www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 May 26, 1993 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 93-14 TO: All Approved Mortgagees SUBJECT: Quality Control for Origination and Servicing Revisions to Mortgagee Letter 89-32 The purpose of this Letter is to clarify, revise and update some of the requirements of Mortgagee Letter 89-32. Since Mortgagee Letter 89-32 was issued in December of 1989, most mortgagees have made considerable progress towards the implementation of effective Quality Control Plans. Since that time, we have received suggestions from within the Department and from the industry concerning ways our Quality Control requirements could be improved and/or modified. Sampling Requirement We have received several requests for permission to use statistical sampling in the selection of loans for review. For large originators and servicers we agree this proposal is more reasonable while providing similar results. Therefore, originating mortgagees may choose to review the lesser of 10% of all loans closed on a monthly basis or a random sample that provides a 95% confidence level with 2% precision. Lenders choosing to use the random sample approach must review all loans that went into default within six months of closing in addition to the number selected for random sample. Servicers may apply the same criteria to their portfolio within the time constraints discussed later in this Mortgagee Letter. Originators and servicers may be asked by the HUD local office or the Office of Lender Activities and Land Sales Registration to explain the method they used in statistical sampling. Lenders closing fewer than 10 loans annually must review at least one loan. If fewer than 10 loans are originated monthly, the 10% sampling requirement may be on a quarterly basis. Loan Origination Loan Correspondents All HUD/FHA-approved lenders, including loan correspondents, are required to have and implement a Quality Control Plan. Sponsors of loan correspondents are required to perform quality control reviews on loans purchased from each of their correspondents; however, this is not meant to be a substitute for the correspondent's own quality control. A correspondent may enter into a contractual arrangement with its sponsor or some other entity to perform its quality control. The results of these reviews must be passed on to the management of the loan correspondent and appropriate action must be taken. (Please see "Use of Outside Firms" on page 4 of this letter.) _____________________________________________________________________ 2 Selection of Loans To improve the quality of reviews, we are providing guidelines that lenders may use in selecting loans for review. Lenders must ensure that all loan officers, underwriters, appraisers and branches are subject to review. A more thorough review will include emphasis on those individuals (including real estate agents) who are large producers, newly employed, or concentrating in soft market areas. In addition, all loans going into default within the first six months must be reviewed. The Department's experience in reviewing loans that went into early default has shown that many of the characteristics listed below are often present. We recommend lenders use these characteristics, or any additional ones they find necessary, in identifying loans to be reviewed. Such targeting of loans will make quality control reviews more effective. Loan Selection Guidelines LOAN CHARACTERISTICS MORTGAGOR CHARACTERISTICS - Mortgagors owning other - No credit history real estate - No or new bank accounts - 2-4 unit properties - Large earnest money deposit - Non-occupying - Large increase in bank co-mortgagors account - Sweat equity - Little cash remaining after - Excessive seller closing concessions - Housing expense increasing - Identity of interest by 1.5 times between buyer and - Front ratio > 29% seller - Back ratio > 41% - New construction - <18 months with current - Soft market areas employer - Rent credit - Gift letter - Self-employed Credit Report It is no longer necessary for a lender to obtain a full Residential Mortgage Credit Report (RMCR) on all loans reviewed, as previously required by 89-32. It is permissible to use a three-repository infile report. All information received from the repositories must be included in the merged report. The merge function must be limited to listing duplicate tradelines together for ease in reading the report. However, a full RMCR must be obtained on at least 10% of all loans subject to quality control, on cases in which the infile credit report reveals discrepancies, and in cases of early default. _____________________________________________________________________ 3 Appraisal Review A desk review of the property appraisal must be performed on all loans chosen for a quality control review. HUD Handbook 4000.4 REV-1, paragraph 2-6(D), identifies the elements of that review. Ten percent (10%) of all appraisals done by staff appraisers must be field reviewed and a sampling of appraisals done by fee personnel must be field reviewed. The size of the sample for fee appraisals is left to the lender to determine. Field reviews must be performed by the Direct Endorsement Underwriter or by review appraisers employed on a contract basis. Loans selected for field review may be included in the normal universe of loans selected for quality control. Home Mortgage Disclosure Act Based upon our experience in collecting information under the Home Mortgage Disclosure Act (HMDA), we have found that the information is often inaccurate. For this reason we are requiring that HMDA reporting be included in lenders' ongoing quality control. The review must ensure that HMDA reporting to HUD/FHA is being done; the information being reported is accurate; all required information is being reported; and the information is reported promptly. Rejected Loans A minimum of 10% of total loans rejected must be reviewed, concentrating on three particular areas. First, the reasons given for rejection must be reviewed and determined to be valid. Second, lenders must ensure that a senior staff person or officer of the company or a committee chaired by a senior staff person or officer concurred with the rejection. Finally, lenders must ensure that the requirements of the Equal Credit Opportunity Act were met and documented in each file. Where possible discrimination is noted, the lender is expected to take immediate corrective action. Alternative Document Loans Alternative document loans must be included in quality control reviews. The requirements for these loans are set forth in Mortgagee Letters 91-51 and 92-15. _____________________________________________________________________ 4 Loan Servicing Sampling Requirement Because much of servicing is computerized, we do not think it is necessary to review all areas on a monthly basis. However, we do consider the following areas of sufficient importance to warrant monthly review: servicing delinquent accounts, foreclosures, Section 235 loans, MIP billing, forbearance, claims and reporting under the Single Family Default Monitoring System (SFDMS). All other areas such as escrow analysis, adjustable rate mortgages, paid-in-full mortgages and assumptions may be reviewed on a quarterly basis. Other Issues The Department has found that many lenders are not submitting the correct monthly MIP to HUD or are failing to submit monthly MIP at all. It is the servicer's responsibility to ensure the correct monthly MIP is being submitted. It is especially important to determine the correct MIP has been paid on all loans being purchased from other lenders. Therefore, your quality control reviews of escrow accounts must include a review of the Mortgage Insurance Certificate to check the Section of the Act Code and date of endorsement. This will determine whether a monthly or risk-based premium is due. This review must include a sampling of recently purchased loans. In addition, the Department has found the location of loans to be a problem. Therefore, servicers must include a review of the Mortgage Record Change, HUD-92080, in their quality control reviews to ensure these forms are completed when loans are sold to another servicer. It is also important to review recently purchased loans to ensure the selling servicer submitted the 92080. Therefore, your quality control reviews of transfers of servicing must include a sampling of each recently purchased portfolio. General Use of Outside Firms Those lenders who elect to not perform their own quality control are free to make use of outside firms that provide this service. Service provided by these firms must comply with the Department's quality control requirements, and must provide written reports to management. The lender will be responsible for ensuring these requirements are met. Lenders must carefully review and analyze the results of these quality control efforts and take prompt corrective measures when specific deficiencies are noted or procedural problems are identified. Also, any instance of mortgage finance fraud must be reported to the Department. _____________________________________________________________________ 5 File Retention The results of quality control reviews, whether performed by the lender or an outside firm, must be retained by the lender for a period of one year. Lenders must have effective Quality Control Plans to ensure that the Direct Endorsement Program continues to be a success. The Mortgagee Review Board has imposed administrative sanctions on lenders for failing to have or implement a Quality Control Plan. Referrals may also be made to the Housing Civil Penalty Panel which may impose monetary penalties against lenders found to be in noncompliance with the Department's Quality Control requirements. If you have any questions on this letter, please contact the Office of Lender Activities and Land Sales Registration at (202)708-1824. Sincerely, Nicolas P. Retsinas Assistant Secretary For Housing - Federal Housing Commissioner *U.S. G.P.O.:1993-342-362:80109