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