D1-1-01, Lender Quality Control Programs, Plans, and Processes (06/04/2025)

An effective QC program is a key component of the lender’s overall control environment. The QC program defines the lender’s standards for loan quality, establishes processes designed to achieve those standards, and mitigates risks associated with the lender’s origination processes. Fannie Mae requires the lender to develop and implement a QC program that provides a structure for identifying the deficiencies in the loan manufacturing process and for implementing plans to quickly remediate those deficiencies and underlying issues. The lender’s QC program must include a written QC plan that outlines requirements for validating loans are originated in accordance with the lender's established policies and procedures. All loans and the QC plan must

• comply with applicable laws as provided in A3-2-01, Compliance With LawsA3-2-01, Compliance With Laws;
• comply with the Selling Guide and the Lender Contract, and be in all respects eligible for delivery to Fannie Mae; and
• guard against fraud, negligence, errors, and omissions by officers, employees, contractors (whether or not involved in the origination of the loans), brokers, borrowers, marketing partners, appraisers, vendors, and others involved in the mortgage process.

Lenders that fail to maintain an effective QC program will be in breach of their contractual obligations with Fannie Mae.

The lender’s QC program must include a documented QC plan that establishes standards for quality and incorporates systems and processes for achieving those standards. The QC plan, at a minimum, must contain the following information.

The lender is responsible for the development and maintenance of standards for loan quality and for the establishment of processes designed to achieve those standards. To effectively evaluate and measure loan quality standards, the lender must establish a methodology for identifying, categorizing, and measuring defects and trends against an established target defect rate.

At a minimum, the lender must identify any loans with a defect (loans not in compliance with the Selling Guide or other related contractual terms and agreements) and establish a methodology by which all loans with identified defects can be categorized based on the severity level of the defect. The lender must define the severity levels appropriate to its organization and reporting needs, however, the highest level of severity must be assigned to those loans with defects resulting in the loan not being eligible as delivered to Fannie Mae.

The lender must also establish target defect rates for its organization, reflecting its quality standards and goals. The establishment of a target defect rate is based on the lender’s post-closing random QC sample and enables the lender to regularly evaluate and measure progress in meeting its loan quality standards. Different target defect rates may be established for different severity levels; however, at a minimum a target defect rate must be established for the lender’s highest level of severity.

A target defect rate must be established that is as reasonably low as possible. Once the targets are set, performance against the targets must be measured at least quarterly and reported to management. The target defect rates must be evaluated and if necessary, reset at least annually. The lender must document the rationale for establishing the target rate(s). 

Fannie Mae may assess how the lender’s chosen target defect rate affects Fannie Mae’s risk and may provide input on a more appropriate target.

As part of its QC program, the lender must establish processes to evaluate and monitor the overall quality of mortgage production through prefunding and post-closing file reviews. Loan file reviews must include, at a minimum, an assessment of

• compliance with Fannie Mae requirements by confirming that
  • the loan meets eligibility and underwriting requirements,
  • the underwriting decision is adequately supported and all documentation required to support the decision is contained in the file, and
  • the loan is secured by a property that provides acceptable collateral; and
• compliance with laws as provided in A3-2-01, Compliance With LawsA3-2-01, Compliance With Laws.

When the lender’s file review identifies discrepancies between the data or information used in the underwriting decision compared to the data or information newly verified through the QC process, the lender must reassess the underwriting decision based on the newly verified information to determine whether the loan remains eligible as delivered to Fannie Mae.

Example: The loan would be considered ineligible as delivered in a case when the lender’s review of the final settlement statement reveals that the borrower received cash back at closing in an amount that exceeds the limit for limited cash-out refinances, but the loan was underwritten and delivered to Fannie Mae as a limited cash-out refinance.

If the lender determines the loan was not eligible as delivered to Fannie Mae, the lender must notify Fannie Mae using the self-report functionality in Loan Quality Connect. For additional information, see Self-Reporting to Fannie Mae below.

The lender’s QC process must include procedures for monitoring the quality of work performed by employees, contractors, vendors, and other third parties involved in loan origination, property appraisal, processing, underwriting, valuation, and closing functions.

The lender must establish and document a process for identifying a representative sample of loans for QC file reviews for both prefunding and post-closing QC. While utilizing discretionary file selections for prefunding QC is appropriate, the post-closing QC process must include both random and discretionary file selections. Post-closing random sample loans must be full-file reviews; however, the lender must assess and understand the holistic risk inherent in its origination processes when determining the appropriate selection methodology and sample size for its prefunding and post-closing discretionary QC sampling.

When considering elements to target for prefunding or post-closing discretionary reviews, the lender must consider risks inherent in its processes and errors or defects identified through prior reviews. For example, if the lender identifies a particular source of business as high-risk, it may decide to conduct reviews on a sample loan from that source. Similarly, reviews may be used to target a specific underwriting component (for example, income calculation or asset verification) that has exhibited defect trends, or to assess areas that pose unique or elevated risks, such as loans with delinquencies shortly after origination.

To be effective, the sampling methodology for discretionary review types must be flexible and fluid enough to target loans with higher potential for risk and to be able to adjust as these risks change over time. Prefunding and post-closing discretionary review selection methodologies must be regularly re-evaluated to ensure their effectiveness and may change frequently as a result of findings from prior reviews or changes in the lender's product mix, staffing, sources of business, or other risk factors.

When the lender sells loans originated by a third party to Fannie Mae, the lender’s QC process must include additional steps to monitor the quality of third-party originations. 

The lender's QC selection process must include a post-closing stratified random sample of third-party originations to ensure that those loans meet the lender's standards for loan quality. The lender must select third-party originations for full-file review on at least a monthly basis.

Additionally, the lender must supplement the random sample with discretionary targeted samples focused on third-party originations with elevated risks as determined by the lender's oversight and control processes. Discretionary targeted samples may be full-file or component reviews and may be implemented in prefunding or post-closing, or prepurchase for correspondent lenders.

The lender must establish a process to provide monthly reports to management of third-party originations defects and findings. For additional information on QC reporting, see D1-1-03, Lender Quality Control ReportingD1-1-03, Lender Quality Control Reporting, and for information on managing third-party originations, see A3-3-01, Outsourcing of Mortgage Processing and Third-Party OriginationsA3-3-01, Outsourcing of Mortgage Processing and Third-Party Originations.

QC reports are a critical component of the QC program and must be designed to enable management to 

• evaluate and monitor the quality of the lender’s origination process compared to targets,
• identify specific loan-level issues and broad-based systemic, procedural, or operational issues, and
• address and remedy those issues to reduce the lender’s defect rate. 

The lender must report on the results of prefunding, prepurchase and post-closing QC file reviews to management on no less than a monthly basis. For additional information on reporting requirements, see D1-1-03, Lender Quality Control ReportingD1-1-03, Lender Quality Control Reporting.

When trends are identified through the review process, the lender must establish a written action plan for specific corrective action to be taken, including root cause(s), responsible parties, the expected resolution and the time frame for implementation and completion.

The lender must notify Fannie Mae within 30 days of the date of confirmation that one or more defects identified through the QC file review process results in the loan being ineligible as delivered to Fannie Mae. The "date of confirmation" is the date the lender publishes its report, and the loan is included in that report. Notification must be made using the self-report functionality in Loan Quality Connect.

When self-reporting to Fannie Mae, the lender must provide a summary of its findings and copies of the relevant documentation to support the finding.

Examples of self-reporting include:

• The lender obtained tax transcripts revealing qualifying income was inaccurate and the loan is no longer eligible as delivered. The lender must provide copies of the original income documentation and the tax transcripts with its notification to Fannie Mae.
• The collateral risk assessment process revealed the property's value is not supported and the loan is no longer eligible as delivered. The lender should provide a copy of the collateral risk assessment with its notification to Fannie Mae.
• The property data collection process revealed the property is not in acceptable condition and the loan is no longer eligible as delivered. The lender must provide a copy of the collateral risk assessment with its notification to Fannie Mae.

The lender must retain all written and electronic records that are created as part of the QC review process for at least three years. These records include documentation of QC reports, QC review findings, reverification documentation, successful rebuttal documentation, and documentation related to any corrective actions. The lender must provide Fannie Mae with a copy of its records upon request.

The lender must have an independent audit process to ensure that its QC process and procedures are followed by QC staff, and that assessments and conclusions are recorded and applied consistently in the lender's system of record.

Results of the QC audit must be distributed to the lender's management. The audit must assess whether other business units influenced or attributed to bias in the QC decision and include a written statement detailing the conclusions. Management must distribute the results to the appropriate areas within the organization and establish an action plan for remediation or changes to policies or processes, if appropriate. The lender must provide a copy of all audit materials for its QC process to Fannie Mae upon request.