www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 May 28, 1997 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 97-24 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Quality Control - FHA Quality Assurance Agreement The Federal Housing Administration (FHA) and the Mortgage Bankers Association of America (MBA), recently signed a national "Quality Assurance Agreement" that begins a new partnership between FHA and the mortgage lending industry to promote quality lending practices in the FHA Single Family mortgage insurance programs. Although FHA regulations currently require lenders to report program violations and instances of fraud or unacceptable practices to FHA, some lenders hesitate to do so because of the potential penalties that FHA might impose upon the lender. In order to encourage lenders to report these violations to FHA, the Department has, in partnership with the MBA, prepared a Quality Assurance Agreement that can be signed by individual lenders. Modeled after the national agreement, this individual Quality Assurance Agreement encourages the timely, voluntary reporting by a lender of program violations and unacceptable activity that the lender detects in connection with an FHA-insured mortgage that it originates. Under the agreement, in return for this timely, voluntary reporting, the lender will receive meaningful loss mitigation incentives from FHA. These lender incentives will include waiver of civil money penalties and other incentives to lessen the consequences to the lender for its reporting of violations. Attached you will find a copy of the national Quality Assurance Agreement signed by the FHA and MBA. Also attached is an individual Quality Assurance Agreement that can be signed by an individual lender and FHA. We are encouraging your company to sign this individual agreement and begin a partnership effort with FHA to help further promote sound quality lending practices. By signing this agreement your company will be making a voluntary commitment to make the FHA homeownership programs work better for all Americans. Should you decide to join in this effort, please sign the attached agreement and return it to Bud Carter, Director, Office of Lender Activities and Program Compliance, Department of Housing and Urban Development, Room B133-P3214, 451 7th Street, SW, Washington, DC 20410. If you have any questions concerning this letter or the Quality Assurance Agreement, please call Bud Carter at (202) 708-1515 extension 101 or the MBA at (202) 861-6534. Sincerely, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner Attachments Mortgage Bankers Association of America and The U.S. Department of Housing and Urban Development Quality Assurance Master Agreement September 27, 1996 INTRODUCTION The opportunity for homeownership is viewed as a critical part of the American landscape and the fulfillment of this opportunity has created an industry that relies upon an intricate web of relationships between private industry and government agencies. Over the years, this industry, with all of its complexities, has successfully provided housing opportunities to a large number of American citizens. Any activity that adversely impacts these opportunities must be addressed and eliminated. Program abuses have in the past damaged this industry, caused financial losses to companies, the American taxpayer, and limited homeownership opportunities. This Agreement sets forth a quality assurance arrangement that provides for the development of a model partnership between the U.S. Department of Housing and Urban Development (HUD) and the Mortgage Bankers Association (MBA). This model partnership provides for the timely reporting of violations of law, regulation, false statements, or program abuses by MBA members to HUD. In return, members will receive meaningful loss mitigation incentives from HUD. Under this Agreement, the MBA commits to support and facilitate HUD's efforts to reach agreements with individual MBA members. The individual agreements will be negotiated between HUD and individual mortgage lending companies and will take into consideration such factors as economic conditions, modes of operation, and the size, location and financial capacity of the individual company. As a result of their participation in such a partnership, it is anticipated that lenders will realize significant loss mitigation incentives resulting from reporting program abuses. Furthermore, HUD will benefit from such a partnership by realizing a reduction in insurance claim losses. In combination, these activities can be expected to significantly reduce program abuses and lender losses. DEFINITIONS In order to accomplish this reporting, agreed upon definitions of common mortgage terminology must be determined. Therefore, for purposes of this Master Agreement and all subsequent individual agreements the following words and phrases will have these meanings: 1) Fraudulent Loan A fraudulent loan is one where the expectation of the performance of the loan is adversely impacted by falsified information utilized during the loan origination process in order to obtain loan approval and FHA insurance. 2) Program Violation A material violation of the requirements set forth in any HUD statute, regulation, handbook, mortgagee letter, or other written rule or instruction that affects the insurability of the mortgage by HUD. 3) Reportable Loan A reportable loan is a loan that involves program violations and/or contains false statements that materially affect the insurability of the mortgage by HUD. 4) Loan Performance Indicator The loan performance indicator is the member's claim and default rate for the HUD field office jurisdiction in which it originates HUD-FHA insured mortgages. This rate will be measured by HUD against the average rate as determined by HUD for all lenders that originate insured mortgages in that jurisdiction. 5) Loss Mitigation Incentive The loss mitigation incentive is defined as reasonable relief measures, as determined by HUD, from losses incurred by the member with respect to loans involving program violations. The incentive will be determined by HUD at the time a loan is reported, and will be based upon the loan performance indicator, losses incurred by HUD, past performance of the member, and financial capacity of the member. HUD will consider incentives that include abatement of claim losses, flexible repayment plans for losses, waiver of fees and/or late charges, and waiver of civil money penalties. TERMS OF THE AGREEMENT In order to realize the potential benefits inherent in this Agreement, each entity must comply with the Agreements and standards defined herein. Department of Housing and Urban Development The Department of Housing and Urban Development intends to facilitate a partnership with member lenders through the use of loss mitigation incentives associated with program violations. In order to accomplish this HUD will implement the following: 1) incentives for loss mitigation to be made available for members 2) reporting of performance indicators 3) report fraudulent activity and program violations to appropriate law enforcement officials, and providing reasonable assistance in the prosecution of the parties involved 4) work with participating lenders to diligently pursue administrative sanctions against individuals and/or companies reported to be in violation of program requirements. 5) publicize instances where a member has promptly reported program violations or abuses, and cooperated with HUD. Participating Lenders The ability to obtain substantive loss mitigation incentives can provide a critical difference in a lender's profitability. As part of this Agreement, members will agree to comply with the reporting requirements as defined in the Agreement. In addition to complying with all existing HUD-FHA program requirements, members must agree to work with HUD and MBA to ensure that: 1) Sound underwriting guidelines are in place and that underwriters are trained in fraud detection and the detection of program violations. 2) Members maintain adequate process controls in order to detect and prevent undue risk from wide-spread program violations and fraudulent activity. 3) Members have a Quality Control Plan in place to enhance their ability to detect and prevent program violations and fraudulent activity. Participating lenders must also agree to provide reasonable assistance to HUD in the legal or administrative actions against participants found to be involved in this activity. Mortgage Bankers Association of America Understanding that education and awareness are critical to the elimination of program violations and fraudulent activity in mortgage lending. The MBA agrees to provide the following support: 1) The MBA agrees to promote and support these Quality Assurance Agreements between member lenders and HUD. 2) The MBA agrees to provide regularly scheduled training activities on the detection and prevention of program violations and prevention of fraud. 3) The MBA agrees to develop and promote public awareness activities to educate potential borrowers of program violations and fraudulent practices. 4) The MBA agrees to develop and promote awareness of the negative impact of program violations and fraudulent lending to the Federal, State, and local legislative bodies in order to increase the number of prosecutions. Mortgage Bankers Association of America By: Title: United States Department of Housing and Urban Development By: Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner Attachment to Quality Assurance Master Agreement The following sets forth examples of program violations that constitute reportable loans pursuant to this Quality Assurance Master Agreement, and a description of the administrative actions taken by the Department with respect to approved mortgagees. These examples are intended to provide guidance to mortgagees with respect to administrative actions that the Department may take regarding such program violations. In determining the administrative actions for each of the specific cited examples, the Department considered such factors as: the seriousness of the violation(s); culpability of the lender; history of past violations; size, location, and financial capacity of the mortgagee; Quality Control Plan and procedures of the mortgagee; corrective action taken by the mortgagee; and the level within the company at which the violations occurred. Example No. 1 Program Violations: Failure by an employee of the mortgagee to perform face-to-face interviews with borrowers and permitting interested third parties to handle loan documents resulting in the submission of false information to HUD-FHA and fraudulent loans with respect to 21 HUD-FHA insured mortgages. Administrative Action by HUD: A Settlement Agreement that includes a reimbursement to HUD-FHA for claim losses in connection with the 21 fraudulent loans and corrective action by the mortgagee to assure compliance with HUD-FHA requirements. Example No. 2 Program Violations: Use of sales contracts that did not reflect the true purchase price by employees of a mortgagee's branch office to establish maximum mortgage amounts in connection with 56 loans; permitting loans to close that contained false statements; violation of the seven-unit limitation; failure to deduct seller concessions from the purchase price; failure to perform field reviews of appraisals involving Section 203(k) investor loans; improperly adding mortgage payments to the property rehabilitation cost; and permitting the seller to loan the required minimum investment for the benefit of the mortgagor. Administrative Action by HUD: A Settlement Agreement that includes indemnification to HUD-FHA for claim losses in connection with 56 improperly originated loans; payment by the mortgagee of a civil money penalty in the amount of $56,000 to HUD-FHA; implementation of corrective action by the mortgagee; and a future review by an independent Certified Public Accountant of the mortgagee's 203(k) program activities. Example No. 3 Program Violations: Failure to implement a Quality Control Plan for the origination of HUD-FHA insured mortgages; permitting borrowers to sign loan documents in blank; and submission of false information to HUD-FHA in connection with two HUD-FHA insured mortgages. Administrative Action by HUD: A Settlement Agreement that includes indemnification to HUD-FHA for claim losses with respect to two improperly originated mortgages; payment to the Department of a civil money penalty in the amount of $l,000; and implementation by the mortgagee of corrective action to assure compliance with HUD-FHA requirements. Example No. 4 Program Violations: Failure to perform face-to-face interviews with borrowers in connection with six HUD-FHA insured mortgage transactions; failure to maintain an adequate Quality Control Plan; failure to properly verify borrowers' gift funds; understating borrowers' liabilities; and failure to verify borrowers' income. Administrative Action by HUD: A Settlement Agreement that includes indemnification to the Department for claim losses on six improperly originated loans; and corrective action to assure compliance with HUD-FHA requirements. UNITED STATES OF AMERICA Department of Housing and Urban Development Washington, D.C. Quality Assurance Agreement This Quality Assurance Agreement is entered into, by and between the following parties: the United States Department of Housing and Urban Development (HUD) and ("the Mortgagee"). WHEREAS, the opportunity for homeownership is viewed as a critical part of the American landscape; WHEREAS, any activity that adversely impacts this opportunity must be addressed and eliminated; WHEREAS, HUD and the Mortgagee mutually desire to enter into this Quality Assurance Agreement that provides for the timely reporting by the Mortgagee of violations of law or regulation, or of false statements or program abuses, to HUD; WHEREAS, in order to accomplish this reporting, HUD intends to make available meaningful loss mitigation incentives to the Mortgagee for the timely reporting of violations of law or regulation, or of false statements or program abuses; NOW, THEREFORE, HUD and the Mortgagee hereby agree as follows: 1. For purposes of this Quality Assurance Agreement, the following agreed upon definitions are applicable: a) Fraudulent Loan A fraudulent loan is one where the expectation of the performance of the loan is adversely impacted by falsified information utilized during the loan origination process in order to obtain loan approval and FHA insurance. b) Program Violation A material violation of the requirements set forth in any HUD statute, regulation, handbook, mortgagee letter, or other written rule or instruction that affects the insurability of the mortgage by HUD. c) Reportable Loan A reportable loan is a HUD-FHA insured loan that involves program violations and/or contains false statements that materially affect the insurability of the mortgage by HUD. d) Loan Performance Indicator The loan performance indicator is the Mortgagee's claim and default rate for the HUD field office jurisdiction in which it originates HUD-FHA insured mortgages. This rate will be measured by HUD against the average rate as determined by HUD for all mortgagees that originate insured mortgages in that jurisdiction. e) Loss Mitigation Incentive The loss mitigation incentive is defined as reasonable relief measures, as determined by HUD, from losses incurred by the Mortgagee with respect to loans involving fraud and/or program violations. The incentive will be determined by HUD at the time a loan is reported, and will be based upon the loan performance indicator, losses incurred by HUD due to fraud and/or program violations, past performance of the Mortgagee, and financial capacity of the Mortgagee. HUD will consider incentives that include abatement of claim losses, flexible repayment plans for losses, waiver of fees and/or late charges, and waiver of civil money penalties. 2. To obtain the loss mitigation incentives from HUD, the Mortgagee agrees to timely report to the Director, Office of Lender Activities and Program Compliance, HUD Headquarters, Washington, D.C., with respect to reportable loans originated by the Mortgagee. 3. The Mortgagee agrees that it shall maintain sound underwriting guidelines, and that the Mortgagee's underwriters are trained in the detection of fraud and program violations. 4. The Mortgagee agrees that it shall maintain adequate controls in connection with the origination of HUD-FHA insured mortgages in order to prevent and detect fraudulent activity and widespread program violations. 5. The Mortgagee agrees that it shall maintain a Quality Control Plan for the origination of HUD-FHA insured mortgages to prevent and detect fraudulent activity and program violations. 6. The Mortgagee agrees to provide reasonable assistance to HUD in the legal or administrative actions brought by HUD against participants determined to be involved in fraudulent activity or program violations. 7. HUD agrees to make available to the Mortgagee loss mitigation incentives for the timely reporting of reportable loans originated by the Mortgagee. 8. HUD agrees to make available to the Mortgagee its loan performance indicator when action is considered by HUD with respect to the loans reported by the Mortgagee pursuant to this Agreement. 9. HUD agrees to work with the Mortgagee to diligently pursue administrative sanctions against individuals and/or companies reported to be in violation of HUD-FHA program requirements. 10. HUD agrees to report fraudulent activity and program violations to appropriate law enforcement officials and provide reasonable assistance in the prosecution of parties involved. 11. HUD agrees to disseminate information relative to instances where the Mortgagee has promptly reported program violations or abuses and cooperated with HUD. WHEREFORE, the parties have duly executed this Quality Assurance Agreement, effective when signed and dated by the Assistant Secretary for Housing-Federal Housing Commissioner of the United States Department of Housing and Urban Development. Date: By: Title: United States Department of Housing and Urban Development Date: By: Assistant Secretary for Housing-Federal Housing Commissioner