Most lenders are aware that Fannie Mae has an established policy that requires the processing of pre-funding (or pre-closing) reviews as part of a lender’s overall written Quality Control Plan. These documented procedures must include (at a minimum) the timing of the reviews, the loan selection process, verification of data & documents and reporting.
However, with the numerous policy & procedural changes implemented by HUD/FHA in September 2015 – now is a good time for lenders to assess their compliance with the new FHA requirements. One of these new requirements is the processing of pre-funding reviews on FHA loan transactions.
In HUD’s “Origination Through Post-Closing/Endorsement Handbook” (Handbook 4000.1), it is stated that a mortgagee’s required Quality Control (QC) sample must comply with the following balance of pre and post-closing reviews:
- Pre-Closing Reviews – 10% or less of the QC sample size
- Post-Closing Reviews – 90% or more of the QC Sample size
Also, if a lender closes nine or fewer FHA loans during the prior one-month period – at least one loan must be selected for a pre-closing review.
This change in policy became effective for loan transactions obtaining their FHA Case Number Assignment on and after September 14, 2015. Previously, in HUD’s 4060.1 Handbook (which has now been superseded by the 4000.1 Handbook) it was suggested to lenders that they “may want to sample cases prior to closing to evaluate the quality of processing and underwriting”. However, no standards for such reviews were set forth.
In HUD’s new Single Family Housing Policy Handbook, the minimum requirements of a pre-closing review are outlined. The following areas should be covered as part of the review (as outlined in the 4000.1 Handbook):
- Appraisal
- Mortgage application, eligibility & underwriting documents
- Disclosures & legal compliance
- Mortgage origination documents
- Handling of mortgage documents
- Credit reports
- Outstanding debt obligations
- Verifications of employment & deposit
- Self-employed Borrowers
- Borrower’s source of funds
- Underwriting accuracy & completeness
- Property Flipping Restrictions
- Prohibited restrictive covenants
- Qualified Mortgage (QM)
- Good Faith Estimate (GFE)
- Discrepancies in the loan file
- Condition clearance
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All lenders that are originating FHA loans should take appropriate steps to ensure that pre-funding reviews are being processed (either by in-house staff or a third-party vendor) on a regular basis.
For more information on pre-funding audit services offered by LoanLogics, visit our website at www.loanlogics.com and click on the “Product Introduction” tab – then check the Box for information on Loan HD – Loan Quality Management Solutions.
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