Module 3: Loan Product Advisor (LPA) Basics
Loan Product Advisor is Freddie Mac’s enhanced automated underwriting system. It helps simplify origination processes and provides lenders with greater certainty that their loans meet Freddie Mac eligibility requirements. It takes the data set transferred from your LOS or manually entered along with a credit reputation review, which can be either an in-file from each of the three bureaus or a tri-merged reported. It reviews whether the loan meets the credit requirements for basic credit policy for Freddie Mac. With the tools built into the system, it evaluates the risk potential on the loan.
When LP is going to make a determination for the credit reputation, it takes many things into consideration. When it’s looking at what the overall risk is within a file, LP can be looking at many components. LP makes a credit recommendation, but the underwriter is who makes the credit decision. LP’s positive recommendation means that if you sell the loan directly to Freddie Mac, it will not question the credit reputation being worthy or unworthy.
The 3 Cs of Underwriting Factors Used in Freddie Mac’s AUS Assessment
Freddie Mac purchases mortgages that meet standards and requirements included in the Sellers Guide. Freddie Mac requirements establish the information that must be analysed and documented in the Mortgage file and, when applicable, warranted by the seller for each mortgage sold to Freddie Mac. The conclusion that a mortgage is acceptable must be based on a determination that the borrower is creditworthy (acceptable credit reputation and capacity), and the mortgaged premises (collateral) is adequate for the transaction. Credit reputation, capacity and collateral are often called the “three Cs” of underwriting as determined by Freddie Mac. If one of these components is not acceptable or if there is excessive layering of risk across components, the mortgage is not acceptable for sale to Freddie Mac.
Credit Reputation Factors:
Credit Score
Foreclosures, bankruptcies, liens and/or judgements
Mortgage delinquencies
Credit delinquencies, repossessions, collections, or charge-offs
Credit accounts: type, age, limits, usage, and status of revolving accounts
Borrower’s request for new credit in last 12 months
Capacity Factors:
Debt ratios: Qualifying monthly housing expense-to-income ratio or monthly debt payment-to-income ratio
Salaried versus self-employed borrower
Cash reserves
Number of borrowers
Loan Characteristics:
Product: a 15-, 20-, and 30-year fixed rate, an adjustable-rate mortgage
Purpose of loan: purchase or refinance (cash-out or no cash-out)
Collateral Factors:
Borrower’s total equity or down payment
Property type: a 1-unit or 2- to 4-unit detached property, condominium unit, or manufactured home
Property use: primary residence, second home, or investment property
Refer to the Freddie Mac Single-Family Seller/Servicer Guide for more information.
All information used to evaluate the creditworthiness of the Borrower must be supported by documentation in the Mortgage file and must be obtained before, as applicable, the Note Date, or:
For Construction Conversion and Renovation Mortgages, the Effective Date of Permanent Financing
The modification date for Seller-Owned Modified Mortgages
The Conversion Date for Seller-Owned Converted Mortgages
The date of the applicable assumption agreement
The Feedback Certificate
Loan Product Advisor returns a Feedback Certificate for each loan submission assessed.
Three types of information appear on the Feedback Certificate:
Selected data entered for the transaction
Results generated by Loan Product Advisor
Responses from Freddie Mac and/or the other organizations that offer services through Loan Product Advisor. These responses may include data integrity messages, status information, risk class results, and underwriting guidelines.
You can use the Feedback Certificate to:
Determine the next steps required to underwrite and document the loan for sale to Freddie Mac
Track the status of your assessment and/or other third-party service request (such as income or asset verification)
Confirm transaction terms or assessment results
Identify potential data entry errors
To View Results from the Search Results page:
Search for the loan.
Select the loan.
Click the View Results button on the right-side slider to view the Feedback Certificate.
Based on the services you request through Loan Product Advisor; the Feedback Certificate includes various sections of information that will guide you in processing the loan.
The following is a list of sections and the associated subsections on the Feedback Certificate you will receive, depending on your requests:
Summary section - The Summary section summarizes the Loan Product Advisor results for the transaction. At a glance, you can see purchase eligibility, risk class, and whether the transaction is eligible for collateral, income and/or asset representation and warranty relief. The Results buttons are links to the corresponding messages on the Feedback Certificate. Each message section identifies specific documentation requirements and/or special underwriting provisions appropriate to the specific risk class. Note: A loan that is eligible for an Automated Collateral Evaluation (ACE) appraisal waiver displays in the Collateral R&W Relief as AppraisalWaiver.
Loan Details section - The Loan Details section provides borrower(s) name, loan identification information, mortgage type and documentation level.
Loan-to-Value Ratios section - The Loan-to-Value Ratios section provides a display of the loan-to-value (LTV), total loan-to-value (TLTV) and HELOC total loan-to-value (HTLTV) percentage results based on Loan Product Advisor's calculations for your loan.
Qualifying Ratios section - The Qualifying Ratios section display includes borrower(s) income and debt information, present housing expense, proposed housing PITI and qualifying ratios. Loan Product Advisor uses this information to assess the borrower(s) capacity to repay the mortgage loan.
Credit Report Details section – The Credit Report Details section provides details on credit scoring provided by the Credit Repositories. This section will also indicate if credit has been reordered or reassessed for this transaction.
Mortgage Details section - The Mortgage Details section provides a summary of the information used for the assessment, based on information you entered.
Asset Details section - The Asset Details section provides the Total Eligible Assets the borrower has available for closing, the Total Funds to be Verified (this includes Required Borrower Funds, Required Reserves, Paid Down Debt and/or Paid Off Debts, if applicable), and Third-Party Asset Validation amount. If an Asset Verification was requested, the Third-Party Asset Validation amount will indicate if Loan Product Advisor was able to verify and validate assets using a third-party service provider and display the verified amount.
Transaction Details section - The Transaction Details section provides the transaction identification information and confirms the counterparty information.
Message Summary section - The Message Summary section displays a list and the number of the message results for the loan by category, along with a Results button to navigate to the messages for any category. By clicking the Results button, you are taken directly to the section, no scrolling required. By clicking on the Messages slider on the left side of the Feedback Certificate page, you can view the messages by any category.
LPA Recommendations
Accept: Indicates the loan satisfies Freddie Mac’s credit risk standards.
Streamlined Accept: Allows for reduced documentation to meet Freddie Mac’s eligibility requirements.
Standard: The most comprehensive level of documentation to meet Freddie Mac’s requirements. Standard documentation is required for higher risk loans.
Caution: Indicates the loan is unlikely to meet Freddie Mac’s eligibility requirements due to excessive layered risks.
Ineligible/Incomplete/Invalid: LP is unable to underwrite the loan as submitted.
Keep in Mind
Use full vested value of the borrower’s 401k, IRA, KEOGH, 403b, or other IRs-qualified plan as reserves if the borrower has access to the funds currently without restriction. Ensure loans taken are subtracted from the value of the asset account and that applicant is fully vested.
Loan Product Advisor does not validate if the maximum seller paid fees have been exceeded. You must validate this based off the LTV.
Address items that Loan product Advisor cannot see, such as missing pages to the bank statement or unrealistic commute.
All assets should be entered based on type i.e., CD, 401k, checking, gifts.
Collections are not required to be paid off by Freddie Mac but may be a requirement of the lender.
Tax liens and judgements must be paid, and funds must be verified, in addition to the funds required to close.
If a revolving debt, open-ended accounts, or deferred non-student loan do not show a payment on the credit report, you are required to use 5% of the balance, or obtain a copy of a statement evidencing lower payment.
For open-ended debt, verify funds to pay the current balance over and above funds needed for closing and reserves. Evidence borrower is reimbursed by employer is also acceptable.
For all properties owned free and clear, evidence of tax and insurance payments and amounts should be included in the DTI ratio.