FHA insured mortgage loans experienced phenomenal growth in 2008. After a large drop in its share of new mortgages in the early ‘90’s, tightening credit has caused an upsurge in FHA loans. In fact, FHA’s share of insured mortgages increased to 26% in 3rd quarter 2008, up from only 3% in 2007. As the volume of FHA loans increases, more lenders are becoming FHA approved. Once approved, they are met with the task of staying in compliance with FHA guidelines. In Mortgagee Letter 09-12 published for FHA approved lenders, HUD stresses the requirement to “implement and maintain a comprehensive quality control plan.” HUD further explains in Letter 09-01 that if a lender “fails to comply with HUD’s policies and procedures, HUD will take the appropriate action…which may include termination of mortgagee [FHA] approval.” (To view all HUD mortgagee letters, visit HUD’s official website.)

According to FHA guidelines, before a lender can become FHA approved, they must submit a quality control plan. As stated in chapter 7 of the HUD 4060.1 handbook, a lender “must review [audit] 10% of the FHA loans it originates,” as part of its quality control plan. These mortgage audits can either be performed internally or by a third party provider. If done internally, the lender must establish and properly train a unit dedicated to quality control. FHA guidelines go on to explain that the staff must not be involved in loan production.

Third party providers can also perform these mortgage file audits, and even provide quality control plans that meet FHA guidelines. For example, Mortgage Compliance Advisors, LLC, can provide a quality control plan and perform the required quality control file audits for an FHA approved lender. When the file audits for a certain period are complete, the audit findings are compiled in a management report and sent to the lender. Third party providers do not report to HUD/FHA. Instead, it is the responsibility of management to review the findings and make any necessary changes to prevent similar findings in the future. When FHA conducts an audit, they want to see in writing what actions have been taken by the lender to stay in compliance with FHA guidelines.

1. Do I have to have a Quality Control Plan?
2. Do any states currently require a Quality Control Plan?
3. What are the goals of Quality Control?
4. Does the Quality Control function need to be independent of the origination function?
5. Do persons performing Quality Control reviews need to be qualified?
6. When should Quality Control reviews be performed?
7. How and how many loans are chosen for review?
8. What needs to happen during the Quality Control loan review?
9. Can my accountant provide Quality Control reviews?

1. Do I have to have a Quality Control Plan?

   All FHA approved mortgagees, including loan correspondents, must have in place and implement a Quality Control Plan for the origination of insured mortgages as a condition of receiving and maintaining FHA approval. A copy of the plan must be submitted when applying for mortgagee approval. Quality Control must be a prescribed and routine function of each mortgagee�s operations whether preformed by a mortgagee�s staff or an outside source.

2. Do any states currently require a Quality Control Plan?

   The Utah Division of Real Estate currently requires that principal lending managers establish and maintain a Quality Control Plan that includes at a minimum procedures for performing pre-closing and post-closing auditing of at least 10 % of all loan files and taking corrective action for problems identified through the audit process. Quality Control Plans which comply with HUD/FHA or Freddie Mac requirements shall be deemed to be in compliance with this rule.

3. What are the goals of Quality Control?

   The following are the overriding goals of Quality Control. Mortgagees must design programs that meet these basic goals:

   • Assure compliance with FHA’s and the mortgagee’s own origination or servicing requirements throughout its operations;
   • Protect the mortgagee and FHA from unacceptable risk;
   • Guard against errors, omissions and fraud; and
   • Assure swift and appropriate corrective action.

4. Does the Quality Control function need to be independent of the origination function?

   The Quality Control function must be independent of the origination function. This independence may be accomplished in a variety of ways. Depending on a mortgagee’s operations, loan volume, staff size or other factors, a mortgagee may prefer one method over another. Quality Control functions may be performed using:

   1. In-House Staff Mortgagees may establish a unit that is dedicated solely to Quality Control. Staff performing Quality Control reviews must not be involved in the day-to-day processes that they are reviewing.

   2. Outside Firms Mortgagees may engage outside sources to perform the Quality Control function. The FHA approved sponsors of loan correspondents are acceptable as such outside sources. A mortgagee contracting out any part of its Quality Control function is responsible for ensuring that the outside source is meeting HUD’s requirements. Any agreement with the outside source must be in writing, state the roles and responsibilities of each party, and be available for review by HUD staff.

5. Do persons performing Quality Control reviews need to be qualified?

   Mortgagees must properly train staff involved in Quality Control and provide them access to current guidelines relating to the operations that they review. A mortgagee contracting out any part of its Quality Control function is responsible for ensuring that the outside source is meeting HUD’s requirements.

6. When should Quality Control reviews be performed?

   Mortgagees must ensure that quality control reviews are performed on a regular and timely basis. Depending on a mortgagee’s production volume, origination reviews may be performed weekly, monthly, or quarterly. The review of a specific mortgage should be completed within 90 days of closing.

   For mortgagees closing more than 15 loans monthly, quality control reviews must be conducted at least monthly and must address one month’s activity. Mortgagees closing 15 or fewer loans monthly may perform quality control reviews on a quarterly basis.

7. How and how many loans are chosen for review?

   The Quality Control Program must provide for the review of a representative sample of a mortgagee’s loans. This review must evaluate the accuracy and adequacy of the information and documentation used in reaching decisions in either the origination or servicing processes.

   Because it is not feasible to review all loans originated during a period, the Program must require that an appropriately sized sample is selected and evaluated during each review. A mortgagee who originates and/or underwrites 3,500 or fewer FHA loans per year must review 10% of the FHA loans it originates. A mortgagee who originates and/or underwrites more than 3,500 FHA loans per year may review 10 % of its loans or a statistical random sampling that provides a 95 % confidence level with 2 % precision. Each review must document how the sample size and selections were determined.

8. What needs to happen during the Quality Control loan review?

   The Quality Control Program must provide for the review and confirmation of information on all loans selected for review.

   1. Credit Report. A new credit report must be obtained for each borrower whose loan is included in a Quality Control review, unless the loan was a streamline refinance or was processed using a FHA approved automated underwriting system exempted from this requirement.
   2. Credit Document Reverification. Documents contained in the loan file should be checked for sufficiency and subjected to written reverification.
   3. Appraisals. A desk review of the property appraisal must be performed on all loans chosen for a Quality Control review except streamline refinances and HUD Real Estate Owned (REO) sales. In certain circumstances, a field review may be required.
   4. Occupancy Reverification. In cases where the occupancy of the subject property is suspect, mortgagees must attempt to determine whether the mortgagor is occupying the property.
   5. Underwriting Decisions. Each Direct Endorsement loan selected for a quality control review must be reviewed for compliance with HUD underwriting requirements, sufficiency of documentation and the soundness of underwriting judgments.

   6. Condition Clearance and Closing Each loan selected for a quality control review must be reviewed to determine whether:

      • Conditions which were required to be satisfied prior to closing were in fact met prior to closing;
      • The seller was the owner of record, or was exempt from the owner of record requirement in accordance with HUD regulations;
      • The loan was closed and funds disbursed in accordance with the mortgagee’s underwriting and subsequent closing instructions; and
      • The closing and legal documents are accurate and complete.

9. Can my accountant provide Quality Control reviews?

   There is often confusion with mortgagees in regard to the annual financial/FHA rule audit performed by an accoun
   tant and the at least quarterly Quality Control file audits performed by properly trained staff separate of production or by a qualified outside firm. The annual financial /FHA rule audit and the at least quarterly Quality Control file audits are two separate and distinct functions that must be conducted by mortgagees.

   Concerning the Quality Control file audits, mortgagees are required to properly train staff that are solely dedicated to Quality Control and provide them access to current guidelines relating to the operations that they may review.

   If mortgagees engage outside sources to perform any part of its Quality Control function, the mortgagee is responsible for insuring that the outside source is meeting HUDs requirements. Quality Control reviews must be done at least quarterly and must review the credit and collateral package in the loan file including compliance with HUD underwriting guidelines, assuring prior to closing conditions were met, closing documents were accurate and complete and the loan funded per underwriting and closing instructions. Any agreement with the outside source must be in writing, state the roles and responsibilities of each party, and be available for review by HUD staff.

   If outside sources, including accountants, are properly trained, have access to current HUD guidelines, are sufficiently familiar with HUDs requirements on all aspects of the loan process from application to funding, provide reviews at least quarterly and provide clear findings as to source and cause of deficiencies in writing to the mortgagee and to HUD as requested, the mortgagee can be relatively confident the outside source is qualified to conduct Quality Control reviews.

For more information, visit www.MortgageComplianceAdvisors.com.