QUESTION
We are a mortgage lender in the northeast. We've been a Fannie Mae Seller/Servicer for many years. Our recent MORA audit found some problems handling our Fidelity Bond and Errors and Omissions Insurance. For example, we don't have a process to notify Fannie about losses that exceed $250,000.
Another procedure issue is we do not have a process to evaluate the insurance regularly. We were criticized for not having sufficient documentation to ensure that all insurance requirements are maintained.
MORA found several issues with the insurance itself, such as the deductible not meeting Fannie's requirements and the coverage not meeting Fannie's guidelines.
We now have a few days to correct these findings and convince MORA that this situation is fixed. However, we want to be sure we're on track to give them what they want. So, we're coming to you for some basic guidance on the requirements.
What should we expect a MORA review to examine with regard to the documentation needed for a MORA review of the Fidelity Bond and Error and Omissions insurance?
ANSWER
You have mentioned several common findings involving Fidelity Bond and Error and Omissions insurance. Fannie Mae's Mortgage Origination Risk Assessment,[i] known by its acronym "MORA," is an audit team that conducts reviews, usually on-site, which is tasked with assessing the operational capabilities, governance, and compliance with Fannie Mae's Selling Guide ("Guide") requirements.
In addition to the findings you mention, there are other results, such as the insurance not including appropriate provisions to protect Fannie's interests, as outlined in the Guide.
A Fannie Seller/Servicer must always be prepared for a MORA audit, which means that the Seller/Servicer must continually monitor and document its compliance with Fannie guidelines.
We are keenly aware of the requirements reviewed in a MORA audit. Many companies use our Fannie Tune-up® as a tool to prepare for the audit and ensure that they comply with many Fannie guidelines. If interested, you can request information HERE about the Fannie Tune-up®.
As a Seller/Servicer, you must have a blanket Fidelity Bond and Error and Omissions insurance policy in effect at all times in an amount sufficient to meet Fannie's minimum coverage requirements, maximum deductible requirements, and provision requirements.[ii]
A fidelity bond is a form of insurance protection that covers policyholders for losses they incur due to fraudulent acts by specified individuals. Errors and omissions insurance is a type of professional liability insurance that protects companies, their workers, and other professionals against claims of inadequate work or negligent actions.
You mentioned that MORA found that your fidelity bond coverage did not meet Fannie's guidelines. Although you requested information specifically about documentation needed for a MORA review of the insurance, I will caution you to be sure that your fidelity bond coverage is equal to a percentage of the greater of your annual total Unpaid Principal Balance ("UPB") of single-family and multifamily annual mortgage loan originations or the highest monthly total UPB of single-family and multifamily servicing of mortgage loans that you own, including mortgage loans owned by you and serviced by others. Coverage must be determined using Fannie's precise formulas.[iii] With certain limitations, errors and omissions coverage must equal the amount of your fidelity bond coverage.[iv]
Given the foregoing, at minimum you should have:
· a process to monitor that coverage is consistent with Fannie requirements and to note that the maximum UPB definitions are based on an annual basis, not just a point in time;
· a process to validate that deductibles are consistent with Fannie requirements;
· a process to validate annually that coverage includes required provisions; and
· a designated individual who maintains evidence of the fidelity bond and errors and omissions coverages.
Now, onto your question about the documentation expectations!
You should be able to provide at least nine types of documentation to MORA. Any defects in these categories may lead to an adverse finding on a MORA audit. I will outline them, though please understand that I must be brief, respecting the article's length and the complexity of the subject.[v]
Documentation Required by Fannie Mae: Fidelity Bond and Errors and Omissions Insurance[vi]
1) Provide the total UPB of single-family and multifamily annual mortgage loan originations (this should not be exclusive to the Fannie servicing portfolio held by your institution and should include the entire serviced portfolio).
2) Provide the highest monthly total UPB of single-family and multifamily servicing of mortgage loans that the seller owns, including mortgage loans owned by the seller and serviced by others.
3) Indicate if multifamily mortgage loans are serviced in addition to servicing single-family mortgage loans.
4) Indicate if there have been any occurrences within the past 12 months of a single fidelity bond or errors and omissions policy loss that is mortgage-related and the amount exceeds the lesser of $250,000 or the policy's deductible. If yes, you should describe in detail the nature of the claims and if they were mortgage-related.
5) Describe the process in place to notify Fannie Mae of a fidelity bond or errors and omissions policy loss that is mortgage-related within 30 days of discovery.
6) Describe the coverage review process, such as how often coverage is evaluated, how adequate coverage is determined, and who within your organization performs this task.
7) Fidelity bond policy has the following:
a. The insurer's name on the insurance certificate;
b. The policy and/or bond number;
c. The named insured;
d. The type and amount of coverage (should specify
whether the insurer's liability limits are an aggregate loss or per-mortgage
basis);
e. The effective date of the insurance coverage;
f. The expiration date of the insurance coverage;
and
g. The deductible amount of the insurance coverage.
8) Errors and omissions policy has the following:
a. The insurer's name on the insurance certificate;
b. The policy and/or bond number;
c. The named insured;
d. The type and amount of coverage (should specify whether
the insurer's liability limits are an aggregate loss or per-mortgage basis);
e. The effective date of the insurance coverage;
f. The expiration date of the insurance coverage;
and
g. The deductible amount of the insurance coverage.
9) Contains evidence of the following provisions for both the fidelity bond and errors and omissions policy:
a. Fannie is named as a "loss payee" on
drafts the insurer issues to pay for covered losses incurred by Fannie;
b. Fannie has the right to file a claim directly
with the insurer if the lender fails to file a claim for a covered loss
incurred by Fannie Mae (if available);
c. Fannie will be notified at least 30 days before
the insurer cancels, reduces, declines to renew, or imposes a restrictive
modification to the lender's coverage for any reason other than partial or full
exhaustion of the insurer's limit of liability under the policy; and
d. Fannie will be notified within 10 days after the insurer receives a lender's request to cancel or reduce any coverage.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] A Fannie team may also audit for compliance with Servicer Total Achievement and Rewards (STAR) requirements
[ii] Fidelity Bond and Errors and Omissions Coverage, Selling Guide, A3-5-01, Fannie Mae, July 25, 2017
[iii] Fidelity Bond Policy Requirements, Selling Guide, A3-5-02, Fannie Mae, July 25, 2017
[iv] Errors and Omissions Policy Requirements, Selling Guide, A3-5-03, Fannie Mae. July 25, 2017
[v] Seller/Servicer Risk Self-Assessment, Fidelity Bond and Errors and Omissions Insurance, Fannie Mae, 2020
[vi] See also Fidelity Bond and Errors and Omissions Coverage Provisions, Selling Guide, A3-5-01 Fannie Mae, July 25, 2017
