Pre-Funding and Post-Funding Quality Control are very important parts of any mortgage operation. A strong quality control program can verify accuracy of documentation, notify of potential training issues, and, when used properly, look for long term issues involving fraud and misrepresentation. Quality Control requirements occur primarily in the loan production area, but are also part of the requirements for mortgage servicers.
Most lenders are familiar with Post-Funding Quality Control requirements; however, Pre-Funding Quality Control is also required to be part of an overall Quality Control plan. Pre-Funding Quality Control has several advantages over a Post-Funding Quality Control, namely the ability to stop a loan prior to loan settlement and address issues that can result in error notices from a secondary market agency or from an investor. A commitment to Pre-Funding Quality Control can also assist in uncovering errors that can result in an eligibility defect which will make the loan non-saleable and/or result in an indemnification or repurchase of a loan from a secondary market agency or investor.
At The Commonwealth Group, we are often asked what is required for an acceptable plan and how may loans should be reviewed. FHA requires a minimum of 10% of files to be reviewed for Quality Control, however, the other agencies (Fannie Mae, Freddie Mac, etc.) do not currently have specific requirements about how many files should be reviewed. However, The Commonwealth Group recommends that at a minimum 10% random selection of each loan typed that is approved for closing should be reviewed for Pre-Funding Quality Control. This can actually result in a slightly higher percentage to be reviewed when all loans are combined together. For example, the prior month’s production for a lender might look something like this:
- FHA – 38 Loans
- VA – 15 Loans
- USDA-RD – 9 loans
- Conventional – 70 Loans
- Total Production – 132 Loans
Given these numbers, the minimum recommended Pre-Funded Quality Control pull for the upcoming month would be:
- FHA – 4 Loans
- VA – 2 Loans
- USDA-RD – 1 Loan
- Conventional 7 Loans
- Total Loans Pulled for Pre-Funding – 14 Loans
As can be seen from this example, the total loans pulled actually exceeds 10% of the prior month’s production. And for the FHA, VA, USDA-RD, it is over 10% for each category. The minimum is 10%, so to achieve that, it has to be “rounded-up” to get to the minimum.
In addition, an acceptable Pre-Funding Quality Plan will also set discretionary pulls. A discretionary pull is a loan that meets a certain criterion that will be pulled and reviewed every time those set of circumstances occur. Examples of discretionary pulls would be:
- Loans from a New Branch
- Loans from a New Correspondent
- Debt-To-Income ratios in excess for 50% for FHA loans
- Cash-Out Refinance Loans greater than 75% Loan to Value (LTV)
- Manufactured Housing
- Condominium Units not eligible for Limited Review
The type of files marked for discretionary will vary according to the needs of a lender. And discretionary situations may not occur every month. However, the random selection must occur every month.
Pre-Funding Quality Control when used effectively can assist any lender when it comes to improved performance and more importantly, better risk management. If your plan has not been reviewed recently or you are in need of Pre-Funding Quality Control services, please contract West Beibers at The Commonwealth Group for more information at either firstname.lastname@example.org or by phone at 901-413-6999.
The Commonwealth Group – Consultants to the Mortgage Industry