Fannie Mae Quality Control Requirements

Question:

What are some examples of quality control practices our company must have in place to comply with the Fannie Mae Selling Guide?

Answer:

 

In its recently released list of Seller/Servicer Risk Self-Assessments, Fannie Mae included a quality control (QC) checklist that helps approved lenders ensure their QC meets the minimum requirements in the Fannie Mae Selling Guide.

 

This checklist includes sections on Governance/Authority, Defect Rate, Pre-funding QC, Post-Closing QC, Appraisals, Reporting, QC Vendor and Third-Party Originations.

 

We will detail one requirement below: “Defect Rate”.

Fannie Mae views defect rate as an effective way to establish loan quality targets to model the financial exposure created at a certain defect level. The concept of “zero defects” generally will be considered challenging to achieve, and Fannie Mae does not evaluate lenders by a zero-defect-rate standard. Instead, Fannie Mae expects lenders to set defect rate targets as reasonably low as possible based on a formal cost–benefit analysis of meeting that target and then demonstrate to Fannie Mae how they are managing loan quality to meet their established target.

 

In its Defect Rate checklist, Fannie Mae asks Seller/Servicers to affirm the following:

  • We have a target defect rate, at a minimum, for the highest severity level for our random, post-closing QC samples and documented rationale for establishing the target rate.
  • We review (at least annually*) our target defect rate to ensure it continues to meet our credit risk needs and is aligned with our loss reserves.
  • We understand the benefits and issues associated with:
    • Reporting a gross defect rate.
    • Reporting a net defect rate.
  • We have a set of standards for loan quality, including a methodology for categorizing loan defects based on severity; our highest level of severity is assigned to defect categories that result in the loan not being eligible as delivered to Fannie Mae.