Recent Mortgage Quality Control Requirement Updates

• Dec 23, 2023
• By Mallory Conway

Ensuring quality loans are being sold to investors is imperative to avoid having to repurchase a loan in the future. As a result, financial institutions that sell loans in the secondary market are required by investors to have a post-closing quality control review completed periodically. The cadence of these reviews depends on the investor, with some requiring monthly reviews and others quarterly. Given the uncertainty in the market and borrower financial stability, investors have recently made some changes to their quality control requirements.

One of the most notable changes made was Frannie Mae’s modernization of the method used to establish a property’s market value. This valuation modernization balances traditional appraisals with appraisal alternatives and involves transitioning to a range of valuation options, with the option matching the risk of the collateral and the loan transaction. This will help lenders, appraisers and risk investigators manage collateral risk more effectively, while also providing consumers with greater appraisal accuracy, lower costs and increased speed of loan decisioning.

For example, value acceptance + property data is a new option that utilizes property data collection by a third party to confirm property eligibility, removing the need for an appraisal. Another alternative is hybrid appraisals. Hybrid appraisals are based on property data collection by a third-party that is provided to an appraiser to inform the appraisal. This option is used when acceptance + property data was initially started, but changes in loan characteristics render the transaction ineligible for that option.

Furthermore, Frannie Mae adjusted the sample size requirements for monthly pre-funding reviews. The total number of loans to be reviewed must equal the lesser of 10% of the prior month’s closings or 750 loans.

Frannie Mae also adjusted the timeframe for completing the post-closing quality control reviews from 120 days to 90 days. For example, the cycle that begins on January 1, 2024 must be completed by March 30, 2024. This update was designed to make it possible for lenders to identify errors in a timely fashion and prevent future occurrences.

Additional mortgage quality control requirements that must be completed independently of the mortgage origination and underwriting departments can be found in individual investor selling guides. The most common investors include Frannie Mae, Freddie Mac, Ginnie Mae and Mortgage Partnership Finance Programs (FHLB Members). Required quality control review elements include, but are not limited to:

·         Reviewing the loan file for required closing documentation

·         Reviewing certain disclosures required by RESPA/Reg Z

·         Timing of the review process

·         Loan sample selection (size - random, statistical or discretionary)

·         Underwriting approval conditions

·         Reverification of assets, credit history, income, employment and taxes

·         Data integrity, including red flags and social security number

·         Appraisal compliance requirements

·         Management reporting and defect rates

To ensure your financial institution is meeting the post-closing quality control requirements set by investors, review the complete investor selling guides or consider reaching out to an outsourced accounting firm for assistance.

About Author:
Mallory Conway is a director in the Advisory & Consulting division of The Bonadio Group and works out of the Albany and Rutland offices. She is a Certified Internal Auditor (CIA) and a Certified Regulatory Compliance Manager (CRCM).  Mallory has been providing financial institution internal audit and regulatory compliance services for 15 years. Prior to this she spent 2 years working at a bank in Vermont. Mallory enjoys spending time outside of Bonadio decorating elaborate cakes for special occasions for friends and family.

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