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U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000
December 26, 1989
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 89-32
TO: ALL APPROVED MORTGAGEES
SUBJECT: Quality Control Plan for Approved Mortgagees
The purpose of this letter is to advise all
approved mortgagees of a significant change in the
Department's requirements for maintaining a Quality Control
Plan for the origination and servicing of HUD-FHA insured
mortgages.
One of the principal HUD-FHA objectives has been to
improve the quality of loan origination and servicing by
approved mortgagees. In keeping with this objective, the
Department requires approved mortgagees to have a written
Quality Control Plan for loan origination and servicing.
This requirement is contained in HUD-FHA regulations 24 CFR
Section 203.2(j). To date, the Department has not required
a specific Quality Control Plan to be implemented by
mortgagees. However, guidelines for quality control
procedures were provided in HUD Handbook 4060.1, Mortgagee
Approval Handbook. These guidelines have remained
essentially unchanged since 1980.
Effective immediately, the Department has
established minimum requirements for an acceptable Quality
Control Plan for mortgagees for loan origination and
servicing. The new requirements are set forth in the
enclosure to this Mortgagee Letter. All approved
mortgagees must take immediate action to ensure that their
existing Quality Control Plan meets the HUD-FHA
requirements. Failure to comply with these requirements is
grounds for an administrative sanction by the Mortgagee
Review Board including the withdrawal of HUD-FHA mortgagee
approval.
We believe that the new requirements will benefit
approved mortgagees and the Department in improving the
quality of HUD-FHA insured mortgages and reducing the risk
to the Department's insurance funds. These new
requirements are based on the Department's extensive
experience in carrying out its monitoring activities with
respect to mortgagees. They are representative of quality
control measures currently used by a large segment of the
mortgage lending industry and should not impose an undue
burden on any mortgagee doing HUD-FHA business. We will
revise HUD Handbook 4060.1 in the near future to
incorporate these requirements.
If you have any further questions concerning this
letter, please contact the Office of Lender Activities and
Land Sales Registration at (202) 755-6924.
C. Austin Fitts
Assistant Secretary for Housing-
Federal Housing Commissioner
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QUALITY CONTROL PLAN FOR LOAN ORIGINATION AND SERVICING
REQUIREMENT. As a condition of HUD-FHA approval,
mortgagees must have implemented a plan for quality control
in the origination and if servicing HUD-FHA insured
mortgages, a plan for quality control in servicing HUD-FHA
insured mortgages. The Quality Control Plan must meet the
requirements set forth herein. It must be a prescribed
function of the mortgagee's operations and assure that the
mortgagee maintains compliance with HUD-FHA requirements
and its own policies and procedures. It must be sufficient
in scope to enable the mortgagee to evaluate the accuracy,
validity and completeness of its loan origination and
servicing operations. It must provide for independent
evaluation of the significant information gathered for use
in the mortgage credit decision making and loan servicing
process for all loans originated or serviced by the
mortgagee. The Quality Control Plan must enable the
mortgagee to initiate immediate corrective action where
discrepancies are found.
a. Policy and Objectives. Approved mortgagees must
establish a formalized quality control plan which utilizes
a program of internal or external audit or provides for an
independent review by the mortgagee's
management/supervisory personnel who are knowledgeable and
have no direct loan processing, underwriting or servicing
responsibilities. The quality control plan must provide
for periodic reports which will identify for senior
management areas of deficiency including, for example,
errors and omissions, unacceptable patterns or trends, as
well as fraud and intentional violations of regulations.
Senior management must initiate prompt and effective
corrective measures to eliminate the deficiencies. All
employees involved in loan origination and servicing must
be familiar with and understand the mortgagee's policies
and procedures regarding quality control.
The primary objectives of the quality control plan are
to:
1) Assure compliance with HUD-FHA requirements.
2) Assure that the mortgagee's policies and standards
are known and adhered to by its personnel.
3) Assure that the mortgagee's procedures are revised
in a timely manner to accurately reflect changes
in HUD requirements; keep its personnel informed
of the changes; and assure that employees are held
accountable for performance failures or errors.
4) Assure that prompt and effective corrective
measures are taken and documented when
deficiencies in loan origination, underwriting or
servicing are identified and to inform its
personnel when deficiencies are found.
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5) Assure that procedures exist for expanding the
scope of quality control reviews where fraudulent
activity or patterns of deficiencies are identified.
b. Scope. The quality control plan must provide for a
review of not less than ten percent of all HUD-FHA insured
mortgages originated by the mortgagee on a monthly basis
including its branches, loan correspondents and authorized
agents. A representative sample of mortgages that is
sufficient in number being serviced by the mortgagee, or
its servicing agent, must also be reviewed to assure that
HUD-FHA mortgage servicing policies and requirements are
being met. For each branch office that originates or
services HUD-FHA insured mortgages, an on-site branch
office review should take place at least once every year.
The Quality Control Plan must also provide for a review of
the mortgagee's files and records to determine compliance
with HUD's Affirmative Fair Housing Marketing Regulations.
Quality control reviews must include:
1) Selection of loans on a random basis including
loans from all branch offices, authorized agents, loan
correspondents and servicing agents.
2) Assurance that all loan officers, underwriters,
appraisers and servicers will have loans subjected to
reviews.
3) Analysis of all loans which go into default with
six or fewer payments made by the mortgagor.
4) Procedures for expanding the scope of the review
where a pattern of deficiencies or fraudulent activity
is disclosed.
c. Initiate Corrective Action. The quality control plan
must require written notification to the mortgagee's senior
management, at least quarterly, of deficiencies cited as a
result of the reviews. Senior management must promptly
initiate action to correct all deficiencies. The actions
taken by management must be formally documented by citing
each deficiency, identifying the cause of the deficiency,
and providing management's response or actions taken.
Management should assure that documentation is promptly
distributed to all loan origination, underwriting and
servicing personnel. Employees should be provided with
corrective instructions where patterns of deficiencies are
identified in processing, underwriting or servicing.
d. Notification to HUD of Significant Discrepencies.
Approved mortgagees are required to report any violation of
law or regulation, false statements or program abuses by
the mortgagee, its employees or any other party to the
transaction to the HUD Regional Office, the HUD Area Office
or to the HUD Regional Office of Inspector General (refer
to HUD Handbook 4000.2 REV-1).
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e. Required Elements of the Quality Control Plan.
1) General
The quality control plan must:
a) Assure that each office of the mortgagee
including, if applicable, its approved Loan
Correspondent(s), Authorized Agent(s), service centers
and branches maintain copies of all HUD issuances,
including regulations, handbooks, mortgagee letters,
circular letters, etc., which are relevant to the
mortgagee's FHA origination and servicing activities.
These documents must be accessible to all employees,
periodically reviewed with appropriate staff, and kept
current.
b) Assure that all loans submitted by the mortgagee
to HUD-FHA for mortgage insurance endorsement are
processed by employees of the mortgagee, its approved
Loan Correspondent(s) or Authorized Agent(s).
c) Assure that HUD-FHA Mortgage Insurance Premiums
(MIP's) are remitted within I5 days from the date of
loan closing and that late charges and interest
penalties are promptly submitted.
d) Assure that sales of HUD-FHA insured mortgages by
the mortgagee or transfers of loan servicing are
properly reported to HUD on Form HUD 92080, Mortgage
Record Change and that the purchaser be advised of any
loans subject to a HUD audit or investigation.
e) Assure that the termination of HUD-FHA mortgage
insurance of a mortgage is properly reported to HUD on
Form HUD 2344, Lender's Request for Termination of
Home Mortgage Insurance and that an assumption of a
mortgage is properly reported on Form HUD 92080,
Mortgage Record Change.
f) Assure that escrow funds received from mortgagors
are not excessive and are not used for any purposes
other than that for which they are received.
g) Assure that the mortgagee does not employ for HUD
origination, underwriting or servicing any individual
who is debarred, suspended or subject to a Limited
Denial of Participation (LDP).
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h) Assure that the mortgagee is in compliance with
the provisions of the Real Estate Settlement
Procedures Act (RESPA), including distribution to
mortgagors of the Special Information Booklet and good
faith estimates which bear a reasonable relationship to
actual costs and, disclosure of business realtionships
with a particular provider of services.
i) Assure that the mortgagee keeps records of quality
control findings and actions taken.
2) Loan Origination
a. General requirements:
1) The quality control plan must provide for the
review of loans rejected by the mortgagee. These
loans cannot be included in the ten percent
review requirement.
2) The quality control plan must provide for the
written reverification of the mortgagor's
employment, deposits, gift letter or other
sources of funds and reordering of a new credit
report from another credit source. The report
must be a Residential Mortgage Credit Report
(RMCR).
3) Direct Endorsement lenders must perform field
reviews on not less than ten percent of the
appraisals performed by their own staff
appraisers.
4) Quality control reviews should be performed
within 90 days of closing of the loan.
b. Specific requirements:
The plan must provide for a review of the origination
and underwriting function in order to:
1) Determine whether each loan file contains all
required loan processing, underwriting and legal
documents.
2) Determine whether a face-to-face interview was
performed with the mortgagor prior to the signing
of the fully completed loan application Form
HUD-92900 and submission of the loan for
underwriting.
3) Determine whether relevant loan documents were
signed in blank by the mortgagor or employee(s)
of the mortgagee; and that all corrections were
initialed by the mortgagor or employee(s) of the
mortgagee.
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4) Determine whether verifications of employment,
verifactions of deposit and the credit report were
handled by any interested third party or the
mortgagor.
5) Determine whether credit report(s) were ordered
from an authorized credit bureau or agency and if more
than one credit report was ordered; determine whether
all credit reports were submitted with the loan package
to HUD-FHA.
6) Determine whether the preliminary loan application
lists each outstanding liability and each asset of the
mortgagor that was used to qualify for the mortgage.
7) Determine whether any outstanding judgements shown
on the credit report were shown on the Form HUD 92900
with an accompanying explanation and documentation.
Explanations are not acceptable where there is a
delinquency or judgement involving a debt to the
Federal Government.
8) Determine whether the loan file contains pertinent
documentation if the mortgagor's source of funds for
the required minimum investment was other than deposits
in a savings institution and whether the source of
funds was verified.
9) Determine whether the loan file contains a
financial statement and a business credit report if the
mortgagor is self-employed.
IO) Determine whether any gift letter reflects
intention of repayment of funds, the relationship of
donor to mortgagor and whether the funds were
deposited.
Il) Determine whether the HUD-1 settlement statement
was accurately prepared and certified to properly.
This involves comparison of the HUD-1 with other
relevant loan documents to determine whether the
mortgagor made the required minimum investment and
whether any seller's credit resulted in an over-insured
mortgage.
l2) Determine whether the loan was current at the time
it was submitted to HUD-FHA for mortgage insurance
endorsement.
l3) Determine whether the mortgagor transferred the
property at the time of closing or soon after closing
indicating the possible use of a "strawbuyer" in the
transaction.
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l4) Determine whether there was written reverification
of the mortgagor's employment, deposits, gift letter or
other source of funds and a new credit report
reordered.
15) Determine whether all conflicting information or
discrepancies were resolved and properly documented in
writing prior to submission of the loan to HUD-FHA for
mortgage insurance endorsement. This involves
comparison of the preliminary loan application and
original verifications of employment, verifications of
deposit, credit report and other relevant loan
documents with the final loan application Form HUD
92900 and all reverification documents.
16) Determine whether a field review of the appraisal
was performed.
17) Determine the accuracy and completeness of
underwriting conclusions and mortgagee documentation.
3) Loan Servicing
a. General requirements:
1) The quality control plan must provide for the
selection of loans on a random basis that are in
sufficient numbers and represent the universe of
HUD-FHA insured mortgages serviced by the mortgagee or
its agents.
2) The quality control plan must provide that all loan
servicing staff, including managers, will have their
loans subject to review.
3) The quality control plan must provide for an
analysis of loans for general compliance with HUD-FHA
servicing requirements, and special requirements such
as assignment processing, Section 235 mortgages,
forbearance, claims without conveyance, deficiency
judgements and foreclosure.
4) The quality control plan must provide for analysis
of escrow administration.
5) The quality control plan must provide for an
analysis of operating procedures for collection and
recordation of payment receipts; escrow bills;
disbursements from escrow; and claim submissions.
6) The quality control plan must provide for the
analysis of loans in foreclosure to determine
compliance with HUD-FHA fiscal requirements and
procedures such as extension requests,
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b. Specific requirements:
The plan must provide for a review of the loan
servicing function in order to:
1) Determine that the mortgagee promptly establishes
loan servicing records after loan closing and that the
servicing records contain the information necessary for
the mortgagee to properly service the mortgage in
compliance with HUD Handbook 4330.1, HUD regulations,
Mortgagee Letters and instructions for the submission
of claims.
2) Determine that mortgagors have been notified when
the mortgagee acquires servicing from another mortgagee
and that loan servicing records are promptly
established immediately upon transfer of a loan to the
mortgagee's loan servicing portfolio.
3) Determine through review of individual loan
servicing records that the amount of fees and charges
imposed on the mortgagor do not exceed those permitted
by HUD-FHA and the mortgage provisions. Among these
are:
a) Late charges and partial mortgage payments
properly assessed;
b) Annual analysis of escrow account including
appropriate adjustments, and disbursements made
promptly as the items for which the escrow was
established become due and payable;
c) Fee or penalty not charged for prepayment or
reinstatement of mortgage;
d) Attorney's fee collected only for the
initiation of foreclosure proceedings; and
e) Assumption fees
4) Determine that requests from mortgagors concerning
their individual mortgage accounts are promptly
responded to.
5) Determine that mortgagor escrow accounts are not
commingled with the mortgagee's operating accounts.
6) Determine that Section 235 recertifications are
performed annually and assistance payments are
accurately computed using the proper formula and that
the income used for computing the assistance payments
is compared to the income included in the mortgagor's
income verification.
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7) Determine that a claim for insurance benefits, form
HUD 27011, submitted to HUD-FHA for payment, was
properly calculated and the claim amount fully
supported.
8) Determine that all defaulted loans with six
payments or less are promptly identified and analyses
performed in order to identify any origination or
underwriting deficiencies once the defaulted loan has
been identified.
9) Determine that mortgagors are provided every
reasonable opportunity to remedy a delinquency or
default including forbearance and recasting prior to a
determination regarding foreclosure proceedings.
10) Determine that deeds-in-lieu are pursued where
appropriate and that deficiency judgements are taken
where required.
Il) Determine that adequate collection activities and
accurate documentation of collection efforts, including
documentation of the referral of the mortgagor to a HUD
approved counseling agency is maintained.
12) Determine that a face-to-face interview with the
mortgagor is attempted before three full mortgage
installments become delinquent. If the face-to-face
interview was not conducted, documentation must be
provided of the permissible exception allowed by HUD.
13) Determine that an acceptable method of forbearance
relief is provided to the mortgagor prior to initiation
of foreclosure proceedings; review individual
forbearance agreements and supporting financial data
submitted or disclosed by the mortgagor to assure that
they are reasonable.
14) Determine that property inspections to protect and
preserve the property are performed when the mortgagor
fails to make a mortgage payment and no contact is
possible within 45 days of the due date, or if the
mortgage is in foreclosure and the property is vacant.
15) Determine that HUD-FHA reporting requirements
under the Single Family Default Monitoring System are
complied with. This includes the accurate and timely
submission of both monthly and quarterly reports.
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l6) Determine that mortgagors are notified of the
availability of mortgage foreclosure relief under the
home mortgage assignment program and that HUD-FHA
requirements for processing assignment applications are
complied with.
17) Determine that foreclosure proceedings are
initiated and completed on a timely basis and in
accordance with HUD-FHA requirements.
18) Determine that there are sufficient controls to
assure that all aspects of the claims for insurance
benefits are accurately prepared and on a timely basis
to minimize the loss to HUD.
19) Determine that HUD pamphlet HUD-426 is mailed to
all mortgagors no later than the second month of
delinquency.
20) Determine that mortgagor information is reported
regularly to credit reporting bureaus.
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