COVID-19 Frequently Asked Questions - Mortgage Originations
Last Updated: Apr. 08, 2020
In response to the COVID-19 national emergency, Fannie Mae and Freddie Mac have provided temporary guidance to lenders on several policy areas to support mortgage originations. These FAQs provide additional information on the temporary policies. We will be adding more FAQs, therefore we encourage you to check in frequently for updates - refer to the "NEW" or "UPDATED" notations after the questions.
Note: The numbering sequence is from the COVID-19 Frequently Asked Questions PDF document that includes mortgage originations and appraisals. These have been separated for easier reference by topic. Click here for the COVID-19 FAQs related to Appraisals. Click here for the COVID-19 FAQs related to Quality Control.
Do Fannie Mae’s existing disaster policies in the Selling Guide and the Servicing Guide apply to the COVID-19 pandemic?
No, Fannie Mae’s existing policies related to disasters do not apply to loans impacted by COVID-19. Instead, lenders and servicers can follow the guidance in Lender Letters LL-2020-02, Impact of COVID-19 on Servicing, LL-2020-03, Impact of COVID-19 on Originations, and LL-2020-04, Impact of COVID-19 on Appraisals. All guidance specific to COVID-19 will be communicated through Lender Letters and FAQ documents such as this.
Given the unprecedented and rapid instances of voluntary and mandated business closures, and the concerns over whether employees will continue to be paid, is updated income documentation required prior to closing?
Yes, in some cases income documentation may need to be updated. Refer to Lender Letter LL-2020-03, Impact of COVID-19 on Originations for details.
If a recent paystub or bank statement is obtained in lieu of the verbal verification of employment (VOE), and the documentation evidences reduced hours and/or pay due to the pandemic, what are the next steps?
Continue to follow the requirements and guidance in the Selling Guide Chapter B3-3 related to income stability and calculation. For example, for declining variable income, the requirements and guidance for declining income trends in the B3-3.1-01, General Income Information are applicable. In those cases, the reduced amount of declining variable income can only be used for qualifying if it has since stabilized and there is no reason to believe the borrower will not continue to be employed at the current level. In no instance may income be averaged over the period of declination.
Are there acceptable alternatives if a lender is unable to obtain a verbal verification of employment (VOE)?
Yes, please reference the guidelines and flexibilities announced in Lender Letter LL-2020-03, Impact of COVID-19 on Originations.
Does the lender remain responsible for the representations and warranties related to the borrower’s employment status when using one of the verbal VOE flexibilities?
Yes. The lender’s representations and warranties related to the borrower’s employment status do not change. We are allowing certain documentation flexibilities due to the unique circumstances resulting from the COVID-19 pandemic to address the issue lenders have raised due to disruption of employer operations and their inability to be reached by phone. Lenders are not required to use these flexibilities if they are not comfortable with them.
How should lenders apply the temporary policy on age of documentation to third-party vendor employment or income verification reports that are not used as part of the DU validation service? NEW
Lender Letter LL-2020-03, Impact of COVID-19 on Originations did not change the age of documentation requirements for third-party vendor employment verifications. Therefore, lenders must continue to comply with the requirements in B3-3.1-07, Verbal Verification of Employment, which require the vendor report date to be no more than 10 days prior to the note date, and the information in the vendor’s database (For example, “current as of” date) to be no more than 35 days prior to the note date.
Lender Letter LL-2020-03, Impact of COVID-19 on Originations did update the age of documentation requirements for third-party vendor income verifications:
- For loan applications prior to Apr. 14, 2020, the vendor report date must be no more than 120 days prior to the note date.
- For loan applications on or after Apr. 14, 2020 through May 18, 2020, the information in the vendor’s database (For example, “current as of” date) must be no more than 60 days prior to the note date.
The borrower is self-employed and owns a business that is closed due to the pandemic. Can the income be used to qualify?
No, if the business is not operating, the income may not be used to qualify.
Can I use the requirements for income while on temporary leave?
Yes, refer to the requirements in the B3-3.1-09, Other Sources of Income.
Does the tax deadline extension issued as a result of the COVID-19 emergency affect documentation requirements?
Lenders should continue to obtain the most recent year’s tax return filed by the borrower as indicated in B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns. However, lenders are not required to obtain a copy of the IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) filed with the IRS, until the point at which the tax deadline extension has expired. Accordingly, lenders are not required to review the total tax liability reported on IRS Form 4868 and compare it with the borrower’s tax liability from the previous two years as a measure of income source stability and continuance.
Is there any impact to the DU validation service for loans with income or employment validation?
If income or employment has been validated by the DU validation service, the validation will remain eligible for representation and warranty relief on income and employment provided the lender complies with the terms of the DU messages.
For employment validation, the lender must comply with the “close by” date in the DU message. Otherwise, the guidance in LL-2020-03, Impact of COVID-19 on Originations related to obtaining a verbal VOE (or allowable alternative) would apply.
Can a closing agent or other affiliated party sign loan documents on the borrower’s behalf using a power of attorney (POA)? UPDATED
Yes. We have expanded the transaction types that are eligible for a party with a connection to the transaction to serve as attorney-in-fact, including an employee of the title insurance company providing the title insurance policy. In addition to limited cash-out refinances (which are currently permitted in the Selling Guide), this exception now also applies to purchase transactions.
All related requirements in B8-5-05, Requirements for Use of a Power of Attorney must be met including the on-line, interactive internet session, the express statements required in the POA, and the prohibition against the attorney-in-fact being an employee of the lender.
- For purchase and limited cash-out refinance transactions, when the attorney-in-fact is an employee of the insuring title insurer or is an employee of the policy-issuing agent of the insuring title insurer, such title insurer must have issued a closing protection letter (or similar contractual protection) for the transaction for such policy issuing agent.
- For purchase transactions, the attorney-in-fact or agent may not be the property seller, any relative of the property seller, or any direct or indirect employee or agent of the property seller, unless they are also a relative of the borrower.
The POA Job Aid contains detailed information on additional flexibilities and new requirements outlined in Lender Letter LL-2020-03, Impact of COVID-19 on Originations for loans with documents signed subject to a power of attorney.
If applicable law requires acceptance of a power of attorney, do the provisions of the Selling Guide and Lender Letter LL-2020-03, Impact of COVID-19 on Originations on powers of attorney apply? NEW
Under Selling Guide B8-5-05, Requirements for the Use of a Power of Attorney, and as noted in LL-2020-03, requirements of applicable law regarding a lender’s obligation to allow use of a power of attorney always have priority over the terms of Fannie Mae policy. If a power of attorney is used because the lender determines such use is required by applicable law, the lender must include in the mortgage loan file a written statement that explains the circumstances. Such statement must be provided to the document custodian with the power of attorney.
It is not always possible to obtain a closing protection letter, for example, as in the state of New York. What specific documentation would a lender be required to obtain? NEW
There are a number of states where closing protection letters are not permitted by insurance regulators. In these cases, an alternative contractual indemnity that provides equivalent protection against title agent misuse of the power of attorney or funds must be confirmed. This can include, for example, indemnity provisions in the agreement between the lender and the settlement provider, or an employee fidelity bond maintained by the title insurance agency. In some states, there are statutory protection schemes; these would also meet the requirements of the lender letter.
The guidance in Lender Letter LL-2020-03, Impact of COVID-19 on Originations introduces a new requirement for purchase transactions closing subject to a power of attorney, requiring borrower confirmation of the loan terms with the borrower. When does this requirement apply? NEW
Except for situations described in the next sentence, the requirement for borrower acknowledgement (in person or via telephone conversation or a video conference system) of his or her understanding of the loan terms applies to all purchase transactions, regardless of who is serving as attorney-in-fact. However, for purchase (as well as limited cash-out refinance transactions) where the attorney-in-fact is a person “connected to the transaction” listed in B8-5-05, Requirements for the Use of a Power of Attorney, then the existing processes in B8-5-05 are mandatory, and there is no need for any further borrower acknowledgment.
The new borrower acknowledgment requirements only apply to borrowers signing by a power of attorney. If a borrower signs personally, and another borrower signs via a power of attorney, then no acknowledgement by any borrower signing personally is required by Lender Letter LL-2020-03.
What, specifically, needs to be reviewed with the borrower during the borrower acknowledgement conversation, and what is meant by the acknowledgment being “memorialized”? NEW
The purpose of the borrower acknowledgement provision is to confirm orally after receiving the Closing Disclosure that the borrower understands both the key features of the loan and that the attorney-in-fact has the ability to contractually bind the borrower to the transaction – including the purchase of a home – on the same basis as if they had signed themselves.
Key features of the loan would include such things as principal amount, interest rate and adjustment provisions (if applicable), first payment date, loan term, and initial loan payment (P&I and PITIA).
The conversation reflecting the acknowledgment by the borrower(s) must be documented either in a written record created by the lender or settlement agent or in a recording capturing the conversation with the borrower. If documented in writing, there is no expectation that the borrower sign the memorialization. In either case, the lender must retain the acknowledgement in the loan file, and make it available to us on request.
What are Fannie Mae’s requirements concerning “gap coverage” in lenders’ title insurance policies?
The Selling Guide Chapter B7-2 requires a loan title insurance policy that satisfies Fannie Mae’s requirements, written on the 2006 ALTA loan title insurance form or local equivalent, be obtained by a lender before a mortgage loan is sold to Fannie Mae.
The 2006 ALTA form includes “gap coverage” in Covered Risk 14 for matters arising between the date a mortgage loan is closed and when the mortgage is recorded. Similarly, if title insurance is obtained on an alternate form, the Selling Guide requires coverage be provided for the period between the closing date of the loan and the date when the mortgage is recorded.
Lenders must continue to ensure that no unacceptable title impediments or policy exceptions exist in accordance with B7-2-05, Title Exceptions and Impediments.
Does Fannie Mae require deferred debt payments (for example, student loans, auto loans, etc.) to be considered in a borrower’s debt-to-income (DTI) ratio?
Yes. Even if a borrower’s debt payments are temporarily suspended due to COVID-19 response, the lender must consider the payment in the borrower’s DTI ratio in qualifying for a mortgage loan. Refer to the requirements in the B3-6-02, Debt-to-Income Ratios and B3-6-05, Monthly Debt Obligations.
What should the lender do when informed of a change in the borrower’s pay structure?
If the lender is notified that the borrower is transitioning to a lower pay structure, for example due to pending retirement, the lender must use the lower amount to qualify the borrower. See B3-3.1-01, General Income Information; Continuity of Income.
Can borrowers still use trust accounts for down payment, closing costs, and reserves?
Yes, lenders can continue to follow the requirements in the B3-4.3-02, Trust Accounts. In addition, lenders must apply the age of document and other requirements and guidance in Lender Letter LL-2020-03, Impact of COVID-19 on Originations for any market-based assets in the trust account required for the transaction.
Can a borrower waive the right to rescind on a refinance transaction?
Fannie Mae does not set requirements around rescission periods. If a lender chooses to allow a borrower to waive the rescission period, they must follow and comply with applicable regulatory requirements.
Does Fannie Mae purchase loans that are in forbearance?
No. During the forbearance, the borrower is not making payments and the loan is not eligible for sale to Fannie Mae.
Can lenders continue to use capital gains and interest and dividend income for qualifying a borrower?
Yes, however, lenders should apply additional due diligence to capital gains and interest and dividend income since it is calculated using a historical view which may not be sustainable given current market volatility. While two years of tax returns are still required to demonstrate a stable history of capital gains and interest and dividends income, lenders must consider the current value of the underlying asset when evaluating income for qualifying purposes.
- If the current value of the asset indicates a reduced amount when compared to historical levels, the lender must use the lower amount provided it is deemed stable at the current level.
- If, due to continued market volatility, the lender cannot determine the income is stable at its current level, the income should not be used for qualifying purposes.
- In the event the current value of the underlying asset indicates an increased amount of capital gains or interest or dividends, the lender should continue to use a two-year average calculated using the borrower’s tax returns.
Do lenders still need to have each borrower whose income (regardless of income source) is used to qualify for the loan to complete and sign a separate IRS Form 4506-T at or before closing? NEW
Yes, lenders are still required to have each borrower whose income (regardless of income source) is used to qualify for the loan to complete and sign a separate IRS Form 4506-T at or before closing. Refer to B3-3.1-06, Requirements and Uses of IRS Request for Transcript of Tax Return Form 4506-T.
Can subordination documents be remotely notarized?
Yes, subordination documents can be remotely notarized provided the lender follows the requirements in the A2-5.1-03, Electronic Records, Signatures and Transactions and Lender Letter LL-2020-03, Impact of COVID-19 on Originations.
Are there any changes to the signature requirements for the promissory note?
No. In accordance with A2-5.1-03 Electronic Records, Signatures, and Transactions, unless the lender is approved to deliver eNotes, we require that the original wet signed promissory note be in the possession of the document custodian when the loan is certified for our purchase.
Was there a methodology for determining the states that are acceptable in the remote online notarization (RON) grid? NEW
For states without an express and currently effective RON statute, we assessed the overall likelihood of that state’s recognition of valid RON acts performed out of state, and looked at a number of factors, including governors’ executive orders, applicable state laws, and applicability of the Full Faith and Credit clause of the U.S. Constitution (and any exceptions to its application). The state list was aligned with Freddie Mac and was reviewed and approved by FHFA.
The passage of a federal law is also contemplated in the language and would potentially supersede the need for state-by-state analysis.
Will Fannie Mae update the RON grid for states that have executive orders or state law issued since publication? NEW
We are actively reviewing any additional governors’ executive orders and any state laws since publication, along with any related federal laws, and we will update the grid as needed.
Based on our review of additional governors’ executive orders, lenders may sell loans with remotely notarized loan documents in the additional states listed below, on the terms and conditions noted in Lender Letter LL-2020-03, Impact of COVID-19 on Originations:
What does “maintain the recording of the notarial ceremony for the life of the loan” mean for storage by lenders? NEW
The requirements are not prescriptive about how this must be stored, but lenders must be able to have the ability to access the notarial ceremony upon our request. Lenders may develop their own system or rely on a vendor’s capabilities to satisfy this requirement.
Can a lender use remote online notarization (RON) to close loans that include wet-ink signed documents, including notes that are not eMortgages? NEW
Yes, lenders may employ RON methods to sign and notarize loan documents in accordance with the terms and conditions in Lender Letter LL-2020-03, Impact of COVID-19 on Originations in transactions where the transaction includes a promissory note (and other closing documents) that are wet-ink signed. As a reminder, sellers can only deliver electronically signed eNotes if they have previously been approved by Fannie Mae.
Further, note that powers of attorney may be notarized using RON methods and the POA Job Aid contains detailed information on these requirements outlined in LL-2020-03, Impact of COVID-19 on Originations.
Does Fannie Mae permit an electronic signature by a borrower on a promissory note that is not an eMortgage? NEW
No, a wet-ink signature is required for all promissory notes, unless the promissory note is an electronic note sold in accordance with Selling Guide A2-5.1-03, Electronic Records, Signatures, and Transactions. Lenders that are approved to deliver eMortgages may refer to the Guide to Delivering eMortgages to Fannie Mae for additional information.