D1-2-01, Lender Prefunding Quality Control Review Process (06/04/2025)

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 file reviews,
• loan selection process, and
• verification of data and documents.

The lender’s prefunding QC process must operate independent of the lender’s production process, if practical. At a minimum, prefunding QC must be conducted by individuals who have no involvement in the origination, processing or underwriting functions 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 or acquiring the loan. The results of prefunding file reviews provide important and timely feedback, allowing the lender to identify loans with defects (such as analysis or calculation errors, inaccurate data, or inadequate documentation) prior to closing or acquiring the loan, and prevents the lender from selling ineligible loans to Fannie Mae.

Fannie Mae encourages lenders to implement independent control points throughout the production lifecycle, such as internal data, 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 staff so that corrections can be made prior to loan closing or acquisition. The lender must complete the review 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-file reviews and analysis of data and documents prior to funding. In addition to the required full-file reviews, the lender may choose to conduct component reviews by making 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 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, such as newly added controls or processes. A full-file review is a 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, production channels, volume, and product mix. The lender must regularly review its risk assessments to ensure the sample selected is appropriate. The monthly sample must include selections from each of the lender's production channels.

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

• 10% of the prior month's total number of loans closed or acquired, or 10% of the current month's projected total number of loans to be closed or acquired (if using projections, the lender must perform a reconciliation process to ensure the 10% requirement is met); or
• 750 loans.

If the lender does not close or acquire at least 10 loans in the prior month, the lender must select at least one loan for its monthly 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 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, prepurchase 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, employee, contractor, third-party originator, or appraiser;
• loans that test the effectiveness of action plan controls;
• loans originated by third-party originators where elevated risks are observed based on lender oversight and controls (for example, results from the stratified random sample, scorecard metrics, other investor results, or third-party originators the lender identifies as having a higher potential for errors, misrepresentation, fraud, etc.);
• loans originated or processed by newly hired loan officers, processors, underwriters, closers, funders, appraisers, other personnel, or third parties involved in the 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 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 an assessment of all of the following:

• data entered into an automated underwriting system;
• borrower 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 or other eligible collateral data or documentation, if applicable, including reconciliation of CU flags and messages;
• adequate mortgage insurance coverage, if applicable; and
• occupancy.

For loans with income or assets validated by the DU validation service, the lender is not required to recalculate validated income or assets as part of its prefunding QC review. However, the lender remains responsible for confirming that the verification report ID matches the ID captured in the final DU findings report and the verification report has not expired.

For all loans, including those with validated income, assets, and employment, 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 typically can be completed more efficiently than full-file reviews. Targeting high-risk elements 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,
• appraisal elements, such as selection of comps,
• debt properly excluded and documented correctly,
• student loan payment calculations,
• solar panel system liabilities, and
• large deposits.