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D2-1-03, Outcomes of Fannie Mae QC Reviews (11/03/2015)

Introduction
This topic describes the possible outcomes of Fannie Mae QC reviews, including:

Definition of Origination Defects Under the Remedies Framework

Upon completion of a full-file quality control review for loans covered by the remedies framework, Fannie Mae will designate any defect uncovered during that review as one of the following:

  • A “finding” is one or more defects that, when considered with other loan features, does not necessitate a change in the price of the loan or result in the loan being unacceptable even if the true and accurate facts about the loan had been known at the time Fannie Mae purchased or securitized the loan.

  • A “price-adjusted loan (PAL)” has one or more defects that, when considered with other loan features and based on the facts of the loan as purchased or securitized by Fannie Mae, result in a loan that was otherwise eligible for delivery had the correct data been delivered and LLPA been paid to Fannie Mae by the lender.

  • A “significant defect” is one or more defects that either necessitates a change to the price on which the loan was acquired or result in the loan being unacceptable for purchase had the true and accurate information about the loan been known at time of purchase. Loans with findings and PALS are not loans with significant defects.

See A2-3.2-03, Remedies FrameworkA2-3.2-03, Remedies Framework, for additional information about the remedies framework.

Criteria for Determining Significant Defects Under the Remedies Framework

In determining whether there is a significant defect on a loan covered by the remedies framework, Fannie Mae must give due consideration to the severity of the defect. In addition, the defect must relate to one of the following:

Significant Defect Criteria Related To Examples
the underwriting of the borrower’s creditworthiness and capacity the borrower’s income, credit, liabilities, and assets
the borrower’s eligibility and qualification

  • area median income

  • first-time homebuyer status

  • status as lawfully present in the United States
the underwriting criteria related to property or project eligibility

  • residential use

  • condo eligibility
the property appraisal or the physical condition of the property  
a life-of-loan representation and warranty as described in A2-2-07, Life-of-Loan Representations and WarrantiesA2-2-07, Life-of-Loan Representations and Warranties
loan and product terms and criteria the criteria provided in the Eligibility Matrix, such as

  • LTV ratio, occupancy, credit score, loan purpose, etc.

and terms such as

  • ineligible transaction types

  • products that may require special lender approval as a prerequisite for delivery

  • limitations on cash out to borrowers that determines the type of refinance

  • any negotiated exception or variance
requirements applicable at the time of loan purchase

  • no defaults

  • all taxes and insurance premiums have been paid or escrows established

  • no modification, encumbrance, subordination, or release of mortgage
the warranties and obligations of the lender regarding the FHFA Suspended Counterparty Program  
the existence, sufficiency, or enforceability of any required insurance or guaranty  
the form and/or execution of Fannie Mae required loan documents, that without which make the loan ineligible for sale or limit the enforceability of the required loan terms

  • the Uniform Residential Loan Application

  • power of attorney

  • a Texas Section 50(a)(6) loan

  • nonstandard and special purpose documents such as living trusts

Breach of Mortgage Insurance Policy

In the event the defect identified by Fannie Mae also turns out to be a breach of any provision of any mortgage insurance policy issued with respect to a loan, the lender is not released from any breach of the Lender Contract that may result if the mortgage insurance company insuring the loan rescinds, cancels, denies, or curtails the mortgage insurance benefit due to the same or similar acts or omissions that make up the defect.

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