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Fannie Clarifies Credit Reports Required Before Closing

Announcement SEL-2010-11

Aug. 1, 2010

By staff

Fannie Mae said lenders misinterpreted a previous letter about the need to pull a credit report just before closing and has clarified its stance.

The Washington, D.C.-based company issued Announcement SEL-2010-01 on March 2 updating its Loan Quality Initiative.

The update required sellers to ensure all debts incurred as of the closing date are disclosed in the final loan application and factored into the debt-to-income ratio. Lenders are expected to have in place a process that prompts the borrower to disclose changes to their financial standing during the origination process. Lenders are also expected to maintain "pre-funding quality control processes to increase the likelihood of discovery of material undisclosed debts."

Fannie said its intent was to remind sellers of certain representations and warranties that address fraud and are outlined in the selling guide and the mortgage selling and servicing contract. Lenders provide warranties for matters that might be outside of their knowledge, so misrepresentation or fraud by the borrower or a third party could constitute a breach of the selling warranty.

"An unintended consequence of Announcement SEL-2010-01 was the misinterpretation by some lenders that Fannie Mae was implementing a new requirement that the borrower be re-qualified up until closing," Fannie said in SEL-2010-11 issued today. "Therefore, many lenders believed this required a new credit report just before the closing of the loan.

"This was not Fannie Mae's intent, and as previously stated, the intent was and continues to be to reinforce lenders' existing representations and warranties outlined in the selling guide and mortgage selling and servicing contract, and to emphasize the need to employ the processes outlined above."

When a lender discovers either additional debt or reduced income during the origination process, the amount must be verified as well as the terms and payment history of any debt. Then the debt-to-income ratio must be recalculated.

"The lender is not required to obtain a new credit report to verify the additional debt(s)," the announcement said.

If the new debt is a subordinate lien on the subject property, the loan must be re-underwritten.

On Desktop Underwriter files, if the revised DTI ratio exceeds 45 percent, then the online loan application must be updated and the loan case file must be re-underwritten through DU. On manually underwritten loans, the loan is not eligible for delivery to Fannie Mae if the ratio is above 45 percent.

Loans where the DTI ratio increases by at least 3 percentage points need to be re-underwritten with the new data even if the ratio is within 45 percent.

Fannie said it simplified resubmission requirements, as outlined in this table.

Previous Resubmission Requirements (1) New Resubmission Requirement
Income: Verified income is less than the income on the loan application submitted to DU by more than 5% of the borrower's total income
Debts: Discrepancies between the credit report payments and balances and those listed on the online loan application, including the presence of undisclosed debt that affect the DTI ratio by more than 2 percentage points
Interest Rate

Fixed-rate: For principal residences or second homes (without a temporary buydown), DU issues a message identifying the maximum interest rate at which the loan can close without being resubmitted. (No tolerance exists for investment properties.)

ARMs: Interest rate increase that results in the total expense ratio increasing by more than 2 percentage points
Loan case files must be resubmitted to DU if the result of the following changes cause the DTI ratio to exceed 45%; or if less than 45%, to increase by 3 percentage points or more:
  • verified income decreases,

  • discrepancies between the payments and balances on the credit report and those listed on the online loan application are identified (including undisclosed debts),

  • additional debt(s) disclosed by the borrower or identified by the lender, and

  • increase in the interest rate.
(1) The current policy only allows one tolerance to be used per loan case file.

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