You heard the saying that the only thing constant is change. Well, I’m attending the MBA’s Risk Management, QA and Fraud Prevention Forum in Dallas this week and the word seems to be that the only thing certain when it comes to life of loan reps and warrants for the GSEs and FHA is that lenders are uncertain.
The GSEs and FHA keep telling lenders that they are making things easier so that lenders may move forward and increase lending; especially to first-time buyers and those of low to moderate incomes.
Not all that long ago, Fannie and Freddie put out their guidelines for rep and warrant relief whereby lenders could reduce their exposure to indemnifications and buybacks. However, these guidelines still hold the lender responsible for the life of the loan when defects arise from misrepresentations and/or data errors.
Keep in mind that Fannie or Freddie do not review or audit for compliance issues. However, under their reps and warrants, a lender certifies that any loan sold to them is compliant with all legal and regulatory requirements. Any breach is grounds for repurchase.
FHA has once again put out for comment, the modifications for lenders individual loan and annual certifications. In general, these both have a lender certify that all loans are originated and closed for FHA insurance in strict compliance with all related FHA requirements. These make no allowance for minor errors and/or clerical mistakes which may have no real, direct bearing on loan performance.
Accordingly, lenders are uncertain on what to expect if and when any of these entities uncover what would be a minor data deficiency or clerical error if a loan defaults. Fear is that they will demand repurchase due a rep and warrant violation, even though the defect was in no way responsible for the default. History has indicated so. Additionally, in the case of an FHA loan default claim, the lender may be liable under the False Claims Act.
So, for now, lenders need to tread very cautiously when originating their loans. My best advice, as I included in my panel presentation at this Forum on reducing defects, is for lenders to more proactive in their defect management.
Do more than a random pre and post-close sampling of loans. Inject loan quality management throughout the loan process with the systems and technology to quickly identify defects so they may be corrected before a loan closes.
Use discretionary pre and post close audits to target specific loans based on characteristics and past performance. Identify the loans that pose the biggest risk. Then, concentrate audits on these loans to ensure things are being done properly, and to help identify areas for additional training and process improvements.
The goal is to identify and correct defects before these agencies discover them – rather than trying to fight a rep and warrant violation after they discover the error.
Get the defects; before they get you.