On January 5, 2011, HUD-FHA issued Mortgagee Letter 2011-02, which clarifies quality control requirements relating to several important areas: (1) due to recent changes to the lender eligibility criteria for participation in FHA programs (i.e., "Helping Families Save Their Homes Act of 2009" (HFSH Act)); (2) "Continuation of FHA Reform: Strengthening Risk Management through Responsible FHA-approved Lenders" (Final Rule FR 5356-F-02); and, (3) Mortgagee Letter 2010-20.
Additionally, this Mortgagee Letter clarifies Quality Control requirements for servicing transfers and loan sales, reporting of fraud and material deficiencies, and the required timeframes for mortgagees to review rejected applications.
Especially if you are a Sponsoring Third Party Originator, we urge you to revise your Quality Plan immediately and implement the requirements contained in Mortgagee Letter 2011-02.
SPONSORING THIRD PARTY ORIGINATORS
Beginning January 1, 2011, FHA will neither approve applications for approval as a loan correspondent, nor monitor lenders acting in such capacity for the purpose of the origination of loans submitted for FHA insurance. All lending entities performing in the capacity of a loan correspondent will thereafter be referred to as Sponsored Third Party Originators.
Consequently, all FHA-approved mortgagees will be responsible for performing quality control reviews of their Sponsored Third Party Originators.
The procedures used to review and monitor Sponsored Third Party Originators must be included in a mortgagee's FHA-approved Quality Control Plan.
Therefore, the Quality Control Plan must be reviewed and, where required, revised with respect to the review of loans originated and sold to the mortgagee by each of its Sponsored Third Party Originators.
- Mortgagees must determine the appropriate sample amount of each Sponsored Third Party Originator's loans to review based on volume, past experience, and other factors specified by the Department in Paragraph 7-6(C) of HUD Handbook 4060.1, REV-2.
- Sponsors must document the methodology used to review Sponsored Third Party Originators, the results of each review, and any corrective actions taken as a result of their review findings.
A report of the Quality Control review and follow-up that includes the review findings and actions taken, and the procedural information (such as the percentage of loans reviewed, basis for selecting loans, and who performed the review), must be retained by the mortgagee for a period of two years.
EARLY PAYMENT DEFAULTS
In addition to the loans selected for routine quality control reviews, mortgagees must review all loans that are originated or underwritten by their company and that are originated by their Sponsored Third Party Originators that go into default within the first six payments (referred to as early payment defaults). (Handbook 4060.1, REV-2 defines early payment defaults as loans that become 60 days past due within the first six payments.)
- Mortgagees must perform reviews of early payment defaults within 45 days from the end of the month the loan is reported as 60 days past due.
- The Early Payment Default review report and follow-up, including review findings and any actions taken, along with procedural information (as specified in HUD Handbook 4060.1 Rev.-2, Paragraph 7-6 (E)), must be retained by the mortgagee for a period of two years.
SALES AND TRANSFER OF LOANS
Mortgagees are responsible for determining whether the Mortgage Change Record was reported accurately to HUD via the FHA Connection on servicing transfers or sales of loans. Mortgagees' Quality Control Plans must contain a requirement to ensure the review of all Mortgage Change Records for accuracy, as follows:
For cases involving the transfer of legal rights to service FHA-insured loans:
- The transferee must report the change of legal rights to service to HUD The transferor should verify that the change of legal rights to service has been reported, and that all details contained in the report are accurate.
For cases involving the holder's sale of loans:
- The holder (seller) must report the sale of loans to HUD The buyer must confirm that the sale of loans has been reported, and that all details contained in the report are accurate.
REPORTING OF FRAUD OR MATERIAL DEFICIENCIES
If a mortgagee discovers potential fraud or other serious material deficiencies, it must be immediately reported to the HUD via the Neighborhood Watch Early Warning System (see: Handbook 4060.1 Rev.-2, Paragraph 7-3 (J)).
- Management is expected to review and respond accordingly to each instance of fraud or other serious material deficiency, indicating what steps if any have been taken to cure and/or resolve these violations.
- All corrective actions taken in response to instances of fraud or other serious material deficiencies should be reported to the Department via the Neighborhood Watch Early Warning System.
- Mortgagees must monitor all loans they originate, underwrite or service for potential fraud or serious material deficiencies throughout the lifecycle of the loans.
Rejected applications must be reviewed within 90 days from the end of the month in which the decision was made.
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