If you’re a mortgage loan risk officer, a quality control (QC) manager, or manger in a similar position, you probably think a lot about QC these days. Fannie Mae requires its approved lenders to have an effective QC program, but in a more general sense, a QC program is critical in helping credit unions manage repurchase and compliance risk.
Lenders delivering mortgage loans to Fannie Mae are responsible for understanding and complying with its QC requirements as detailed in the Selling Guide (for details, refer to the Selling Guide and the recent updates described in Announcement SEL-2013-05). A good starting point is to get in the habit of following seven guiding principles for lender QC (these are highlights, not an exhaustive list of Fannie Mae’s expectations; refer to the Selling Guide for all requirements):
It’s up to you. An effective QC program defines the lender’s individualized loan quality standards and establishes processes designed to achieve them throughout its entire origination book of business, including identifying deficiencies and implementing plans to quickly remediate those deficiencies. Each lender must establish its own standards for loan quality that define its credit culture and aid in the development of appropriate controls.
Set target defect rate and severity levels. Although long recommended, Fannie Mae’s recently updated requirements provide that each lender must establish target defect rates and severity levels — the highest severity level indicates a loan is ineligible for delivery to Fannie Mae. These requirements are intended to help lenders mitigate risk; generally, the lower the lender’s eligibility defect rate, the less its repurchase risk exposure will be.
Identify and remediate. The lender must have a structure to identify and remediate defects.
The buck stops with senior management. The lender’s QC program must include reporting results of QC reviews to senior management, who must ensure that actions are implemented to address and remediate defects discovered in the lender’s review process, if appropriate. The strength of a lender’s corporate governance of QC is one component Fannie Mae evaluates during Mortgage Origination Risk Assessment (MORA) reviews.
Staff the QC function appropriately. Lenders must establish minimum requirements for the skill set and expertise of staff performing QC file reviews.
Manage vendors. Lenders that elect to use a QC vendor are responsible for appropriate oversight of the vendor’s work. New requirements: The lender must ensure the QC vendor conducts its reviews in accordance with the lender’s QC plan and must review at least 10% of loans reviewed by vendors; review must be conducted by the lender, not contracted out.
Keep your eye on the ball. Anyone in a position of responsibility in a mortgage lending organization should be aware of key QC performance indicators. Be aware of your organization’s target defect rate and why it is what it is; it should reflect your organization’s risk appetite and have full senior management buy-in. Know your actual defect rate. Know what your institution is doing to address defects, what the planned actions are meant to accomplish, and when results are expected. Finally, leverage Fannie Mae’s QC self-assessment tool to help evaluate your QC program’s effectiveness and compliance with Fannie Mae requirements. Find the self-assessment, along with other resources to assist you and your QC staff, on the loan quality page of the Fannie Mae website.
If you get in the habit of following these guiding principles, you will be well on your way to a successful QC program that meets investor requirements and helps you manage risk.
Steve Spies is the vice president of loan quality and lender assessment at Fannie Mae.
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