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Thursday, March 5, 2015

Quality Control: Defect Rate

Question
What is an acceptable defect rate target? Has the mortgage industry set a maximum defect rate target that lenders need to adhere to?

Answer
No, at this point there is no acceptable defect rate standard established by the mortgage industry.  However, Fannie Mae requires lenders to establish a methodology for identifying, categorizing, and measuring defects and trends against established defect rate targets in order to effectively evaluate and measure its loan quality standards.

Defects are defined as findings, errors or mistakes found within the loan documents of a loan file. Findings found within the compliance documents are not included in the defect rate calculations.

The Gross Defect Rate is calculated by dividing the number of loans with defects by the number of loans in the Quality Control sample for the period being audited.

The Net Defect Rate is calculated by dividing the number of loans with defects (gross defects), minus the defects that have been corrected or cured, by the number of loans in the Quality Control sample for the period being audited.

Target defect rates need to be established as reasonably low as possible and based upon the current defect rates. 

Lenders should review the current actual defect rates obtained from their Post Closing Quality Control Audits and then set their Gross and Net Targets accordingly, for the purposes of improving the quality standards. Once the defect rate targets are set, a lender should develop procedures or an action plan to reduce the defect rates to the new target levels. Defect rate targets must be reviewed at least annually and reset, if necessary.

Bruce Culp
Director/Quality Control & Loan Analytics
Lenders Compliance Group