Electrical Plans Examiner Certification (EPE)

Correct: Requiring a standardized narrative addendum is the most effective control because it creates a clear, reproducible audit trail. Regulatory and compliance audits focus on the underwriter’s rationale and the evidence used to support a decision. By linking specific source documents to GSE guidelines, the firm ensures that the resolution of red flags is transparent, consistent, and verifiable by external auditors.

Incorrect: Escalating to a senior officer provides a second look but does not solve the underlying documentation gap required for an audit trail. Relying solely on the final system status is insufficient because the status itself does not explain the logic or evidence used to clear specific flags. Archiving preliminary runs shows the process history but fails to provide the qualitative justification needed to prove compliance with specific underwriting standards.

Takeaway: Effective compliance underwriting requires a documented narrative that bridges the gap between automated system alerts and the final credit decision using specific guideline references.

Correct: When a rate lock expires and market rates have increased, the underwriter is required to re-calculate the borrower’s Debt-to-Income (DTI) ratio using the higher current market rate or the new note rate. This ensures that the borrower still possesses the ability to repay the loan under the new financial terms and that the loan remains eligible for purchase by Government-Sponsored Enterprises (GSEs) like Fannie Mae, which have strict DTI ceilings.

Incorrect: Approving loans based on expired rates as a policy exception is incorrect because it results in loans that do not meet GSE delivery requirements, creating significant liquidity risk. Applying an arbitrary rate reduction or concession does not satisfy the requirement to use the actual note rate for DTI qualification. Seeking a force majeure waiver for post-closing is not a standard underwriting practice and does not mitigate the risk of the borrower’s increased debt obligation relative to their income.

Takeaway: Underwriters must re-qualify borrowers at current market rates if a lock expires to ensure the debt-to-income ratio remains compliant with investor eligibility requirements.

Correct: The internal auditor’s primary responsibility is to evaluate the effectiveness of controls and the objectivity of the decision-making process. By performing a comparative analysis, the auditor can determine if the underwriter’s judgment was compromised by the gift. This helps identify whether the exceptions granted were a result of undue influence or were consistent with the firm’s risk appetite and treatment of other similar borrowers, thereby assessing the severity of the control breakdown.

Incorrect: Recommending immediate termination is an HR and management function, not the primary initial step for an internal auditor, who must first gather evidence and assess the control impact. Contacting the client directly is generally inappropriate for an internal auditor as it may compromise a potential fraud investigation and falls outside standard audit procedures. Simply reviewing LTV and DTI ratios is insufficient because it only checks for quantitative compliance and fails to address the qualitative integrity of the documentation exceptions and the potential conflict of interest.

Takeaway: Internal auditors must evaluate whether gifts or entertainment have compromised the objectivity of the underwriting process by comparing the treatment of the specific transaction against established policies and peer cases.

Correct: For small-balance multi-family properties (2-4 units), underwriters must validate the reliability of rental income. Using executed leases provides current contractual proof of income, while Schedule E from the borrower’s federal tax returns confirms the historical performance, vacancy rates, and the borrower’s actual experience in managing the property. This dual verification ensures that the income used for qualification is both legally documented and historically sustainable.

Incorrect: Prioritizing market rent projections over actual lease terms is incorrect because existing leases are legal obligations that define the actual income regardless of market trends. Excluding property-related expenses from the debt-to-income ratio is a fundamental underwriting error, as the net rental income or loss must be integrated into the borrower’s total financial profile. While physical characteristics like common areas and utility meters are relevant to property condition, they do not serve as primary indicators of income stability or regulatory compliance for income qualification.

Takeaway: Underwriting small-balance multi-family properties requires reconciling current contractual lease agreements with historical tax data to ensure the stability and accuracy of qualifying rental income.

Correct: Implementing a hard-stop validation before the clear-to-close is issued is a preventative control that ensures the most current financial data is evaluated by the AUS. This directly addresses the risk of delivering loans to GSEs that do not meet eligibility requirements due to undisclosed or late-discovered debt, which is a critical component of residential underwriting integrity.

Incorrect: Expanding post-closing QC is a detective control that identifies errors after the loan has already closed, which does not prevent the risk of non-compliance at the point of sale. Relying on loan officer certifications is insufficient because it does not provide independent verification of the data within the underwriting systems. Increasing the frequency of retrospective internal audits is a monitoring activity that identifies trends but does not provide a real-time control to prevent individual file errors.

Takeaway: Preventative controls, such as mandatory system reconciliations before closing, are more effective than detective controls for ensuring mortgage loans meet GSE eligibility requirements.

Correct: According to Fannie Mae and Freddie Mac guidelines, if a borrower is personally obligated on a debt but a business (or another party) has been making the payments, the debt may be excluded from the DTI ratio if the underwriter obtains documentation (such as cancelled checks or bank statements) showing the business has paid the debt for the most recent 12 months and there is no history of delinquency. This ensures the borrower’s cash flow is not actually impacted by the obligation.

Incorrect: A corporate resolution is not a substitute for the required 12-month payment history documentation under GSE guidelines. While tax deductions for interest are relevant for business analysis, they do not satisfy the specific underwriting requirement to prove the business has consistently made the full payment. The standard rule for excluding installment debt is typically 10 months or fewer remaining, not 18 months, and this rule is distinct from the requirements for debts paid by others.

Takeaway: To exclude a personal liability paid by a business from the DTI ratio, auditors must verify a documented 12-month history of timely payments made by that business entity.

Correct: According to standard GSE guidelines (Fannie Mae and Freddie Mac), installment debts with ten or fewer payments remaining can generally be excluded from the debt-to-income (DTI) ratio. However, lease agreements are a notable exception; because leases typically represent a recurring need for a replacement vehicle, the payment must be included regardless of the number of remaining months. Furthermore, underwriters are expected to use professional judgment to include any debt—even those with fewer than ten payments—if the monthly payment is so large that it would significantly impact the borrower’s capacity to pay the mortgage during those remaining months.

Incorrect: Excluding both debts is incorrect because lease payments must always be included in the DTI ratio regardless of the remaining term. Including only the personal loan is the opposite of the required treatment, as the lease is the mandatory inclusion. Subtracting the total balance from liquid assets is not a standard underwriting procedure for DTI calculation; liabilities are measured by their impact on monthly cash flow rather than as a direct reduction of asset reserves for qualifying purposes.

Takeaway: While installment debts with fewer than ten payments can often be excluded, lease payments must always be included in the DTI ratio, and underwriters must assess the overall impact of any large short-term obligations on the borrower’s financial stability.

Correct: According to GSE (Fannie Mae and Freddie Mac) guidelines, borrowers who have experienced a hardship and entered into a forbearance plan are generally eligible for a new mortgage once they have resolved the delinquency. Specifically, if the borrower missed payments, they must typically complete a period of performance, such as making three consecutive timely payments under a repayment plan, payment deferral, or loan modification, to demonstrate a return to financial stability.

Incorrect: Releasing a lien occurs at the payoff of the loan, not during the underwriting of a new refinance application. Credit score increases are not a specific GSE requirement for post-forbearance eligibility; the focus is on the payment performance history. While deferred interest might be capitalized in a loan modification, it is not a mandatory principal adjustment for a new, separate refinance transaction.

Takeaway: Underwriters must verify a specific post-forbearance payment performance period to ensure a borrower has regained financial stability before qualifying for a new conventional loan.

Correct: Under the Dodd-Frank Act’s Credit Risk Retention Rule (Regulation RR), securitizers are generally required to retain five percent of the credit risk of the assets they securitize. However, the rule provides a critical exemption for Qualified Residential Mortgages (QRM). Because the definition of QRM is currently aligned with the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage (QM) standards, ensuring loans meet these Ability-to-Repay (ATR) requirements allows the securitizer to avoid the five percent retention entirely, which is the most effective way to minimize the impact on the firm’s balance sheet.

Incorrect: Retaining a vertical interest is a valid method of compliance but fails to meet the objective of minimizing retention because it still requires the firm to hold five percent of the risk. Third-party B-piece acquisitions are a compliance option specifically tailored for Commercial Mortgage-Backed Securities (CMBS), not residential mortgages. The L-Shaped method is a valid combined approach, but the required retention is five percent, not ten percent, and it still results in a capital charge that the QRM exemption would otherwise eliminate.

Takeaway: The most efficient way to manage risk retention requirements in residential underwriting is to ensure loans meet Qualified Mortgage (QM) standards to qualify for the Qualified Residential Mortgage (QRM) exemption.