www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 December 26, 1989 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 89-32 TO: ALL APPROVED MORTGAGEES SUBJECT: Quality Control Plan for Approved Mortgagees The purpose of this letter is to advise all approved mortgagees of a significant change in the Department's requirements for maintaining a Quality Control Plan for the origination and servicing of HUD-FHA insured mortgages. One of the principal HUD-FHA objectives has been to improve the quality of loan origination and servicing by approved mortgagees. In keeping with this objective, the Department requires approved mortgagees to have a written Quality Control Plan for loan origination and servicing. This requirement is contained in HUD-FHA regulations 24 CFR Section 203.2(j). To date, the Department has not required a specific Quality Control Plan to be implemented by mortgagees. However, guidelines for quality control procedures were provided in HUD Handbook 4060.1, Mortgagee Approval Handbook. These guidelines have remained essentially unchanged since 1980. Effective immediately, the Department has established minimum requirements for an acceptable Quality Control Plan for mortgagees for loan origination and servicing. The new requirements are set forth in the enclosure to this Mortgagee Letter. All approved mortgagees must take immediate action to ensure that their existing Quality Control Plan meets the HUD-FHA requirements. Failure to comply with these requirements is grounds for an administrative sanction by the Mortgagee Review Board including the withdrawal of HUD-FHA mortgagee approval. We believe that the new requirements will benefit approved mortgagees and the Department in improving the quality of HUD-FHA insured mortgages and reducing the risk to the Department's insurance funds. These new requirements are based on the Department's extensive experience in carrying out its monitoring activities with respect to mortgagees. They are representative of quality control measures currently used by a large segment of the mortgage lending industry and should not impose an undue burden on any mortgagee doing HUD-FHA business. We will revise HUD Handbook 4060.1 in the near future to incorporate these requirements. If you have any further questions concerning this letter, please contact the Office of Lender Activities and Land Sales Registration at (202) 755-6924. C. Austin Fitts Assistant Secretary for Housing- Federal Housing Commissioner _____________________________________________________________________ QUALITY CONTROL PLAN FOR LOAN ORIGINATION AND SERVICING REQUIREMENT. As a condition of HUD-FHA approval, mortgagees must have implemented a plan for quality control in the origination and if servicing HUD-FHA insured mortgages, a plan for quality control in servicing HUD-FHA insured mortgages. The Quality Control Plan must meet the requirements set forth herein. It must be a prescribed function of the mortgagee's operations and assure that the mortgagee maintains compliance with HUD-FHA requirements and its own policies and procedures. It must be sufficient in scope to enable the mortgagee to evaluate the accuracy, validity and completeness of its loan origination and servicing operations. It must provide for independent evaluation of the significant information gathered for use in the mortgage credit decision making and loan servicing process for all loans originated or serviced by the mortgagee. The Quality Control Plan must enable the mortgagee to initiate immediate corrective action where discrepancies are found. a. Policy and Objectives. Approved mortgagees must establish a formalized quality control plan which utilizes a program of internal or external audit or provides for an independent review by the mortgagee's management/supervisory personnel who are knowledgeable and have no direct loan processing, underwriting or servicing responsibilities. The quality control plan must provide for periodic reports which will identify for senior management areas of deficiency including, for example, errors and omissions, unacceptable patterns or trends, as well as fraud and intentional violations of regulations. Senior management must initiate prompt and effective corrective measures to eliminate the deficiencies. All employees involved in loan origination and servicing must be familiar with and understand the mortgagee's policies and procedures regarding quality control. The primary objectives of the quality control plan are to: 1) Assure compliance with HUD-FHA requirements. 2) Assure that the mortgagee's policies and standards are known and adhered to by its personnel. 3) Assure that the mortgagee's procedures are revised in a timely manner to accurately reflect changes in HUD requirements; keep its personnel informed of the changes; and assure that employees are held accountable for performance failures or errors. 4) Assure that prompt and effective corrective measures are taken and documented when deficiencies in loan origination, underwriting or servicing are identified and to inform its personnel when deficiencies are found. _____________________________________________________________________ 2 5) Assure that procedures exist for expanding the scope of quality control reviews where fraudulent activity or patterns of deficiencies are identified. b. Scope. The quality control plan must provide for a review of not less than ten percent of all HUD-FHA insured mortgages originated by the mortgagee on a monthly basis including its branches, loan correspondents and authorized agents. A representative sample of mortgages that is sufficient in number being serviced by the mortgagee, or its servicing agent, must also be reviewed to assure that HUD-FHA mortgage servicing policies and requirements are being met. For each branch office that originates or services HUD-FHA insured mortgages, an on-site branch office review should take place at least once every year. The Quality Control Plan must also provide for a review of the mortgagee's files and records to determine compliance with HUD's Affirmative Fair Housing Marketing Regulations. Quality control reviews must include: 1) Selection of loans on a random basis including loans from all branch offices, authorized agents, loan correspondents and servicing agents. 2) Assurance that all loan officers, underwriters, appraisers and servicers will have loans subjected to reviews. 3) Analysis of all loans which go into default with six or fewer payments made by the mortgagor. 4) Procedures for expanding the scope of the review where a pattern of deficiencies or fraudulent activity is disclosed. c. Initiate Corrective Action. The quality control plan must require written notification to the mortgagee's senior management, at least quarterly, of deficiencies cited as a result of the reviews. Senior management must promptly initiate action to correct all deficiencies. The actions taken by management must be formally documented by citing each deficiency, identifying the cause of the deficiency, and providing management's response or actions taken. Management should assure that documentation is promptly distributed to all loan origination, underwriting and servicing personnel. Employees should be provided with corrective instructions where patterns of deficiencies are identified in processing, underwriting or servicing. d. Notification to HUD of Significant Discrepencies. Approved mortgagees are required to report any violation of law or regulation, false statements or program abuses by the mortgagee, its employees or any other party to the transaction to the HUD Regional Office, the HUD Area Office or to the HUD Regional Office of Inspector General (refer to HUD Handbook 4000.2 REV-1). _____________________________________________________________________ 3 e. Required Elements of the Quality Control Plan. 1) General The quality control plan must: a) Assure that each office of the mortgagee including, if applicable, its approved Loan Correspondent(s), Authorized Agent(s), service centers and branches maintain copies of all HUD issuances, including regulations, handbooks, mortgagee letters, circular letters, etc., which are relevant to the mortgagee's FHA origination and servicing activities. These documents must be accessible to all employees, periodically reviewed with appropriate staff, and kept current. b) Assure that all loans submitted by the mortgagee to HUD-FHA for mortgage insurance endorsement are processed by employees of the mortgagee, its approved Loan Correspondent(s) or Authorized Agent(s). c) Assure that HUD-FHA Mortgage Insurance Premiums (MIP's) are remitted within I5 days from the date of loan closing and that late charges and interest penalties are promptly submitted. d) Assure that sales of HUD-FHA insured mortgages by the mortgagee or transfers of loan servicing are properly reported to HUD on Form HUD 92080, Mortgage Record Change and that the purchaser be advised of any loans subject to a HUD audit or investigation. e) Assure that the termination of HUD-FHA mortgage insurance of a mortgage is properly reported to HUD on Form HUD 2344, Lender's Request for Termination of Home Mortgage Insurance and that an assumption of a mortgage is properly reported on Form HUD 92080, Mortgage Record Change. f) Assure that escrow funds received from mortgagors are not excessive and are not used for any purposes other than that for which they are received. g) Assure that the mortgagee does not employ for HUD origination, underwriting or servicing any individual who is debarred, suspended or subject to a Limited Denial of Participation (LDP). _____________________________________________________________________ 4 h) Assure that the mortgagee is in compliance with the provisions of the Real Estate Settlement Procedures Act (RESPA), including distribution to mortgagors of the Special Information Booklet and good faith estimates which bear a reasonable relationship to actual costs and, disclosure of business realtionships with a particular provider of services. i) Assure that the mortgagee keeps records of quality control findings and actions taken. 2) Loan Origination a. General requirements: 1) The quality control plan must provide for the review of loans rejected by the mortgagee. These loans cannot be included in the ten percent review requirement. 2) The quality control plan must provide for the written reverification of the mortgagor's employment, deposits, gift letter or other sources of funds and reordering of a new credit report from another credit source. The report must be a Residential Mortgage Credit Report (RMCR). 3) Direct Endorsement lenders must perform field reviews on not less than ten percent of the appraisals performed by their own staff appraisers. 4) Quality control reviews should be performed within 90 days of closing of the loan. b. Specific requirements: The plan must provide for a review of the origination and underwriting function in order to: 1) Determine whether each loan file contains all required loan processing, underwriting and legal documents. 2) Determine whether a face-to-face interview was performed with the mortgagor prior to the signing of the fully completed loan application Form HUD-92900 and submission of the loan for underwriting. 3) Determine whether relevant loan documents were signed in blank by the mortgagor or employee(s) of the mortgagee; and that all corrections were initialed by the mortgagor or employee(s) of the mortgagee. _____________________________________________________________________ 5 4) Determine whether verifications of employment, verifactions of deposit and the credit report were handled by any interested third party or the mortgagor. 5) Determine whether credit report(s) were ordered from an authorized credit bureau or agency and if more than one credit report was ordered; determine whether all credit reports were submitted with the loan package to HUD-FHA. 6) Determine whether the preliminary loan application lists each outstanding liability and each asset of the mortgagor that was used to qualify for the mortgage. 7) Determine whether any outstanding judgements shown on the credit report were shown on the Form HUD 92900 with an accompanying explanation and documentation. Explanations are not acceptable where there is a delinquency or judgement involving a debt to the Federal Government. 8) Determine whether the loan file contains pertinent documentation if the mortgagor's source of funds for the required minimum investment was other than deposits in a savings institution and whether the source of funds was verified. 9) Determine whether the loan file contains a financial statement and a business credit report if the mortgagor is self-employed. IO) Determine whether any gift letter reflects intention of repayment of funds, the relationship of donor to mortgagor and whether the funds were deposited. Il) Determine whether the HUD-1 settlement statement was accurately prepared and certified to properly. This involves comparison of the HUD-1 with other relevant loan documents to determine whether the mortgagor made the required minimum investment and whether any seller's credit resulted in an over-insured mortgage. l2) Determine whether the loan was current at the time it was submitted to HUD-FHA for mortgage insurance endorsement. l3) Determine whether the mortgagor transferred the property at the time of closing or soon after closing indicating the possible use of a "strawbuyer" in the transaction. _____________________________________________________________________ 6 l4) Determine whether there was written reverification of the mortgagor's employment, deposits, gift letter or other source of funds and a new credit report reordered. 15) Determine whether all conflicting information or discrepancies were resolved and properly documented in writing prior to submission of the loan to HUD-FHA for mortgage insurance endorsement. This involves comparison of the preliminary loan application and original verifications of employment, verifications of deposit, credit report and other relevant loan documents with the final loan application Form HUD 92900 and all reverification documents. 16) Determine whether a field review of the appraisal was performed. 17) Determine the accuracy and completeness of underwriting conclusions and mortgagee documentation. 3) Loan Servicing a. General requirements: 1) The quality control plan must provide for the selection of loans on a random basis that are in sufficient numbers and represent the universe of HUD-FHA insured mortgages serviced by the mortgagee or its agents. 2) The quality control plan must provide that all loan servicing staff, including managers, will have their loans subject to review. 3) The quality control plan must provide for an analysis of loans for general compliance with HUD-FHA servicing requirements, and special requirements such as assignment processing, Section 235 mortgages, forbearance, claims without conveyance, deficiency judgements and foreclosure. 4) The quality control plan must provide for analysis of escrow administration. 5) The quality control plan must provide for an analysis of operating procedures for collection and recordation of payment receipts; escrow bills; disbursements from escrow; and claim submissions. 6) The quality control plan must provide for the analysis of loans in foreclosure to determine compliance with HUD-FHA fiscal requirements and procedures such as extension requests, _____________________________________________________________________ 7 b. Specific requirements: The plan must provide for a review of the loan servicing function in order to: 1) Determine that the mortgagee promptly establishes loan servicing records after loan closing and that the servicing records contain the information necessary for the mortgagee to properly service the mortgage in compliance with HUD Handbook 4330.1, HUD regulations, Mortgagee Letters and instructions for the submission of claims. 2) Determine that mortgagors have been notified when the mortgagee acquires servicing from another mortgagee and that loan servicing records are promptly established immediately upon transfer of a loan to the mortgagee's loan servicing portfolio. 3) Determine through review of individual loan servicing records that the amount of fees and charges imposed on the mortgagor do not exceed those permitted by HUD-FHA and the mortgage provisions. Among these are: a) Late charges and partial mortgage payments properly assessed; b) Annual analysis of escrow account including appropriate adjustments, and disbursements made promptly as the items for which the escrow was established become due and payable; c) Fee or penalty not charged for prepayment or reinstatement of mortgage; d) Attorney's fee collected only for the initiation of foreclosure proceedings; and e) Assumption fees 4) Determine that requests from mortgagors concerning their individual mortgage accounts are promptly responded to. 5) Determine that mortgagor escrow accounts are not commingled with the mortgagee's operating accounts. 6) Determine that Section 235 recertifications are performed annually and assistance payments are accurately computed using the proper formula and that the income used for computing the assistance payments is compared to the income included in the mortgagor's income verification. _____________________________________________________________________ 8 7) Determine that a claim for insurance benefits, form HUD 27011, submitted to HUD-FHA for payment, was properly calculated and the claim amount fully supported. 8) Determine that all defaulted loans with six payments or less are promptly identified and analyses performed in order to identify any origination or underwriting deficiencies once the defaulted loan has been identified. 9) Determine that mortgagors are provided every reasonable opportunity to remedy a delinquency or default including forbearance and recasting prior to a determination regarding foreclosure proceedings. 10) Determine that deeds-in-lieu are pursued where appropriate and that deficiency judgements are taken where required. Il) Determine that adequate collection activities and accurate documentation of collection efforts, including documentation of the referral of the mortgagor to a HUD approved counseling agency is maintained. 12) Determine that a face-to-face interview with the mortgagor is attempted before three full mortgage installments become delinquent. If the face-to-face interview was not conducted, documentation must be provided of the permissible exception allowed by HUD. 13) Determine that an acceptable method of forbearance relief is provided to the mortgagor prior to initiation of foreclosure proceedings; review individual forbearance agreements and supporting financial data submitted or disclosed by the mortgagor to assure that they are reasonable. 14) Determine that property inspections to protect and preserve the property are performed when the mortgagor fails to make a mortgage payment and no contact is possible within 45 days of the due date, or if the mortgage is in foreclosure and the property is vacant. 15) Determine that HUD-FHA reporting requirements under the Single Family Default Monitoring System are complied with. This includes the accurate and timely submission of both monthly and quarterly reports. _____________________________________________________________________ 9 l6) Determine that mortgagors are notified of the availability of mortgage foreclosure relief under the home mortgage assignment program and that HUD-FHA requirements for processing assignment applications are complied with. 17) Determine that foreclosure proceedings are initiated and completed on a timely basis and in accordance with HUD-FHA requirements. 18) Determine that there are sufficient controls to assure that all aspects of the claims for insurance benefits are accurately prepared and on a timely basis to minimize the loss to HUD. 19) Determine that HUD pamphlet HUD-426 is mailed to all mortgagors no later than the second month of delinquency. 20) Determine that mortgagor information is reported regularly to credit reporting bureaus. _____________________________________________________________________