Important Freddie Mac Multifamily updates: new public records search requirements for mortgage origination and servicing

Purpose of the changes

Freddie Mac’s new public search requirements promote more alignment and consistency across the organization’s product lines, including the small balance loan. Standardizing the search process reduces variability in how the mortgage originator and servicer handle public records.

The changes create a single set of uniform search requirements for lenders and servicers, streamlining the process and mitigating risks associated with inconsistent or incomplete public record searches.

Key changes in public records search requirements

The updated public records search requirements significantly expand and refine the existing protocols, especially those that target the Conventional and Targeted Affordable Housing mortgages. Key changes include:

Expansion of existing small balance loan requirements

The requirements that previously were exclusive to the small balance loans have been extended to include the Conventional and Targeted Affordable Housing mortgages to ensure uniformity across Freddie Mac-backed products.

Additionally, the extensions of these requirements also affect the transfer of ownership servicing requests requiring Freddie Mac's consent. Ensuring the same level of scrutiny applies in the origination process for any ownership changes.

Specific search requirements

The updated regulations include specific search requirements for public records searches and criminal searches.

• Public Records Searches: Lenders must conduct comprehensive searches that include UCC Searches, Federal and state Tax Lien searches, Judgments, Litigation (State and Federal), Bankruptcy searches, and OFAC (Patriot Act) searches to identify potential legal and financial issues that could impact the mortgage’s performance.
• Criminal Searches: The added layer of criminal searches ensures the mortgage originator or mortgage servicer identifies potential risks associated with a criminal history.

The changes allow for more consistency when searching public records, which mitigates risks and increases the reliability of Freddie Mac’s portfolio.

Timeline and documentation

In addition to the new public records search requirements, Freddie Mac included specific timelines and documentation protocols for compliance during mortgage origination and mortgage servicing.

The validity period for public record searches

Searches must be conducted within 60 days prior to the mortgage origination or mortgage servicing request. This new time frame ensures the search returns the most current results and reduces the risk of missing newly filed liens and legal actions.

Documentation requirements

With the new documentation requirements, lenders must provide extensive documentation of public records searches conducted during the origination process, including records related to:

• Criminal history
• Bankruptcy
• UCC filings
• Tax liens
• Litigation

The lender must include the results in the mortgage file and make them available for Freddie Mac’s review upon request.

For mortgage servicing, especially for Transfer of Ownership requests, servicers must document and maintain the results of public records searches and abide by the 60-day validity period.

Search conduct and delivery

The new search requirements show how important it is to conduct searches with integrity and accuracy. Newly established key guidelines ensure consistency and reliability during the search process.

Third-party search company requirements

Lenders and servicers are must use “reputable third-party search compan[ies]” for public records searches to maintain the highest standards of accuracy and diligence. The companies must specialize in gathering data related to UCC Searches, Federal & State Tax Liens, Judgments, Litigation (State and Federal), Bankruptcy, Criminal Records (Local & Federal) and OFAC (Patriot Act) searches.

This requirement allows Freddie Mac to minimize certain risks, including incomplete filings and inaccurate filings for mortgage origination and mortgage servicing.

Direct delivery of search results

The third-party provider must deliver search results directly to the lender or servicer without any intermediary handling. This requirement preserves the integrity of the information. Additionally, the lender or servicer must file the results in accordance with Freddie Mac’s documentation protocols and be available for review.

Impact on different mortgage types

The new public records search requirements will impact several types of mortgages as they streamline processes and ensure greater due diligence.

• Conventional Mortgages will be scrutinized more closely. Lenders must search more types of public records to ensure potential risks are identified early in the mortgage process.
• Targeted Affordable Housing Mortgages will have a uniform process for public records searches, which means more consistency in affordable housing projects where legal compliance and financial viability are usually highly regulated.
• Small Business Loan Mortgages, which already had strict search standards, will see the fewest changes. However, aligning them with the search requirements for the targeted affordable housing mortgages ensures the same type of due diligence on small business loans.

Steps for compliance

Lenders and servicers must become fully compliant with Freddie Mac’s new policies by:

• Updating Internal Processes: Review and revise your current internal processes to include Freddie Mac’s new public search requirements. Adjust timelines and ensure the 60-day validity period is included and adhered to. Implement standardized documentation procedures for mortgage originators and mortgage servicers.
• Training: Train staff members to understand the public records search requirements, including UCC Search, Federal & State Tax Liens, Judgments, Litigation, Bankruptcy, and OFAC (Patriot Act) searches.
• Establish Relationships with Third-Party Search Companies: Make sure Freddie Mac approves any third-party search companies you use or that are new. They should specialize in gathering accurate and comprehensive public records data.

Potential challenges and solutions

The potential challenges for third-party lenders include:

Increased Processing Time

The expanded scope of public records will likely cause longer processing times and could delay mortgage origination or mortgage servicing. When lenders and servicers streamline their internal workflows, they can initiate searches earlier in the process. Partnering with experienced third-party providers who offer fast turnaround and use technology to automate the process can help reduce the impact on timelines.

Optimizing search operations

To enhance efficiency and reduce costs associated with additional searches, streamline operations by implementing automated workflows and integrating API-enabled solutions compatible with your Loan Origination System (LOS). Partner with third-party vendors offering seamless integration and volume discounts to minimize expenses and manual labor. This approach optimizes costs and allows for scalable operations while maintaining control.

Ensuring accuracy and completeness of searches

To address the increased complexity of public records searches and potential compliance issues, utilize reputable, experienced third-party search companies with proven track records. To ensure accuracy and compliance, implement quality control measures, including regular audits and data cross-checking.

Benefits of the new requirements

Not only do the updated public records search requirements enhance compliance, but they also provide tangible benefits to lenders and servicers, including:

• Enhanced Risk Management: The requirements for the additional public records searches contribute significantly to improving risk management. It helps lenders and servicers identify red flags earlier in the origination and servicing processes, which can reduce future defaults, legal issues, and financial losses.
• Improved Consistency: The new requirements ensure that all Freddie Mac mortgage types have a uniform standard, simplifying the search process for lenders and servicers. This also makes it easier to manage diverse portfolios since all loans receive the same search protocols.
• Informed Decision-Making: A single and comprehensive set of public records search requirements means lenders and servicers have access to more complete and up-to-date information when making lending decisions. Detailed insights into a borrower’s financial and legal standing allow for better judgment calls and reduce uncertainty in mortgage-related decisions.

Partner with Compliance Solutions

Lenders and servicers significantly reduce their risks by implementing the updated public records searches to include UCC filings, tax liens, bankruptcies, litigation, and criminal records.

Reach out to Compliance Solutions for the new search results required by Freddie Mac and have them provided directly to you according to Freddie Mac’s new compliance rules.