D1-2-01, Lender Prefunding Quality Control Review Process (10/04/2023)

The lender must maintain and implement a written prefunding QC plan that outlines requirements for reviewing a sample of its loans prior to closing or, in the case of loans acquired from a delegated third party, prior to acquisition. The lender must have documented procedures that include, at a minimum, the following elements:

• timing of the prefunding QC reviews,

• loan selection process,

• verification of data and documents, and

• reporting.

The lender’s prefunding QC process should operate independent of the lender’s production department, if practical. At a minimum, prefunding QC must be conducted by individuals who have no involvement in the processing and underwriting decision of the loan being reviewed.

The lender’s prefunding QC plan must be designed in a manner that supports its ability to identify and address defects prior to closing a loan. The results of prefunding loan file reviews provide important and timely feedback to the origination staff, allowing the lender to identify loans with defects (such as analysis or calculation errors, inaccurate data, or inadequate documentation) prior to closing and prevents the lender from delivering ineligible loans to Fannie Mae.

Fannie Mae encourages lenders to implement independent control points throughout the production lifecycle, such as internal and third-party data and analytical tools. Fannie Mae’s own research indicates that these tools can be effective aids in identifying errors and inconsistencies early in the origination process. However, the isolated use of such tools is not a substitute for full file reviews that are a critical component of a comprehensive prefunding QC process.

Prefunding QC reviews must be conducted early enough in the origination process to allow adequate time to make loan selections, complete the reviews, and properly inform the loan production organization so that corrections and/or revisions can be made prior to loan closing. Fannie Mae requires reviews to be done when there is sufficient documentation in the file to perform the required review of data and documents described in Review Types, below.

The lender's prefunding QC plan must contain requirements for full reviews of loan files and analysis of data and documents prior to funding. In addition to the required full file reviews, the lender may choose to make loan selections designed to focus solely on a specific element of the loan or underwriting component (for example, income and employment, assets, credit, or property). Component reviews may be completed without performing a full file QC review. They should be completed in areas the lender believes pose unique or elevated risk, or to confirm that a particular control or process is working as intended. A full file review is a more comprehensive review of the underwriting decision while a component review is a review of a specific element.

The lender must establish and document a monthly process for selecting loans for its prefunding QC reviews. The process must take into account the lender’s assessment of the risks inherent in its origination processes, business sources and volume, and product mix, and must be reviewed regularly to ensure that the sample selected is appropriate. The monthly sample must include selections from each of the lender's origination channels.

Lenders must complete a minimum number of prefunding QC reviews monthly. The monthly loan selection must equal, at a minimum, the lesser of:

• 10% of the prior month's total number of loans originated or acquired, or
• 750 loans.

If the lender does not originate or acquire at least 10 loans in the prior month, the lender must select at least one loan for its current month's prefunding QC review.

Note: Government loans acquired from a correspondent lender that meet the following requirements may be excluded from the 10% prefunding sample calculation:

• the correspondent lender completed the underwriting of the loan (delegated underwriting); and
• the correspondent lender obtained the required government guaranty or government insurance, as applicable. 

Reviews must target areas that the lender identifies as having a higher potential for errors, misrepresentation, or fraud. Targeted areas may include the following:

• loans with characteristics or circumstances related to errors or defects identified in prior prefunding and post-closing review results;

• loans with complex income calculations (for example, rental income, self-employed, and short history of receipt of income);

• loans requiring the use of non-standard processing or underwriting guidelines (for example, delayed financing, multiple financed properties, assets used as income, or manual reserve calculations);

• loans secured by properties located in areas with high delinquency rates or areas experiencing rapid increases or decreases in property values;

• loans with flags and messages that indicate potential overvaluation or appraisal quality issues on appraisals scored through Collateral Underwriter;

• loans with multiple layers of credit risk, such as high LTV ratios, low credit scores, or high DTI ratios;

• loans originated or processed through various business sources, a particular branch office, staff person, contractor, third-party originator, or appraiser;

• loans that test the effectiveness of action plan controls;

• loans originated or processed by newly hired loan officers, processors, appraisers, or other personnel or third parties involved in the loan origination process; and

• loans for which the feedback or results from third-party tools indicate potential areas of concern.

Leveraging a mix of full file and component reviews can enable lenders to review more loans and provide a broader, more comprehensive risk review than simply performing a full review on all loans sampled.

Full File Reviews

Full file reviews are comprehensive reviews of an underwriting decision and must include review of, at a minimum, the following data and documents to ensure the documents are present and complete, and that the data relied upon in making the underwriting decision is accurate. A full file review must include all of the following:

• data entered into an automated underwriting system;

• borrower(s)’ Social Security number(s);

• income calculations and supporting documentation;

• employment documentation, including verbal verification of employment;

• assets needed to close or meet reserve requirements;

• appraisal, if applicable, including reconciliation of CU flags and messages; and

• documentation of adequate mortgage insurance coverage.

For loans with income or assets validated by the DU validation service, the lender is not required to re-calculate the validated income or assets as part of its prefunding QC review.

For all loans, including those with validated income, employment, or assets, the lender must continue to ensure the information it enters in DU is appropriate based on its review and investigation of any inconsistent or contradictory information in the loan file and the verification report.

Component Reviews

Component reviews focus on specific elements of a loan and can be completed more efficiently and for less cost than full file reviews. Targeting high-risk variables can help create visibility into unknown risks and confirm controls are working effectively. Components that can be reviewed include, but are not limited to

• income when the DTI ratio is at or over a certain threshold,
• self-employment income,
• rental property income or debt, 
• comparable selections,
• debt properly excluded and documented correctly,
• student loan payment calculations,
• solar panel liabilities, and 
• large deposits.

Lenders must establish and implement a process to report defects identified in the prefunding reviews. The process must include

• monthly reporting to senior management within 30 days of completion,

• communicating to the parties responsible for resolving the defects,

• summarizing the results into a report of all prefunding QC findings, and

• documenting the resolution of the defects.

At a minimum, the reports must

• describe the sample selection, including the sample criteria, number of loans reviewed, and percentage total of eligible loans reviewed;

• report and trend gross defect percentages for the highest severity level;

• include defect trending information for issues and top defects over the most recent three months; and

• include action plans to address top defect trends.