B3-2-02, DU Validation Service (09/04/2024)

The DU validation service offers lenders an opportunity to deliver loans with more certainty. Certain components of the loan file – income, employment, and assets – are eligible for validation by DU using electronic verification reports obtained from vendors. When a component of the loan is validated by DU, the loan may be eligible for representation and warranty enforcement relief related to that component. Different lender quality control and documentation requirements may also apply. See the following for additional information:

• A2-2-01, Representations and Warranties OverviewA2-2-01, Representations and Warranties Overview,

• A2-2-04, Limited Waiver and Enforcement Relief of Representations and WarrantiesA2-2-04, Limited Waiver and Enforcement Relief of Representations and Warranties,

• B1-1-03, Allowable Age of Credit Documents and Federal Income Tax ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns,

• B3-3.1-01, General Income InformationB3-3.1-01, General Income Information,

• B3-3.1-02, Standards for Employment DocumentationB3-3.1-02, Standards for Employment Documentation,

• B3-3.1-06, Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-CB3-3.1-06, Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C,

• B3-3.1-07, Verbal Verification of EmploymentB3-3.1-07, Verbal Verification of Employment,

•   B3-3.1-09, Other Sources of IncomeB3-3.1-09, Other Sources of Income,

• B3-3.5-01, Income and Employment Documentation for DUB3-3.5-01, Income and Employment Documentation for DU,

• B3-4.2-01, Verification of Deposits and AssetsB3-4.2-01, Verification of Deposits and Assets,

• B3-4.2-02, Depository AccountsB3-4.2-02, Depository Accounts,

• B3-4.4-02, Requirements for Certain Assets in DUB3-4.4-02, Requirements for Certain Assets in DU,

• D1-2-01, Lender Prefunding Quality Control Review ProcessD1-2-01, Lender Prefunding Quality Control Review Process, and

• D1-3-02, Lender Post-Closing Quality Control Review of Approval Conditions, Underwriting Decisions, and DocumentationD1-3-02, Lender Post-Closing Quality Control Review of Approval Conditions, Underwriting Decisions, and Documentation.

The DU validation service is an optional service available only for conventional loans underwritten through DU. Lenders are not required to participate in the DU validation service in order for a loan to be underwritten through DU, and may not require a borrower to participate in the DU validation service.

A lender may obtain a verification report directly from a “report supplier” or from a “report distributor” as described below:

• Report suppliers have entered into an agreement with Fannie Mae to participate in the DU validation service. Report suppliers generate the report and send the report data electronically to the DU validation service. This report reflects the report supplier’s name and/or logo.

• Report distributors have not entered into an agreement with Fannie Mae, but have an agreement with an eligible report supplier. The report supplier (not the distributor) sends the report data electronically to the DU validation service. The verification report reflects both the report distributor’s name and the name and/or logo of the applicable report supplier.

The DU Validation Service Verification Report Vendors list provides a listing of authorized report suppliers and report distributors and is available on Fannie Mae’s website.

Asset verification reports provided by third-party vendors may include:

• a 30- or 60-day report; 
• data covering up to 12 months (or more) of asset account data;
• a report showing a subset of information typically found on an asset verification report (for example, deposit transaction information with no corresponding amount or account balance) intended to be used to verify employment using direct deposit transactions (a "supplemental asset report").

To validate income or employment using an asset verification report, the lender must order an asset verification report with a minimum of 12 months of data from an authorized vendor.

No special approval is required from Fannie Mae to use the DU validation service, however, lenders must “opt-in” to validate income and employment using an asset verification report.

When a lender provides the required reports, all loans that are submitted to DU will automatically be assessed through the DU validation service for validation of the related component.

To participate in the DU validation service, the lender must

• have a relationship with, and have entered into a contract for the services provided by, a vendor(s) –either a report supplier or a report distributor – that is authorized to obtain a verification report;

• have an agreement with a vendor(s) that

  • allows for the report supplier to share the information contained within the verification report (obtained by the lender) with Fannie Mae electronically for use by the DU validation service; and

  • ensures the lender receives, or has access to, the same data that is shared with Fannie Mae electronically in accordance with A2-4.1-01, Establishing Loan FilesA2-4.1-01, Establishing Loan Files; and

• establish controls to manage and monitor the vendors in accordance with its own regulatory requirements.

For loans assessed by the DU validation service, the lender must

• obtain borrower authorization to receive the information from the vendor;

• confirm that the verification report matches the borrower;

• ensure information entered by the lender in DU is properly documented;

• investigate and resolve any conflicting or contradictory information;

• retain a copy of all verification reports in the loan file (see  A2-4.1-01, Establishing Loan FilesA2-4.1-01, Establishing Loan Files for details), in addition to any other documentation required by DU; and

• ensure that the most current version of the verification report is used by the DU validation service. If the lender obtains an updated verification report, the lender must resubmit the loan to DU and receive a message that the component has been validated in order for the representation and warranty enforcement relief to apply.

When a component of the loan file is assessed by the DU validation service, three results are possible: validated, not validated, or unable to be validated. DU will issue a message providing the validation results.

Validated

DU has determined that the information provided on the verification report supports the information entered into DU for the component being validated.

The DU message(s) will indicate that the verification report is acceptable documentation to support the component that has been validated.

Not Validated

DU has determined that the information provided on the verification report does not fully support the information entered into DU for the component of the loan file eligible for validation.

The DU message(s) will indicate what documentation, in addition to the verification report, is required.

Unable to Validate

DU is unable to validate the information entered into DU for the component eligible for validation. This could be due to DU’s inability to access the verification report data, or insufficient data in the report.

The DU message(s) will indicate what documentation is required.

Note: Regardless of the validation result, DU will continue to use the information provided by the lender in determining the DU underwriting recommendation. The results of the validation service do not override, impact, or alter any information submitted by the lender.

The following table lists the income types that can be validated, and the documentation that DU will require, which may be different than the standard documentation required in this Guide. For all eligible income types, the lender must determine the income type, amount, and source and enter this information in the applicable field in DU.

Note: Income types not listed below (such as military income) are not eligible for income validation by DU.

Note: Additional supporting documentation may be required for some income types (such as child support or alimony).

Income—Additional Information

The following additional information applies to income validated by DU:

• If an employment and income verification report is used, the vendor must obtain income information using data obtained from the report supplier’s existing database of employer-provided information.

• All income or direct deposit amounts shown on the income or asset verification report must be reflected in U.S. dollars.

• When DU validates income, the lender

  • is not required to determine if the borrower is employed by a family member or interested parties to the property sale or purchase.

  • must continue to obtain employment verification as described in  B3-3.1-07, Verbal Verification of EmploymentB3-3.1-07, Verbal Verification of Employment.

    • The verification report may contain sufficient information to satisfy this requirement. See Employment—Additional Information below.

  • must review the verification report relied upon by DU for validation and

    • investigate and resolve any conflicting or contradictory information, and 

    • when an asset verification report is used to validate income, the lender must confirm that the borrower is listed as an owner of the asset account and that the report reflects the borrower's name as account holder. The lender need only review the report the covering the period of time (30- or 60- days) required for asset verification for the transaction type, or if no asset verification is required for the transaction, the account activity covering the most recent 30-day period, for these purposes.

Age of Income Document Requirements

Asset Verification Reports and Employment and Income Verification Reports: The date of the report must comply with Fannie Mae’s standard age of credit document requirements as outlined in B1-1-03, Allowable Age of Credit Documents and Federal Income Tax ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns.

Tax Return Transcripts: To ensure that the income validation is completed using the most recent tax transcripts, the following will be used to determine if the transcript contains the most recent tax return information. Lenders are not required to comply with the age of credit documents as outlined in B1-1-03, Allowable Age of Credit Documents and Federal Income Tax ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns, when DU issues the message that income has been validated.

• For loan casefiles created on or before April 30, the most recent tax transcript must be provided. The most recent tax transcript would be for the prior year (current year minus 1). If the prior year tax return has not yet been filed or the transcript is not yet available, the most recent tax transcript will be the current year minus 2.

• For loan casefiles created after April 30, the most recent year tax transcript must be provided for validation to be completed. The most recent tax transcript will be for the prior year (current year minus 1).

The following table describes the employment that can be validated and the documentation that DU will require, which may be different than the standard documentation required in this Guide.

Note: Military employment is not eligible for employment validation by DU.

Employment—Additional Information

The following additional information applies to employment validated by DU:

• If an employment and income verification report is used, the vendor must obtain employment information using data obtained from the report supplier's existing database of employer-provided information. 

• Income and employment are assessed independently; however, the results of the employment validation may impact income validation.

• When employment is validated by DU, the validation satisfies the requirement for verbal verification of employment described in B3-3.1-07, Verbal Verification of EmploymentB3-3.1-07, Verbal Verification of Employment. Lenders must comply with all DU messages, including ensuring the loan closes by the “Close by Date” stated in the DU employment validation message.

• The lender must review the verification report relied upon by DU, including any Employer Disclaimer information, if applicable, and:

  • investigate and resolve any conflicting or contradictory information, and 

  • when an asset verification report is used to validate employment, the lender must confirm that the borrower is listed as an owner of the asset account and that the report reflects the borrower's name as account holder. The lender need only review the report covering the period of time (30 or 60 days) required for asset verification for the transaction type, or if no asset verification is required for the transaction, the account activity covering the most recent 30-day period, for these purposes.

When employment is initially validated using an asset verification report and the loan will not close by the "Close by Date" stated in the DU employment validation message, the lender may obtain a supplemental asset report from an asset verification report vendor and either submit it to DU or perform a manual review of the report to satisfy the verbal verification of employment described in  B3-3.1-07, Verbal Verification of EmploymentB3-3.1-07, Verbal Verification of Employment.

When used to reverify employment (whether through an automated or a manual review), the supplemental asset report must contain

• the account numbers and the account holder name for each account included in the report,
• the date of the report, and 
• the date and deposit details of the deposits reflected on the report.

The lender must review the report to confirm the borrower is listed as an account holder. The lender must not have any information indicating the borrower may no longer be employed and must investigate and resolve any contradictory or conflicting information.

When a manual review is performed, the lender must obtain the report within the same timeframe required for a verbal verification of employment and additionally, review the report to confirm

• the deposit details of the direct deposits that are being used to reverify employment 
  • match the ACH details identified in the DU findings messages for the direct deposit streams used by DU to validate employment, and 
  • are consistent with the income source provided in DU;
• the pattern of receipt of the identified direct deposits used to reverify employment does not reflect missed payments, and the latest expected payment prior to the date of the report is present.

Note: When a lender performs a manual review of the supplemental asset report to reverify employment, the enforcement relief from representations and warranties related to the employment validation through the DU validation service described in A2-2-04, Limited Waiver and Enforcement Relief of Representations and Warranties,A2-2-04, Limited Waiver and Enforcement Relief of Representations and Warranties does not apply.

All supplemental asset reports must be retained in the loan file.

The following table lists the asset types that can be validated and the documentation that DU will require, which may be different than the standard documentation required in this Guide.

Asset—Additional Information

The following additional information applies to asset validation:

• All assets shown on the asset verification report must be in U.S. dollars and held in a U.S. or state regulated financial institution.

• The account statements obtained from the vendor must cover the most recent:

  • 30 days of account activity for refinance transactions

  • 60 days of account activity for purchase transactions

  • The most recent quarter, if account information is reported on a quarterly basis

• The lender must review the verification report (covering the account activity for the period of time required) and investigate and resolve any conflicting or contradictory information. The lender must also confirm that the borrower is listed as an account holder for each asset account.

• The DU validation service automates the assessment of large deposits on purchase transactions required in B3-4.2-02, Depository AccountsB3-4.2-02, Depository Accounts. When a large deposit needs to be documented, DU will issue a message specifying the amount of the large deposit, as well as the institution name and account number of the account that includes the large deposit. If no message is issued by DU, then no documentation of any large deposit appearing on the asset report is required when assets have been validated.

• When the DU validation service validates assets on transactions with gift funds, the lender must ensure that the gift funds that appear as deposits on the asset verification report (if any) meet the requirements in B3-4.3-04, Personal GiftsB3-4.3-04, Personal Gifts.

• If the actual amount of funds required to complete the transaction is greater than the Funds Required to Close specified in DU, the lender must document liquid assets to cover the additional amount. See B3-2-10, Accuracy of DU Data, DU Tolerances, and Errors in the Credit ReportB3-2-10, Accuracy of DU Data, DU Tolerances, and Errors in the Credit Report for additional details on whether the loan must be resubmitted to DU.

• For self-employed borrowers, if an eligible asset account is reflected as a business account on the verification report, the lender must perform a business cash flow analysis to confirm that the withdrawal of funds for this transaction will not have a negative impact on the business. If the lender determines the withdrawal would have a negative impact on the business, the lender must remove the assets from the online loan application, obtain an updated verification report that excludes the business account, and resubmit the loan to DU.

• When retirement assets are entered in DU, DU issues a message requiring the lender to ensure that withdrawals are permitted, and that withdrawals are not limited to those completed in connection with the borrower’s employment termination, retirement, or death. If any of these conditions are present, the lender must remove the retirement account assets from the online loan application, obtain an updated verification report that excludes the retirement account, and resubmit the loan to DU.

Note: If the lender would like to use the asset verification report to supplement the credit risk assessment in DU, see Rent Payment History in B3-2-03, Risk Factors Evaluated by DUB3-2-03, Risk Factors Evaluated by DU  for additional information.