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Quality Control Defect Rate

Q: What does Fannie Mae require when establishing defect rates in relation to a Lender's quality control program?

A: Fannie Mae requires lenders to implement a quality control program that regularly evaluates, measures and manages their progress in meeting their loan quality standards. Fannie expects lenders to demonstrate how they manage loan quality to meet their established targets. As part of an effective quality control plan, a lender should understand the defect rate principles and, at a minimum, do the following:

  • Establish a target defect rate that reflects the lender's loan quality standards and goals.
  • Identify a target defect rate for the top severity level which indicates the loan is ineligible for delivery to Fannie Mae.
  • Define lower severity levels as appropriate for the lender's organization.
  • Develop a methodology for identifying and categorizing different target defect rates for different severity levels, as applicable.
  • Set defect rate targets as reasonably low as possible based on the lender's formal cost-benefit analysis of meeting that target.
  • Evaluate, and if necessary, reset the target defect rate at least annually to ensure it continues to meet credit risk needs.

Once a defect rate is set and defined, the lender should monitor performance against the rate, and report findings to senior management team. The target defect rate allows a lender to monitor and measure its actual performance against its target.

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