Quality Control Self-Assessment Worksheet

Use this worksheet to take

Measuring the effectiveness of your quality control program the QC self-assessment
and add notes to help you
This document is designed to help you manage your risk and comply with Fannie Maes develop or update your
Selling Guide requirements, and includes highly suggested practices for quality control. organizations QC plan.

GOVERNANCE

Governance/Authority Notes
Our senior management, CEO, and Board of Directors (as
applicable) are accountable and actively involved in:

establishing and driving to our target defect rate.

monitoring the monthly defect rate, issues identified, and

remediation activity.

creating a QC philosophy* (objective/purpose) by which we identify,

remediate, and monitor the risks associated with originating good
quality loans (e.g., risks such as fraud, repurchase, financial losses,
penalties, regulatory, product, and channel,
including TPO).

ensuring that an independent audit of the QC process is conducted,

and if appropriate, establishing an action plan for remediation or
policy/procedure changes identified from such an audit.*

overseeing the process of underwriting approval authority and

authority levels.

ensuring that the QC reporting structure is independent of the

production, underwriting, and closing functions.*

providing appropriate resources to the QC function that will enable

adherence to required timelines.

We have a robust training program that develops the core

competencies of our origination and QC staff associated with
originating and evaluating good quality loans. The program
ensures that:

all QC personnel performing loan reviews are experienced and

tenured in origination and underwriting.

detailed standard operating procedures including updates on

industry changes are available to all employees involved with,
or affected by, the QC process.

employees participation in training is tracked and monitored.

training content is current to our investor guidelines and reflects

current industry practices.

Available on FannieMae.com/singlefamily:
Training opportunities, including webinars and self-paced training
Beyond the Guide
Fannie Mae Selling Guide
* Indicates Selling Guide requirement. This document is not a replacement for the Selling Guide. May 2013
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 Elements of a Successful Quality Control Plan

Defect Rate Notes

Senior management has established and proactively manages
to a target defect rate and ensures that:

we have a target defect rate.

we have a gross defect rate.
we have a net defect rate (recommended).

we have a set of standards for loan quality*, including a severity

rating system (e.g., significant, moderate, minor) and defect/error
rate thresholds.
Tip: Identify at least two severity levels with detailed definitions.

we review (at least annually) our target defect rate to ensure it

continues to meet our credit risk needs and is aligned with our
loss reserves.

Defect Rate Tutorial

The lender should calculate a defect rate for its two most severe defect rate types as defined by the lender
for its own organization. In this example, the lender defines Significant and Moderate defect types.
January Fundings: 1,000 loans
10% QC Sample Selection: 100 loans

Calculation
Calculating a Gross Defect Rate EXAMPLE: Gross Defect Rate Calculation
The number of loans with a defect divided by the number of loans # of loans with a Significant defect: 5
in the QC sample size.
- 5/100 = 5% gross Significant defect rate
This calculation should be done for your two most severe defect
# of loans with a Moderate defect: 10
types (e.g., Significant and Moderate).
- 10/100 = 10% gross Moderate defect rate

Calculating a Net Defect Rate EXAMPLE: Net Defect Rate Calculation

The number of loans with a defect minus the number of corrected # of loans with a Significant defect: 5
loans, divided by the number of loans in the QC sample size.
- minus the # of resolved Significant defects prior to the
final QC report: 3
- 53/100 = 2% net Significant defect rate
# of loans with a Moderate defect: 10
- minus the # of resolved moderate defects prior to the
final QC report: 4
- 104/100 = 6% net Moderate defect rate
Analysis and Remediation
Analyzing the Defect EXAMPLE: Initial defect = insufficient income
Once initial (gross) defects are cured, it is important to determine Defect: All income documentation used to underwrite the file was
root causes, analyze issues, and reconcile the difference between not provided to QC for review.
your gross and net defects and action plan accordingly.
Resolution: During the rebuttal process, the additional income
Analyze the cause between the gross and net defect rates. documentation missing from the QC file was provided.
The goal is to identify and remediate the issues to narrow Action Plan: Implement processes/checks to ensure that all
the gap between the gross and net defect rates. documentation used to underwrite the loan is in the file.
How was the initial finding resolved prior to the distribution
of the final QC report?

An effective way to establish loan quality targets is to model the financial exposure created at a certain defect level. While the
concept of zero defects generally will be considered challenging to achieve, the lender should select a target defect rate that
is as reasonably low as possible.

* Indicates Selling Guide requirement. This document is not a replacement for the Selling Guide. May 2013
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 Elements of a Successful Quality Control Plan (continued)

Pre-Funding Notes
Our Pre-funding QC/QA process* includes:

a clearly defined pre-funding quality control program.

being managed or performed by someone other than a party to loan

originations.*

sampling of loans with characteristics related to defects identified in

prior reviews.

performing a monthly pre-funding discretionary QC loan review

focusing on higher-risk loans, in addition to the monthly random/
statistical sample.

validation/verification of:
AUS data integrity
Social Security Numbers
Employment
Assets
MI coverage
Appraisal review

a full re-underwrite of sampled loans, including re-calculation of:

Income
Assets
Liabilities (reconcile Form 1003 and credit report)

fraud checks using industry tools and/or vendors.

obtaining IRS tax transcripts prior to underwriting.

validating that the condo project meets FM requirements and

ensuring that condo project eligibility documentation is retained.*

a process to identify the root cause of the identified defects.

system hard stops to ensure that loans dont close with defects (list
the systems used).

use of Fannie Maes tools to ensure accurate delivery data

(information available on FannieMae.com/singlefamily).
UCDP
EarlyCheck
Loan Delivery edit history reports

an open line of communication with the business units and the post-
close QC staff.

a remediation process to correct the defects identified prior to close.

a process to re-test loans identified with defects prior to closing the

loan.

Reviews performed prior to funding provide important and timely feedback to the origination staff, and may prevent closing loans
with significant defects such as misrepresentation, inaccurate data, or inadequate documentation.

* Indicates Selling Guide requirement. This document is not a replacement for the Selling Guide. May 2013
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 Elements of a Successful Quality Control Plan (continued)

Post-Closing Notes
We ensure that our Post-closing QC plan includes the following:

Sampling Method

a minimum 10% Random Sample or a Valid Statistical Sample*

samples are representative of our originations (book of business),*
including
size
production channels
geographic areas of operation
specialty products/programs
early payment defaults (EPD)

a separate monthly discretionary sample focusing on loans with

higher-risk characteristics*, including:
unique underwriting/processing/appraisal techniques
lender personnel
patterns identified in other reviews
TPOs
higher-risk property types (leaseholds, co-ops, manufactured homes)

Timing of QC Review

sampling loans within 30 days of closing.*

completing the review within 60 days of the sample selection.*

finalizing reports to senior management within 30 days of

completed reviews.*

completing the overall QC cycle within 120 days* (Fannie Mae

recommends a 60- to 90-day QC cycle)

notifying Fannie Mae if QC reviews are behind by more than one

30-day cycle *

Example: Timing of QC Review for Loans Funded in January

Sample Selections (30 days): QC loan samples for January fundings are selected during the month of February.
Reviews (60 days): QC reviews (inclusive of rebuttals from production/operations) are completed no later than the end of April.
Final Reporting (30 days): Final reports are distributed to senior management no later than the end of May.

Re-verify Critical Data

employment/income directly with the source of the original

documentation.*
Obtain the IRS Tax Transcripts (if not obtained prior to closing)*

assets attempt to reverify directly with the source of the original

documentation.*

* Indicates Selling Guide requirement. This document is not a replacement for the Selling Guide. May 2013
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 Elements of a Successful Quality Control Plan (continued)

Post-Closing (continued) Notes

Re-verify Critical Data (continued)

credit*
New in-file credit report from a different credit reporting agency.
Non-traditional credit each credit reference listed on the report.

accuracy and integrity of the AUS information used to make the

lending decision.*

compare supporting documentation to the AUS (data integrity),*

including:

Borrower/co-borrower name
SSN

Employment/employment type
Income

Assets
Address

Property type
Loan term/type/purpose

Obtain, Compare, Verify, Correct, and Maintain

occupancy check for primary residences and second homes.*

Social Security Number(s) validation with the Social Security

Administration (SSA) if SSN discrepancy is not resolved at
origination.*

review potential red flag messages found on the AUS or alerts

created by sources other than the AUS (e.g., credit reports, SSN
verifications).*

review manually underwritten loans for compliance with Fannie

Maes guidelines and loan eligibility criteria.*

review DU/AUS underwritten loans for compliance to Fannie Mae

loan eligibility criteria and AUS verification messages/approval
conditions.*

review each closing document for completeness, accuracy, and

compliance with all underwriting and eligibility requirements.*

material errors are corrected if found, and all affected documents

and systems are updated and resubmitted to the AUS as
applicable.*

notify Fannie Mae if the loan is determined to be ineligible or has

AUS data errors.*

notify Fannie Mae within 30 days of the discovery during the QC

process of misrepresentation.*

maintain QC records for a minimum of 3 years after loan closing.*

Post-closing reviews help lenders evaluate and monitor the overall quality of their mortgage production and their re-verification
procedures. Is the loan you closed, the loan you thought you closed?

* Indicates Selling Guide requirement. This document is not a replacement for the Selling Guide. May 2013
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 Elements of a Successful Quality Control Plan (continued)

Appraisals Notes
We ensure that our appraisals meet generally accepted appraisal
practices* and provide accurate value by doing the following:

ensuring that all loans we originate comply with the provisions of

the Appraiser Independence Requirements (AIR) and are validated
through the post-close QC process.*

completing a desk review on 90% of the loans selected for a QC

review.*

conducting a field review by an appraiser not affiliated with the

original appraisal on 10% of the loans selected for a QC review.*

when utilizing an appraisal management company (AMC), we:

ensure that the AMC is complying with the AIR provisions.
confirm that the AMC uses appraisers that have a current license, are in
good standing, and have the proper insurance.
track appraisal defects by appraisal company and appraiser.
utilize industry tools to score the appraisals received from AMCs.
review the AMCs policies and procedures annually.
require the AMC to have a process to review each appraisal for
accuracy prior to providing it to us.

ordering an AVM report to validate/support the appraised value.

keeping the appraisal review team separate from the underwriting

team.

providing an appraisal review protocol based on the results of the

appraisal tools or appraised value.

ensuring staff is trained to use and understand the appraisal tools/

AVM reports that we utilize.

utilizing Fannie Maes appraisal quality feedback, including loan-

specific reports and messages from UCDP and aggregated (trend)
reports available via Message Manager, to identify and remediate
appraisal quality issues.

Evaluating the quality of an appraisers work through the normal underwriting review of all appraisal reports, as well as conducting
spot-check field review appraisals, is necessary to validate the accuracy of the provided value.

Reporting Notes
Reports are shared with senior management, business units, and
pre- and post-closing QC staff within 30 days after completion of
the review* to be used in determining the root cause of identified
defects. Our monthly reports show the:

defects found in the pre-funding QC process

defects found in the post-closing QC Process

defect rate for each severity rating (e.g., Significant, Moderate,

Low)

* Indicates Selling Guide requirement. This document is not a replacement for the Selling Guide. May 2013
Page 6 of 8 2013 Fannie Mae. Trademarks of Fannie Mae.
 Elements of a Successful Quality Control Plan (continued)

Reporting (continued) Notes

separation of compliance and underwriting/credit findings and

defect rate

gross defect rate (and net rate if applicable)

defects identified by:

Branch Originator
Underwriter
Processor Funder
Closer
TPO

defect rate trending over time

root cause trending by categories and sub-categories

(Income>Miscalculation) (Income>Unverified)

loan-level details

Action Planning Notes

Our reports show:

action plan/corrective action/remediation of all identified defects*,

including:

Defect
Remediation
Outcome/resolution

Source of finding
Implementation date
Re-test

Root cause
Controls

remediation or resolution achieved

remediation/resolution not achieved next steps

defects and outcome/resolution reported to senior management

Robust reporting is a useful internal management tool for evaluating and monitoring the quality of a lenders loan manufacturing
process (production). These reports provide meaningful data used to support analysis, decision-making, and remedial actions.

QC Vendor Notes
We understand that outsourcing is an option for our QC process,
but Fannie Mae holds us fully accountable for the work performed
by our contractors.* If using a QC vendor, we:

understand that a contract for services is not a substitute for our

own proprietary QC procedures.*

review the QC vendors policies and procedures annually.

conduct ongoing dialogue with the QC vendor on a regular basis

(no less than quarterly).

validate the vendors monthly QC findings, including testing a

percentage of the no finding results, prior to the final report being
presented to management within the required 120-day timeframe
(inclusive of rebuttals).

* Indicates Selling Guide requirement. This document is not a replacement for the Selling Guide. May 2013
Page 7 of 8 2013 Fannie Mae. Trademarks of Fannie Mae.
 Elements of a Successful Quality Control Plan (continued)

QC Vendor (continued) Notes

have a process to verify that our QC vendor:

follows Fannie Mae QC requirements and meets the required QC
review timeframes.
uses an agreed-upon severity rating system and definitions.
captures a gross defect rate, not just the number of exceptions.
Tip: Capturing a net defect rate is also recommended.
follows our requirements for managing the severity rate, including not
changing the initial finding.
has a separate fraud investigation team or notifies us when fraud is
identified through the QC review.

Third-Party Originations Notes

We have a process to manage our TPO (broker / correspondent)
business to ensure good quality originations, which includes:

reviewing loans from correspondents prior to purchase.

reviewing a representative sample of the mortgage loans received

from the TPO to ensure that those originations meet our standards
for loan quality.*

reviewing loans from all originating TPOs at least once annually.*

conducting discretionary reviews* of the TPOs production,

which include, but are not limited to property location, LTV ratios,
mortgage product types, borrowers credit scores, and the TPOs
past performance.

rigorously managing the TPO approval and oversight process.

Tip: Ensure there is a process to conduct the required annual
review of all originating TPOs.

ensuring the TPO has a current license.

maintaining a TPO scorecard, including but not limited to loan

quality (QC results), pull-through rate, number of EPDs, and
number of repurchases.

validating the experience of the TPO origination and QC staff (if

applicable).

reviewing the TPOs QC policies and procedures annually and

ensuring they meet Fannie Mae requirements.

Additional Guidance Notes

we continually monitor our TPOs compliance by using tools such

as Internet searches, FHA Compare Ratio, GSA and LDP lists, and
HUD Neighborhood Watch.

Lenders frequently request information on how to build effective quality control programs that manage
risk, drive business decisions, and become part of their companys culture. Contact your Fannie Mae
representative for further assistance.

* Indicates Selling Guide requirement. This document is not a replacement for the Selling Guide. May 2013
Page 8 of 8 2013 Fannie Mae. Trademarks of Fannie Mae.