Since the Federal Housing Administration (FHA) changed the way correspondents and mortgagees are approved with their agency, there has always been confusion at both the broker and lender level on who performs the post-closing quality control (QC) audits. Since that initial change in FHA approval, the broker’s interpretation has been “My sponsor is going to do the QC for me.” Of course when we called the lenders and large banks to validate this information last year, their response was generally, “We have not communicated such information nor have we approved such communication to our account executives.”
In order to clear up any misinterpretations in the previous Mortgagee Letters, the FHA has provided more specifics on what and how post-closing QC should be performed.
The U.S. Department of Housing & Urban Development (HUD) issued Mortgagee Letter 2011-02 on Jan. 5, 2011, made efforts to further clarify post-closing QC efforts and quality control plans. We’re now halfway through 2011 and many lenders are still not in full compliance. Here is a step-by-step view into what HUD is requiring:
►The procedures used to review and monitor sponsored third-party originations (STPOs) must be included in a mortgagee’s FHA-approved QC Plan. It’s not enough for the lender to start performing this review … they also must work it into their QC Plan and get it approved by FHA.
►All FHA-approved mortgagees, including those in a sponsored relationship, must have a QC Plan that requires the review of loans that are originated or underwritten.
Interpretation: It’s not just the sponsoring lender that needs a plan, but also all STPOs.
►For those mortgagees who have STPOs, the QC Plan must require the review of loans originated and sold to the mortgagee by each of its STPOs. Mortgagees must determine the appropriate sample amount of each STPO’s loans to review based on volume, past experience, and other factors.
Interpretation: The sponsoring mortgagee will articulate, in its QC Plan, how it will test and sample files from each STPO. This will be expensive to the sponsoring mortgagee, especially if the STPO’s volume is very low. This means that the sponsoring mortgagee could possibly be performing more than 10 percent sampling post-closing QC resulting in more files being audited whether the QC is performed in-house or outsourced. The next question is, “What technique will the sponsoring mortgagee use to ensure that each STPO’s files are sampled correctly?”
►In addition, sponsors must document the methodology used to review STPOs, the result of each review, and any corrective action taken of their review findings. A report of the QC review and follow-up that included 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.
Interpretation: Articulate the methodology used to review STPOs in the QC Plan.
►In addition to the loans selected for routine QC reviews, sponsoring mortgagees must review all loans that are originated or underwritten by their company and that are originated by their STPO that go into default within the first six payments (referred to as early payment defaults).
►In order to ensure that sponsoring mortgagees’ operations are in compliance with fair lending regulations, HUD requires that rejected applications must be reviewed within 90 days from the end of the month in which the decision was made.
The clearer this issue becomes, the more onerous it appears to be for FHA lenders. With FHA taking on more responsibility for insuring loans for America’s riskiest home loan borrowers, HUD will take whatever steps it deems necessary to mitigate risk and protect the program. The real question is whether lenders will be able to comply with the resources they have, outsource QC effectively or move away from FHA lending altogether.
Tommy A. Duncan, CMT, is president of Quality Mortgage Services LLC, a provider of mortgage quality assurance and mortgage compliance solutions. He was instrumental in developing the firm’s QA/QC software currently in use by mortgage bankers/lenders. Tommy may be reached by phone at (615) 591-2528, ext. 124 or e-mail
[email protected].
