FHA: Updates Quality Control Requirements

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.

Effective: Immediately

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

Rejected applications must be reviewed within 90 days from the end of the month in which the decision was made.

Visit Library for Issuance

Quality Control Requirements for Direct Endorsement Lenders
Mortgagee Letter 2011-02
January 5, 2011

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FHA: Issues FHA Connection Update for Sponsored TPOs

In my article, entitled FHA Issues Guidance for Lender Approvals (July 2010, National Mortgage Professional Magazine), I discussed the many changes that would be required pursuant to Mortgagee Letter 2010-20.

This ML, issued on June 11, 2010, outlines some of the most important revisions that HUD-FHA has made to its single family loan origination program and contained the long-awaited guidance regarding the implementation of its Final Rule. That Final Rule adopted changes pertaining to the approval of mortgage lenders by the Federal Housing Administration (FHA) that are designed to strengthen FHA by improving its management of risk.

If your organization has not drafted and begun implementing policies and procedures to comply with Mortgage Letter 2010-20, I highly urge you to do so immediately.

After December 31, 2010, loan correspondents (i.e., Third-Party Originators, so-called "TPO"s) will only be permitted to continue participation in FHA programs by establishing a sponsorship relationship with an FHA-approved mortgagee. Indeed, loan correspondents will no longer have access to non-public FHA systems, beginning January 1, 2011 (i.e., FHA Connection). Only FHA-approved mortgagees will be permitted to order FHA case numbers from the FHA Connection. HUD will provide future guidance, with respect to the processing of case numbers ordered prior to the January 1, 2011.

Mortgagee Letter 2010-33 has been expected. It describes the system enhancements to FHA Connection, providing notice to mortgagees who are sponsors ("Sponsoring Mortgagees') of sponsored third party originators ("Sponsored Originators") of new FHA Connection data submission requirements as was announced in Mortgagee Letter 2010-20.

For transactions originated by an FHA-approved loan correspondent, mortgagees should follow the current process through December 31, 2010.

FHA Connection enhancements will be implemented on October 4, 2010, and sponsoring mortgagees must begin complying with the new data entry requirements on that date.

_____________________________________

Highlights

EFFECTIVE DATES

On or After October 4, 2010

• All required sponsored origination data fields must be completed on assigned case numbers assigned.

• Sponsoring mortgagees will no longer enter their 10 digit FHA ID in the FHA Connection as the loan originator for loans involving a sponsored originator, as previously advised in Mortgagee Letter 2010-20, as a temporary workaround pending this system enhancement release.

• For mortgagees using B2G (FHA Connection Business to Government) that are unable to modify their systems to accommodate the transmission of the Employer Identification Number (EIN) by October 4, 2010, the FHA Connection Case Number Assignment screen must be used to order a case number for sponsored originator transactions.

• The modified HUD/VA Addendum to the Uniform Residential Loan Application (92900-A) is required for all applications.

Until January 1, 2011

• For loan originations not involving a sponsored originator, FHA mortgagees may use the prior version of the 92900-A (dated 5/2008) until January 1, 2011.

As of January 1, 2011

• The FHA-approved loan correspondent program will no longer be available, and B2G mortgagees must comply with new systems requirements to support collection of sponsored originator data. Only FHA-approved entities will have direct access to FHA Connection.

SYSTEM AND SCREEN CHANGES

• New Sponsored Originator Maintenance Screen Modified Case Number Assignment Screen

• Modified Case Transfer Screen

• Modified Insurance Application and HECM Insurance Application Screens

• Modified Case Query Screen

• Viewing Sponsored Originator Performance in Neighborhood Watch

• FHA TOTAL Scorecard Changes

FORM CHANGE AND NEW SIGNATURE COMPLIANCE

HUD/VA Addendum to Uniform Residential Loan Application (92900-A)

• Modified on page 3 to capture necessary information for sponsored originators, as follows:
  • Loan Origination Company - Entity's Legal Name of the originating mortgagee
  • Loan Origination Company Tax ID -- Employer Identification Number issued by the Internal Revenue Service (IRS)
  • NMLS ID of the Loan Origination Company - The unique identifier of the company, if licensed with NMLS

• For those loans originated by a sponsored originator, the sponsoring mortgagee must enter its name and address in block 15 on pages 1 and 3. Directly below block 15 on page 3 are the new fields the mortgagee must enter for capturing the sponsored origination information described above.

• The revised form 92900-A (dated 9/2010) must be used for all loan applications taken by a sponsored originator on or after October 4, 2010.

• For loan originations not involving a sponsored originator, FHA mortgagees may use the prior version of the 92900-A (dated 5/2008) until January 1, 2011.

Uniform Residential Loan Application

• On the Universal Residential Loan Application (URLA), the actual interviewer's name, signature and telephone number must appear on page 4, regardless of who employs the interviewer (e.g., a sponsored originator).
• While common practice in the industry is for the interviewer to also sign page 1 of the 92900-A, if a sponsored originator is involved, it is now required that the sponsoring mortgagee must sign and date page 1 of the URLA.

_____________________________________

Visit Library for Issuance

FHA Connection Enhancements to Support
Sponsored Third Party Originations (Sponsored Originations)
Mortgagee Letter 2010-33, September 21, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.