Last year, Fannie and Freddie announced some relief to lenders under their Reps and Warrants. Under this announcement, lenders could receive relief from responsibility for indemnification and repurchases via two methods;
- Acceptable Payments History: Borrower making payments for 36 consecutive months with no more than one 30 day delinquent; or
- Quality Control Reviews: a satisfactory review by the agency that determines the loan to be acceptable; barring any misrepresentations
You can review my prior newsletter on this topic. if you wish. (How Do You Spell Relief?).
With this announcement, Fannie and Freddie also put an increased emphasis on defect management, pushing lenders toward delivery of near zero defect loans. In doing so, lenders would be rewarded with this rep and warrant relief.
FHA appears to be following along in their footsteps. FHA recently announced their newly revised defect taxonomy aimed at providing lenders with much better, concise, feedback on FHA insured loan defects.
My colleague, Gerry Glavey, being somewhat of an FHA expert, wrote about the new FHA QA assessments. This is worth a read, if you missed it (FHA Taxonomy).
Reducing defects should be the goal of the industry. In the past, we learned the hard way what these defects can do to a loan, a lender and the industry.
Lenders need to take the steps to manufacture a quality product. After all, isn’t that the goal of any business. Most lenders try to, and believe they do, create quality loans. The problem is like proof reading your own email. You tend to see what you think you wrote. Unfortunately, all too often, you find misspellings and missing information after you hit the Send button.
That is why it is so important to have an independent audit function, separate for all other loan origination processes. A person, department, or company that will review loans to determine quality AND compliance. That “someone” can provide the lender with the feedback and information needed to identify defects and/or areas of potential problems so the appropriate corrective actions may be taken.
Corrective actions are the other half of the equation. It is a total waste of time and money if nothing is done with the results of the agency reports and/or QC audits.
Lenders need to heed the warning signs and modify procedures to ensure identified defects and problems are adequately addressed with the appropriate staff and that systems and procedures are modified to avoid re-occurrences. Actions taken need to be documented. This is important when addressing concerns or findings raised as a result of regulatory or agency audits.
Don’t ignore the warning signs. Act to identify loan defects and do what is needed to ensure they are addressed and corrected, timely. Lenders have been fined for not doing so.
BTW, FHA will be requiring pre-closing audits with issuance of their lending guide in September. Are you prepared ?