Fannie Mae and Freddie Mac Update Origination Guidance Due to COVID-19

On March 31, 2020, Fannie Mae updated Lender Letter 2020-03 and Freddie Mac issued Bulletin 2020-8 to revise their guidelines regarding mortgage loan originations and quality control requirements. With regard to origination, Fannie Mae and Freddie Mac address the permitted age of income and asset documents, the verification of employment with self-employed borrowers, the use of market-based assets in underwriting, and the closing of loans with powers of attorney or remote online notarization. 

Age of Documentation. For most income and asset documentation, Fannie Mae and Freddie Mac are lowering the maximum document age from 120 days to 60 days. For asset information that is reported on a quarterly basis, the lender must obtain the most recently issued quarterly statement. 

For electronic employment and income verifications obtained from third-party verification service providers, the information in the provider’s database must be no more than 60 days old as of the note date.

The standard age of documentation requirements continue to apply to various income types, including military income on a Leave and Earnings Statement, Social Security and other retirement income, long-term disability income, mortgage credit certificates, and public assistance income. 

The changes apply to loans with application dates on or after April 14, 2020, through May 17, 2020, but lenders are encouraged to apply the changes to existing loans in process.

Waiver of Documentation Requirement. Based on the extension of the federal income tax filing deadline to July 15, 2020, for loans with an application or disbursement date between April 15 and July 15, 2020, Fannie Mae advises that it is waiving the requirement to provide (1) a copy of the IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Tax Return), and

(2) an IRS Form 4506-T (Request for Transcript of Tax Return).

Verification of Self-Employment. When a borrower is using self-employment income to qualify, the lender must verify the existence of the borrower’s business within 10 business days of the note date, instead of the standard 120-day period. Examples of methods that a lender may use to confirm the existence of the business are:

• Evidence of current work (executed contracts or signed invoices that indicate the business is operating on the day the lender verifies self-employment);
• Evidence of current business receipts within 10 days of the note date (payment for services performed);
• Lender certification the business is open and operating (lender confirmed through a phone call or other means); or
• Business website demonstrating activity supporting current business operations (timely appointments for estimates or service can be scheduled).

This change applies to loans with application dates on or after April 14, 2020, through May 17, 2020, but lenders are encouraged to apply the change to existing loans in process.

Market-Based Assets. In view of the current market volatility, when a borrower is using stocks, stock options or mutual funds:

• For the down payment or closing costs, the lender must obtain evidence of the liquidation of the assets and the borrower’s receipt of funds.
• For reserves, no more than 70% of the value of the asset may be considered.

Powers of Attorney. Fannie Mae and Freddie Mac provide for flexibility from their current requirements for the use of powers of attorney in the closing of loans for loans with application dates on or before May 17, 2020. The details are specified in the releases.

Remote Online Notarization. Fannie Mae and Freddie Mac announce policies that expand the acceptance of remote online notarizations effective immediately, and the policies are not temporary. The use of remote online notarization must be legally valid under applicable law. Borrowers may not be required to use remote online notarization and lenders must have other notary options available for borrowers. Of course, based on the COVID-19 emergency the options that are available may be beyond the control of the lender. (Fannie Mae expressly states that the policies apply to both electronic transactions and ink-signed transactions.)

The states in which remote online notarization may be used currently are identified in the releases. If going forward a state that is not identified expressly adopts a law that expressly permits the use of remote notarization, or expressly accepts (either through state law or through the application of an express federal law) remote notarizations performed out-of-state in accordance with the laws of the state in which the notarial act is performed, remotely notarized loan documents meeting the requirements set forth in the releases will be permitted for such state.

The system used for the remote notarization must meet the following minimum standards:

• At least two-factor identity authentication, including using a government-issued photo ID that has a signature, credential analysis and identity-proofing;
• Tamper-sealed notarized documents and system security sufficient to (1) prevent interference with the authenticity, integrity and security of the notarial ceremony or corruption or loss of the recording of the same, and (2) protect the communication technology, electronic record and backup record from unauthorized use;
• The remote online notary must keep a secure electronic journal of the notarial act including evidence of identity of the principal (a video and audio conference can be the basis for satisfactory evidence of identification) and maintain a backup of the electronic record; and
• Recording of the notarial ceremony with storage for the minimum period required by applicable laws or, if no period is specified in the applicable law, for seven years.

Lender Quality Control Requirements. Fannie Mae and Freddie Mac announce flexibility with regard to post-closing quality control (QC) requirements for all loans selected for post-closing QC review until June 2020 QC selections. Subject to conditions, for specific income, employment or asset reverifications that are typically mailed, the verifications may be completed verbally or electronically. If a verbal or electronic reverification cannot be completed, the lender can complete the file review without the reverification. 

Instead of using a field review of appraisals in connection with QC reviews, lenders have the option of using Collateral Underwriter® (Fannie Mae) or Loan Collateral Advisor® (Freddie Mac) or other third-party tools. If the reviewer reaches a different opinion regarding the value of the property through this process, the lender may obtain a field review to determine whether the original property value can be supported. 

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.