Prefunding QC: What you need to know
Written by: Steve Britton – Senior Consultant, Underwriting and Credit Review
Since the onset of the credit crisis in 2008, the one constant shared by state and federal regulators, Fannie Mae, Freddie Mac, FHA, VA and other investors is their focus on loan quality and the reduction of credit risk. Both investors and regulators have taken a hard look at how they could avoid similar disasters in the future and the answer has been a continued emphasis on lenders’ quality control (QC) programs.
Although around for decades, QC requirements took a significant advancement forward with Fannie Mae’s introduction of the Loan Quality Initiative (LQI) in early 2010. While traditionally QC reviews were a post-closing function, the GSE’s began to recognize this approach was akin to closing the gate after the horse had left the corral, and for the first time some QC requirements were moved to preclosing. The pre-funding QC function is the only audit function that is proactive and allows the lender to correct documentation deficiencies, omissions, and miscalculations prior to the loan closing.
Over the years, the pre-funding QC requirements have evolved and been refined but requires, at a minimum:
To be in writing (as part of the lenders over-all QC program).
Address the independence requirement of the review from other production staff.
Address the timing of the prefunding reviews.
Address the loan selection process (more weight to the more complex or riskier transactions)
The verification standards for data and documentation.
Reporting requirements to senior management (including a 3-month defect trending analysis) and how corrective measures were implemented.
Beginning in September of last year, Fannie Mae instituted requirements that mandates 10% of the prior month’s loan production be the minimum pre-funding reviews completed for the current month’s production (minimum of 1 pre-funding review completed every month), up to a maximum of 750 loans.
Given the significant increase in repurchase request from the GSE’s over the past few years, attention to all aspects of a lender’s QC program, especially prior to a loan closing, is critical to avoid the time and costs associated with curing post-closing loan defects and repurchase requests.
Prefunding quality control reviews are an essential component of the mortgage process. They provide numerous benefits to lenders, borrowers, investors, and insurers. By embracing prefunding quality control reviews as a valuable tool in the loan origination process, lenders can ensure certainty regarding the health of their manufacturing process.
At Spillane Consulting Associates, we offer fully customizable solutions to Prefunding QC, from outsourced services to the creation and implementation of effective and compliant Quality Control procedures. Contact our Director, Bill Dolan, at WDolan@scapartnering.com or by phone at (617) 694-2617 for more information.
