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A3-2-02, Responsible Lending Practices (09/01/2021)

Introduction
This topic contains information on responsible lending practices, including:

Overview

Each seller/servicer must use prudent, sound, and responsible business practices in its marketing and origination efforts. The seller/servicer’s operating policies and procedures must provide an effective means of ensuring responsible lending practices, and identifying and avoiding predatory lending practices.

Sellers/servicers must update their business practices as necessary to ensure responsible lending practices that are in line with current market conditions. They must have policies and procedures, including quality control procedures, to ensure that loans delivered to Fannie Mae comply with these responsible lending requirements. For quality control requirements, see Part D, Ensuring Quality Control (QC).

Responsible Lending Policies

Sellers must comply with the responsible lending practices described in the following table.

Topic Policy
Steering Sellers must:

  • seek to offer the lowest-cost product with the lowest-risk loan terms for which they qualify,

  • not steer borrowers toward a particular loan program to qualify the borrower for a loan in an effort to misrepresent the borrower’s true credit or income related qualifications, and

  • ensure their loan originator compensation practices comply with the loan originator compensation provisions of the TILA and Regulation Z, and that loan originators comply with these requirements when presenting loan options to consumers.
HOEPA Loans The following loans are ineligible for sale to Fannie Mae:

  • a loan that is subject to the Home Ownership and Equity Protection Act of 1994 as described in Section 32 of Regulation Z (HOEPA); and

  • a loan that is part of a larger transaction that is structured in a manner intended to circumvent the requirements of HOEPA and Section 32 of Regulation Z.
State Higher-Priced Loans Certain state-defined higher-priced loans are ineligible for sale to Fannie Mae, regardless of whether the seller is subject to such state requirements as a matter of law. Any state higher-priced loan described in B2-1.5-02, Loan EligibilityB2-1.5-02, Loan Eligibility, is ineligible for sale to Fannie Mae.
Single Premium Credit Insurance Sellers may not require the borrower to purchase, and no proceeds of the loan may be used to purchase, single premium credit insurance (e.g., life, disability, accident, unemployment, or health insurance) or a single fee debt cancellation agreement.
Prepayment Penalties Loans subject to prepayment penalties are ineligible for sale to Fannie Mae.
Arbitration A loan that was originated on or after October 31, 2004, and is subject to mandatory arbitration is ineligible for delivery to Fannie Mae.
Interagency Guidance on Nontraditional Mortgage Product Risks A loan that has a loan application date on or after September 13, 2007, and that is a “nontraditional loan” within the meaning of the Interagency Guidance on Nontraditional Mortgage Product Risks, 71 Fed. Reg. 58609 (Oct. 4, 2006), must comply in all material respects with such guidance, regardless of whether the lender is subject to the guidance as a matter of law.
Statement on Subprime Mortgage Lending (Subprime Statement) An adjustable-rate mortgage (ARM) loan that has a residential loan application date on or after September 13, 2007, must comply in all material respects with the Statement on Subprime Mortgage Lending, 72 Fed. Reg. 37569 (July 10, 2007), regardless of whether the lender is subject to such statement as a matter of law.
Ability to Repay Sellers must comply with all applicable requirements. See  B2-1.5-02, Loan EligibilityB2-1.5-02, Loan Eligibility, for additional information.

 

Underwriting Standards

Every loan sold to Fannie Mae must be underwritten in order to establish that the borrower has the ability, willingness, and capacity to repay the debt. Sellers must have adequate internal controls and processes in place to evaluate borrower income and liabilities.

The requirements in the following table apply to all loans sold to Fannie Mae.

✓ The seller must...
  analyze a borrower’s repayment capacity, including an evaluation of the borrower’s capacity to repay the debt by its final maturity, assuming a fully amortizing repayment schedule.
  maintain written policies and procedures for how it takes into account income or assets, debt obligations, alimony, child support, and monthly DTI ratio in its ability to repay determination.
  if risk-layering is involved:

  • demonstrate the existence of effective compensating factors that support the seller’s underwriting decision and borrower’s repayment capacity,

  • have clear policies governing the use of risk-layering features,

  • not rely solely on one factor to compensate for the risk, but instead must consider a combination of compensating factors.
  verify and document the borrower’s income (both source and amount), assets, and liabilities used in the underwriting decision, except as otherwise expressly provided in the Selling Guide.
  analyze the borrower’s DTI, including

  • total monthly housing-related payments, (principal, interest, taxes, insurance, and other property-related assessments); and

  • long-term and significant short-term monthly debts
  ensure the final loan application signed by the borrower at closing includes all income and debts of the borrower that were verified, disclosed, or identified during the mortgage process and considered by the lender in the qualification for the loan, except as otherwise expressly provided in the Selling Guide.

A lender may be required to repurchase a loan that is in breach of the requirements of this topic at any time notwithstanding that the loan is otherwise eligible for relief from enforcement for breaches of certain underwriting and eligibility representations and warranties in accordance with A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and EligibilityA2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility

Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2021-08 September 01, 2021

 

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