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 Lenders Compliance Group
________________________
[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
