Fannie Mae Requirements for Internal Audit of the QC Process

Question:

I’m approved with Fannie Mae. What are Fannie's requirements in relation to internal audit and management control of the QC process?

Answer:

According to the FNMA Selling Guide, the seller/servicer must have internal audit and management control procedures to evaluate and monitor the overall quality of its loan production and servicing processes, as applicable. At a minimum:

  • The procedures must be independent of all key functions of the loan manufacturing process and the servicing processes that they review, so that such procedures provide an objective and unbiased evaluation that adds value and improves the seller/servicer’s operations.
  • The seller/servicer’s lines of reporting must reflect the independence of the audit process at all levels, resulting in activities that are conducted in an unbiased manner and without quality compromises resulting from internal influences or conflicts of interest.
  • The audit function must not share any reporting lines with the functional areas that it reviews.
  • The audit function must report directly to the seller/servicer’s senior management and/or board of directors. Exceptions are permitted in situations in which the size of the seller/servicer’s organization is insufficient to support adequate resources to allow for separation of these functions. In those situations, the seller/servicer’s audit plan must include the rationale for the lack of separation, as well as the controls that have been established to mitigate the risks associated with the lack of separation of these functions.
  • The procedures must be consultative, so that they help the seller/servicer accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control, and governance processes.

The Selling Guide also states that the lender must ensure that assessments and conclusions are recorded and consistently applied. The lender must also distribute results of the QC audit to senior management and include in this report an affirmative statement that no influence from other business units or bias in the QC conclusions was apparent. Management must then distribute findings to the appropriate areas within the organization and an action plan must be established for remediation or changes to policies or processes, as appropriate. The lender must provide a copy of the QC audits and the audit of the QC process to Fannie Mae upon request.

 

Although not stated in the Selling Guide, the 2020 Fannie QC Self-Assessment document references a requirement that the QC internal audit be performed annually. Specifically, the document states: “our senior management – a CEO and Board of Directors as applicable – are accountable and actively involved in: … ensuring that an independent audit of the QC process is conducted and, if appropriate, establishing an action plan for remediation or policy/procedure changes identified from such an audit. Results of the annual QC audit include an affirmative statement that no influence from other business units or bias in the QC conclusions was apparent.” Recent FNMA MORA exam results indicate this is a current area of focus and that Fannie is enforcing the annual requirement based solely on the language noted in the Self-Assessment document.