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Question: How can a mortgage lender ensure it maintains an effective, independent oversight process for mortgage origination Quality Control (QC) in compliance with Fannie Mae requirements?

Answer: Fannie Mae’s December edition of Quality Insider focuses on the importance of maintaining clear QC independence and an effective internal audit process to ensure a robust QC program.  Lenders that fail to maintain an effective QC program will be in breach of their contractual obligations with Fannie Mae. 

Fannie Mae noted that during audits of approved seller/servicer QC programs, it commonly finds that lenders do not have a compliant process in place to audit their post-closing QC process.  In fact, most commonly, Fannie Mae indicated it observes that a lender’s QC program:

• Does not have an internal audit function;
• Has an internal audit function but it is not independent of the business functions it reviews;
• Does not have a comprehensive written plan to direct the internal audit process across all loan manufacturing and servicing business functions;
• Has an internal audit program but has not initiated the internal audit process; and 
• Has not established an internal audit schedule to specify the areas of review and time frame in which they will be conducted.

Within the Quality Insider, Fannie Mae indicates that lenders should conduct an annual independent audit review of the QC process to maintain a robust risk management program and clearly define the scope of the audit process as well as the proposed schedule.  

Lenders must have internal audit and management control procedures to evaluate and monitor the overall quality of its loan production. At a minimum, Fannie Mae requires:

• The procedures must be independent of all key functions of the loan manufacturing process that they review, so that such procedures provide an objective and unbiased evaluation that adds value and improves the lender’s operations.
• The lender’s lines of reporting must reflect the independence of the audit process at all levels, resulting in activities that are conducted in an unbiased manner and without quality compromises resulting from internal influences or conflicts of interest.
• The audit function must not share any reporting lines with the functional areas that it reviews.
• The audit function must report directly to the lender’s senior management and/or board of directors. The procedures must be consultative, so that they help the lender accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control, and governance processes.

For more information on the importance of maintaining an effective internal audit program of the QC functional area, please visit Fannie Mae’s fourth edition of the Quality Insider.  

Haven’t performed an independent audit of your QC program in the past 12 months?  Start today!