WHAT ARE THE AGENCY QUALITY CONTROL PRE-FUNDING REQUIREMENTS?
Fannie Mae, Freddie Mac and FHA all require that lenders complete pre-funding quality control audits. Lenders and investors receive great benefits from these pre-funding reviews by preventing loan from being closed that are fraudulent, are missing required documentation or were processed with incorrect data. Although not specifically required by Rural Housing, the 3555 handbook does reference a pre-funding audit as a sound quality control practice. VA does not require pre-funding audits either, but this type of audit should be conducted as a best practice and may be required by some private investors.
Timing is a crucial component of the pre-funding audit so that the closing process is not unnecessarily slowed down. FHA requires the review cannot take place until after the loan has been approved by the DE Underwriter. Fannie Mae and Freddie Mac guidelines are less specific, but should be completed when there is sufficient documentation to perform the review. A best practice is to follow FHA and complete the pre-funding audit after the loan has been approved by an underwriter.
FHA requires that 10% of the total quality control selections be pre-funding (leaving 90% for post-closing). Fannie Mae and Freddie Mae do not specify a percentage, but as a best practice at least a 10% sample is recommended for all agencies. The selections should be based on loans with higher risks and characteristics such as:
- the lender’s entire product line
- loans with characteristics already identified as having errors or defects based on previous pre- and post-closing audits
- loans from new branch offices, underwriters, processors and third party originators
- loans with difficult income, asset or debt calculations, such as rental income or loss, self-employed and stocks and bonds
- loans with high LTVs, high DTIs and low credit scores
- loans with risk concerns on the credit report and/or AUS
The audit should include, at a minimum, a review of the following calculations and supporting documents:
- AUS data
- Validated borrower(s) social security number(s)
- Income and employments used to quality
- Assets needed to close and reserves, if required
- Debts used to qualify
- Adequate Collateral
- Compliance with program requirements
- Sufficient mortgage insurance coverage, if required
- Compliance with initial agency, federal and state regulations