participation (“LDP”) List, and (iii) the Federal Housing Finance Agency Suspended Counterparty Program List.
- HUD indicates in its Handbook 4000.1, Chapter II, A, 1, iii that a mortgagee may not contract with entities or persons that are suspended, debarred, or otherwise excluded from participation in HUD programs, or under a LDP that excludes their participation in FHA programs. HUD requires a mortgagee to ensure that it does not engage any contractors to perform any function relating to the origination of an FHA-insured Mortgage. Further, HUD indicates a mortgagee must check the System for Award Management (SAM) (www.sam.gov) and must follow appropriate procedures defined by that system to confirm eligibility for participation.
- Freddie Mac indicates in its Seller/Servicer Guide Chapter 3101 that sellers/servicers must use the Freddie Mac Exclusionary List (“Exclusionary List”) to screen parties involved in the origination of the mortgage prior to the sale of each mortgage to Freddie Mac. Freddie Mac also requires sellers/servicers to establish and maintain procedures to ensure they do not employ or contract with individuals or entities listed on FHFA’s Suspended Counterparty Program (“SCP”) list. If a party whose name is on the Exclusionary List or SCP list is the borrower or played a role in the origination of a mortgage or the underlying real estate transaction, the mortgage is not eligible for sale to Freddie Mac.
 Fannie Mae defines third-party origination as any loan that is completely or partially originated, processed, underwritten, packaged, funded, or closed by an entity other than the seller (or its parent, affiliate or subsidiary) that sells the loan to Fannie Mae. Note, Fannie Mae advised that if a seller enters into a contract with a third party known for the quality of its underwriting (such as a mortgage insurer) to help the seller in underwriting its mortgage originations, the loans will not be considered third-party originations.
 HUD permits a mortgagee to utilize contractors to perform administrative and clerical functions, such as typing of mortgage documents, mailing out and collecting verification forms, ordering credit reports, and/or preparing for endorsement and shipping Mortgages to investors. HUD prohibits the use of contract underwriters.