Mortgage Compliance and Quality Control: A Reference to the Terms
Mortgage compliance vocabulary is unusually precise, and terms that sound interchangeable often are not. A "defect" and a "finding" are different things. A repurchase demand and an indemnification are different remedies. Gross and net defect rates can differ by a factor of several.
This reference defines the terms as they are used operationally, with the distinctions that matter in practice.
Quality control
Quality control (QC) — the review function testing whether loans were originated, underwritten, documented and disclosed as required. Distinct from underwriting: underwriting makes the credit decision, QC tests whether it was made and evidenced properly.
Pre-funding QC — review before closing, when defects can still be cured. The cheapest point at which to find anything.
Post-closing QC — review after closing, typically on a sample within a defined window. Most investor requirements attach here.
Random sampling — a statistically drawn sample intended to estimate the population defect rate.
Discretionary or targeted sampling — a sample selected by risk characteristic (channel, product, originator, geography). Finds concentrations that random sampling is structurally poor at detecting. Most programmes require both, for exactly this reason.
Defect — a deviation from an applicable requirement. The word is used differently by different frameworks, and the difference matters when rates are compared. Under FHA's defect taxonomy, a finding is FHA's determination that a defect exists, which is then assigned a severity tier. [1] Under Fannie Mae's remedies framework, an identified defect may be corrected, remedied or rebutted, and the terminology of significant defects and remedies is its own. [2] This glossary marks which framework each term belongs to; treating them as interchangeable is a common source of miscommunication with investors.
Critical defect — a defect material enough to affect saleability, insurability or the credit decision. The industry's headline defect rate refers to this category.
Gross versus net defect rate — gross counts defects as initially identified; net counts those remaining after cure and rebuttal. They can differ substantially, and a defect rate quoted without specifying which is not comparable to another.
Severity rating — a scale classifying findings by consequence. Severity distributions are more informative than defect counts.
Root cause analysis — determining why a defect occurred rather than that it did. Required by most investor QC plans, and the part most often performed superficially.
Remediation — corrective action addressing a root cause, as opposed to curing the individual file.
Rebuttal — the seller's response contesting a finding, supported by evidence. A finding successfully rebutted is withdrawn.
Disclosure and consumer protection
TILA (Truth in Lending Act) / Regulation Z — governs disclosure of credit terms and cost, including the APR and finance charge.
RESPA (Real Estate Settlement Procedures Act) — governs settlement services: Section 8 prohibits kickbacks and unearned fees, Section 10 governs escrow accounts.
TRID (TILA-RESPA Integrated Disclosure) — the integrated disclosure regime combining TILA and RESPA requirements. Produces the Loan Estimate and Closing Disclosure, and imposes both content and timing requirements. TRID findings are frequently timing failures rather than content errors.
Loan Estimate (LE) — early disclosure of terms and costs, due within a defined period of application.
Closing Disclosure (CD) — final disclosure, required to be received a defined interval before consummation.
Tolerance / variance — limits on how much certain charges may increase between the LE and CD. Exceeding a tolerance without a valid changed circumstance requires a cure, typically a refund.
Changed circumstance — a defined event permitting a revised disclosure. Must be documented contemporaneously; a changed circumstance asserted afterwards is a common finding.
Intent to proceed — the borrower's acknowledgement after receiving the LE. Its timing governs when most fees may be collected.
ECOA / Regulation B — prohibits discrimination in credit and imposes adverse action notice requirements, including timing.
Adverse action notice — notice of denial, counteroffer or incomplete application, with reasons, due within a defined period.
FCRA (Fair Credit Reporting Act) — governs use of consumer reports, permissible purpose and risk-based pricing notices.
HMDA (Home Mortgage Disclosure Act) — requires collection and reporting of loan-level data on the Loan Application Register. HMDA findings are usually data-accuracy findings: reported values must agree with the file.
Underwriting standards
ATR (Ability to Repay) — [4] the requirement to make a reasonable, good-faith determination that the borrower can repay, based on verified information.
QM (Qualified Mortgage) — a loan meeting defined criteria and receiving presumption of ATR compliance.
Safe harbour versus rebuttable presumption — QM loans priced below a threshold receive a safe harbour; higher-priced QM loans receive only a rebuttable presumption, which a borrower may contest.
APOR (Average Prime Offer Rate) — the benchmark against which pricing thresholds are measured.
Points and fees test — a QM limit on points and fees as a percentage of loan amount. What counts toward it is a recurring source of defects.
Non-QM — a loan outside QM criteria. Not a lower standard, and not a statement about which rules apply. Where the loan is consumer credit secured by a dwelling, ATR applies and typically requires more documentation rather than less. Where the credit is extended primarily for a business, commercial or agricultural purpose, § 1026.43(a) excludes it from the ATR requirement altogether — a common situation for DSCR and investor-entity lending. [3] Applicability follows the purpose and characteristics of the transaction, never the market label.
HOEPA — additional protections and restrictions for high-cost mortgages exceeding defined rate or fee triggers.
Investor requirements and remedies
Representations and warranties — the seller's assertions about how a loan was originated and documented, made at sale. A repurchase demand alleges one was untrue.
Selling guide — an investor's requirements for loans it purchases. The operative standard for conforming loans.
Repurchase demand — a requirement that the seller buy the loan back at a defined price.
Indemnification — an agreement to cover losses on a loan in lieu of repurchasing it. Often negotiated as an alternative where the defect is real but the loan is performing.
Make-whole — payment of the investor's loss rather than repurchase of the loan.
Early payment default (EPD) — default within a defined number of payments after sale. Usually triggers file review, which is why a disproportionate share of reviews occur on loans already performing badly.
Representation and warranty relief — the point at which certain reps expire, typically after a period of clean payment history or a satisfactory review. Relief does not extend to defects such as misrepresentation or fraud.
Institutional obligations
GLBA Safeguards Rule — requires a written information security programme protecting customer information.
SAFE Act / NMLS — licensing and registration of loan originators. Licence status on the application date is a checkable fact.
AML / SAR obligations — anti-money-laundering programme requirements and suspicious activity reporting.
Fair lending — supervisory examination of whether outcomes differ by protected class, tested statistically across a portfolio rather than file by file.
Four distinctions worth getting right
Separate the four states, and say which framework you mean. An observation is something review noticed. A finding is what review has recorded against a requirement. A confirmed defect is a finding that survived rebuttal. A resolution status — cured, remediated, indemnified, outstanding — is separate again from all three. Reporting any two of these interchangeably overstates defect rates and understates rebuttal capability. Note that FHA uses "finding" for its own determination that a defect exists, [1] which is not the same use as the one above; always state the framework alongside the term.
A cure is not a remediation. Curing fixes the file. Remediation fixes the cause. A programme producing many cures and no remediations will keep producing the same defect.
Timing failures are content-independent. A large share of TRID and ECOA findings involve correct documents delivered outside a required window. No amount of examining what a document says will surface a failure about when it arrived.
Absence of a finding is not evidence of compliance. It may mean the requirement was tested and met, or that it was never tested. In a sampled programme these are different states, and only one of them is assurance.
Sources
- FHA Defect Taxonomy, Appendix 8.0 to Handbook 4000.1, attachment to Mortgagee Letter 2025-01, for Title II loan reviews initiated on or after 15 January 2025. HUD now lists that letter as incorporated into superseding handbook policy — verify tier definitions against the current Single Family Housing Policy Handbook 4000.1. These definitions are specific to FHA review and differ from Fannie Mae remedies terminology.
- Fannie Mae Selling Guide, D2-1-04, Identifying and Remedying Origination Defects Under the Remedies Framework. Sets out permitted corrections and the conditions under which additional documentation covering the underwriting period may resolve a defect.
- Regulation Z, 12 C.F.R. § 1026.43. The ability-to-repay requirement applies to consumer credit secured by a dwelling; § 1026.43(a) excludes extensions of credit primarily for a business, commercial or agricultural purpose.
- Regulation B, 12 C.F.R. § 1002.9. Adverse-action notice provisions and the official interpretation of specific reasons. ECOA, 15 U.S.C. § 1691.