Before your organization can become FHA approved, HUD requires that you submit a quality control plan in writing. This quality control plan must be fully functioning from the date of your initial FHA approval. You can find basic requirements for a quality control plan in chapter 7 of the HUD Mortgagee Approval Handbook 4060.1, if you choose to write the plan yourself. Alternatively, you can purchase a quality control plan from a third party. The third party should ask some basic questions to make sure the quality control plan they create is tailored to your specific circumstances.
To help mortgage lenders and brokers understand HUD’s quality control plan requirements, below is a summary of some of HUD’s requirements (mostly in the context of Single Family production). (For full guidelines, see HUD Handbook 4060.1.)
Goals of Quality Control
HUD requires that quality control programs meet the following goals:
- “Assure compliance with FHA’s and the mortgagee’s own origination or servicing requirements throughout its operations;
- Protect the mortgagee and FHA from unacceptable risk;
- Guard against errors, omissions and fraud; and
- Assure swift and appropriate corrective action.”
Your quality control functions may be performed by in-house staff, but only if those employees are properly trained and do not have part in the origination or servicing. They cannot be involved in the day-to-day processes they are reviewing. This means that if you choose to do your quality control file audits in-house, you need to set up a unit that is dedicated solely to quality control.
As an alternative, you can outsource your quality control function to a third party. If you choose to outsource, HUD requires a written agreement between the third party and your organization. HUD also states that you are responsible for making sure that the third party is meeting HUD’s requirements.
You are also required to perform quality control reviews (audits) on a regular and timely basis. If your organization closes more than 15 loans in a month, your audits need to be performed at least monthly. If you close 15 or fewer loans monthly, you can perform your audits quarterly. To meet HUD’s deadline, the quality control file audits need to be completed within 90 days of closing.
As part of your quality control plan, the loans you review should be a representative sample, to evaluate accuracy and adequacy. The general rule is that you should audit 10% of your FHA loans. In addition to that 10%, you must also audit 100% of the loans in early payment default. These are defined as loans going into default within the first six payments. Furthermore, you need to make sure that you are reviewing all aspects of operation, including auditing loans from all branch offices, loan processors, loan officers, underwriters, etc. If you do a significant amount of work with certain appraisers, real estate companies, and builders, you should also review their work.
Documentation and Verification
For each loan being audited, HUD requires that certain documents be reviewed and confirmed.
a. New Credit Report – HUD requires that you order a new credit report for each borrower whose loan is under review, unless the loan is a streamline refinance or was processed with an FHA approved automated underwriting system.
b. Re-verifying Documents – you need to re-verify certain items of documentation, such as the borrower’s employment or funds to close.
c. Appraisal Desk Review – except on streamline refinances and HUD Real Estate Owned sales, a desk review of the property appraisal must be performed for every audited loan. Furthermore, HUD expects field reviews to be performed on 10% of the loans you audit. Generally, select loans for field review if there are any issues with the desk review, such as discrepancies or items of suspect.
d. Occupancy Re-Verification – If the occupancy of the subject property is suspect, try to verify that the borrower is actually occupying the property. If the owner is not occupying the property, you need to report this in writing to HUD.
All offices that originate or service FHA loans must be reviewed to make sure they are in compliance with FHA requirements. These offices include traditional or nontraditional branches and direct lending offices. For offices with certain higher risk criteria, annual visits are mandatory. For other sites, you can determine how often is appropriate for you to visit.
During the visits, items to be reviewed include such things as making sure the office is properly registered with FHA, the address is current, the office is professional and business-like, walk-in customers can clearly identify the office, you offer toll free lines or accept collect calls from borrowers, each office is sufficiently staffed with trained employees, the office procedures are appropriately revised to reflect changes in HUD policies, and so on. Furthermore, you must check at least semi-annually that no employees are debarred, suspended, or under Limited Denial of Participation.
Reporting and Corrective Action
Once the quality control file audits are complete, management must be notified of any findings within one month. Management should then create a report which contains any actions being taken based on the findings, a timetable for their completion, and any necessary follow-up actions. You do not need to report insignificant findings to HUD. Submit your findings to HUD (in writing) only if there are findings of fraud or other significant violations. Such findings need to be reported to HUD within 60 days of their initial discovery.
Keep your quality control review report and the follow up on file for two years. This includes findings from the audit, actions taken, and procedural information.