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.

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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: Quality Control for TPOs

By Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

Today, the Department of Housing and Urban Development (HUD) published a Comment Request, in a Notice entitled Quality Control Requirements for Direct Endorsement Lenders.

Mortgagee Letter 2010-20, issued on June 11, 2010, outlined 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 lenders by the Federal Housing Administration (FHA). (Issuance)

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. (Article)

Please visit our Archive for relevant posts.

As of January 1, 2011, mortgagees that were previously approved as Loan Correspondents will only be able to participate as Third Party Originators (TPOs) in FHA-insured mortgage transactions if the conditions outlined in 24 CFR 202.8 are met.

Per 24 CFR 202.8 (3), DE lenders which sponsor TPOs are responsible for the actions of third party originators or mortgagees in originating loans or mortgages, unless applicable law or regulation requires specific knowledge on the part of the party to be held responsible.

Consequently, DE lenders will be responsible for conducting quality control on TPO originations of FHA-insured mortgage loans, and ensuring that their QC plan is expanded to contain this oversight provision.

Comment Period Deadline: February 22, 2011
Contact Information in Federal Register.

Overview

On and after January 1, 2011, 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 Direct Endorsement mortgagee.

HUD will hold the DE mortgagee responsible for compliance with FHA requirements in all aspects of an FHA loan transaction, whether performed by the DE mortgagee or by its sponsored TPO (unless applicable law or regulation governing the violations in question require specific knowledge on the part of the party to be held responsible).

Quality control is a core feature of HUD's verification and validation procedures. It is a regulatory compliance requirement that must be implemented in accordance with specified guidelines.

It is, therefore, critical that a DE mortgagee set forth and clearly delineate policies, procedures, approval guidelines, quality control requirements, and many other features of FHA and regulatory compliance, with respect to their sponsored TPOs.

All our clients that have TPO relationships now have their policies and procedures in place to support these new FHA relationship requirements.

ACTION: If your organization has TPO relationships, but has not drafted policies and procedures to comply with Mortgagee Letter 2010-20, we urge you to do so immediately.

Highlights

The Notice is soliciting comments from members of the public and affected agencies concerning the proposed collection of information to:

(1) Evaluate whether the proposed collection is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;

(2) Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information;

(3) Enhance the quality, utility, and clarity of the information to be collected; and

(4) Minimize the burden of the collection of information on those who are to respond, including the use of appropriate automated collection techniques or other forms of information technology (i.e., permitting electronic submission of responses).

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FHA: Quality Control Requirements for Direct Endorsement Lenders; Notice of Proposed Information Collection: Comment Request
Federal Register: 75/244
December 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.