Sharon Reichhardt of ACES Quality Management: Spring Your QC Forward or Fall Behind Fannie Mae’s New Requirements this September

Sharon Reichhardt is executive vice president of operations with ACES Quality Management, Denver. She brings more than three decades of industry experience to ACES. Reach her at sreichhardt@acesquality.com. To learn more about Fannie Mae’s changes, check out the latest ACES “QC Now” webinar, “Fundamental Changes to Fannie QC: Are You Prepared?”

Originally known as “war time,” Daylight Savings Time was first instituted during World War I as a fuel saving measure and, as of 2005, officially occurs on the second Saturday in March. This spring, Fannie Mae announced changes to its selling guide that, once instituted, will spring lenders’ quality control (QC) and compliance departments forward. While the changes were announced on March 1, 2023, they aren’t slated to take effect until September 1 of this year, meaning lenders have nearly six months to update their compliance operations.

Given the downturn in mortgage volume and the exploding cost to originate, Fannie Mae’s announcement comes at a time when QC departments may be much leaner than they were the year before. However, lenders can ill afford to ignore these changes, and compliance may mean investing in automation despite declining profitability.

Fannie Mae’s new requirements include:

Lenders must maintain and implement a written pre-funding 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:

• Prefunding QC Review Process
• 10% or 750 sample size of prior month’s originations/acquisitions
• Combination of full file and component reviews

In addition, Fannie Mae made one major change to its post-Closing QC requirements. The Audit Life Cycle has been reduced from 120 days to 90 days, a 25% reduction in time.

For those with QC on the back burner or outdated processes, this announcement should be a wake-up call. Now is the time to take a hard look at current practices and procedures. For example, data collection is the foundation for an efficient QC process, and Fannie Mae’s changes will require lenders to take a hard look at their current data collection process. Data must be captured and categorized in a manageable way that is easy to understand and facilitate root cause analysis. These are critical characteristics to drive meaningful reporting.

These reports must include target defect rates, gross and net defect rates, root cause analysis and trending and action plans. Using “unclean” data to generate these reports will likely result in inaccuracies that could impact loan salability and may trigger deeper scrutiny from Fannie Mae. Thus, the first step in meeting these new requirements is to clean up the data collection processes on the front end.

Lenders must now also maintain and implement a written pre-funding QC plan that includes the timing of the pre-funding QC reviews, loan selection process, verification of data and documents and reporting. When creating these plans, lenders must clearly state their data collection method and definitions to limit confusion throughout the QC department. These data terms should be regularly checked for adherence in both the pre-funding and post-closing review process.

For those still using spreadsheets and email to power their QC process, now is the time to rethink those methods. 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 corrections and revisions can be made prior to the loan closing. Fannie Mae requires reviews to be done when there is sufficient documentation in the loan file to perform the required review of data and documents.

Similarly, Fannie Mae is now asking for post-closing reviews to be done within 90 days of closing, reduced from 120 days. With both of these requirements, turntimes and accuracy become especially important. While spreadsheets and email are both technically “digital” tools, they are both generalist in nature, thus requiring more manual intervention to adapt them for mortgage lender’s unique QC review needs.

To meet these new requirements, lenders must invest in some form of technology that enables them to:

• Automate loan import, qualification, selection and assignment;
• Filter out non-applicable questions/requirements;
• Auto-issue exceptions and uphold review deadlines;
• Complete re-verifications in an integrated environment;
• Produce executive-level reports quickly and easily;
• Conduct root cause analysis; and
• Generate effective action plans for remediation.

A well-managed QC process not only enhances origination activity by supporting high-quality, high-performing mortgage production but also reduces operational deficiencies and risk, improves fraud prevention and ultimately protects borrowers. Investing in QC automation multiplies the impact of QC efforts enterprise-wide by enhancing quality in both lending and non-lending lines of business, thereby extending the value of the investment. With these new requirements from Fannie Mae, can your organization afford not to comply?

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)