www.hudclips.org 


U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

May 26, 1993
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 93-14
     TO:  All Approved Mortgagees
     SUBJECT:  Quality Control for Origination and Servicing
               Revisions to Mortgagee Letter 89-32
 
           The purpose of this Letter is to clarify, revise and update some
     of the requirements of Mortgagee Letter 89-32.
 
           Since Mortgagee Letter 89-32 was issued in December of 1989,
     most mortgagees have made considerable progress towards the
     implementation of effective Quality Control Plans.  Since that time,
     we have received suggestions from within the Department and from the
     industry concerning ways our Quality Control requirements could be
     improved and/or modified.
 
     Sampling Requirement
 
           We have received several requests for permission to use
     statistical sampling in the selection of loans for review.  For large
     originators and servicers we agree this proposal is more reasonable
     while providing similar results.  Therefore, originating mortgagees
     may choose to review the lesser of 10% of all loans closed on a
     monthly basis or a random sample that provides a 95% confidence level
     with 2% precision.  Lenders choosing to use the random sample approach
     must review all loans that went into default within six months of
     closing in addition to the number selected for random sample.
     Servicers may apply the same criteria to their portfolio within the
     time constraints discussed later in this Mortgagee Letter.
     Originators and servicers may be asked by the HUD local office or the
     Office of Lender Activities and Land Sales Registration to explain the
     method they used in statistical sampling.
 
           Lenders closing fewer than 10 loans annually must review at
     least one loan.  If fewer than 10 loans are originated monthly, the
     10% sampling requirement may be on a quarterly basis.
 
     Loan Origination
 
           Loan Correspondents
 
           All HUD/FHA-approved lenders, including loan correspondents, are
     required to have and implement a Quality Control Plan.  Sponsors of
     loan correspondents are required to perform quality control reviews on
     loans purchased from each of their correspondents; however, this is
     not meant to be a substitute for the correspondent's own quality
     control.  A correspondent may enter into a contractual arrangement
     with its sponsor or some other entity to perform its quality control.
     The results of these reviews must be passed on to the management of
     the loan correspondent and appropriate action must be taken.  (Please
     see "Use of Outside Firms" on page 4 of this letter.)
 
_____________________________________________________________________
 
                                   2
 
      Selection of Loans
 
      To improve the quality of reviews, we are providing guidelines that
lenders may use in selecting loans for review.  Lenders must ensure that
all loan officers, underwriters, appraisers and branches are subject to
review.  A more thorough review will include emphasis on those individuals
(including real estate agents) who are large producers, newly employed, or
concentrating in soft market areas.  In addition, all loans going into
default within the first six months must be reviewed.
 
      The Department's experience in reviewing loans that went into early
default has shown that many of the characteristics listed below are often
present.  We recommend lenders use these characteristics, or any additional
ones they find necessary, in identifying loans to be reviewed.  Such
targeting of loans will make quality control reviews more effective.
 
                            Loan Selection Guidelines
 
        LOAN CHARACTERISTICS                 MORTGAGOR CHARACTERISTICS
 
- Mortgagors owning other                    - No credit history
  real estate                                - No or new bank accounts
- 2-4 unit properties                        - Large earnest money deposit
- Non-occupying                              - Large increase in bank
    co-mortgagors                               account
- Sweat equity                               - Little cash remaining after
- Excessive seller                             closing
  concessions                                - Housing expense increasing
- Identity of interest                          by 1.5 times
  between buyer and                          - Front ratio > 29%
  seller                                     - Back ratio > 41%
- New construction                           - <18 months with current
- Soft market areas                             employer
- Rent credit                                - Gift letter
                                             - Self-employed
 
      Credit Report
 
      It is no longer necessary for a lender to obtain a full Residential
Mortgage Credit Report (RMCR) on all loans reviewed, as previously required
by 89-32.  It is permissible to use a three-repository infile report.  All
information received from the repositories must be included in the merged
report.  The merge function must be limited to listing duplicate tradelines
together for ease in reading the report.  However, a full RMCR must be
obtained on at least 10% of all loans subject to quality control, on cases
in which the infile credit report reveals discrepancies, and in cases of
early default.
 
_____________________________________________________________________
 
                                   3
 
      Appraisal Review
 
      A desk review of the property appraisal must be performed on all
loans chosen for a quality control review.  HUD Handbook 4000.4 REV-1,
paragraph 2-6(D), identifies the elements of that review.
 
      Ten percent (10%) of all appraisals done by staff appraisers must be
field reviewed and a sampling of appraisals done by fee personnel must be
field reviewed.  The size of the sample for fee appraisals is left to the
lender to determine.  Field reviews must be performed by the Direct
Endorsement Underwriter or by review appraisers employed on a contract
basis.  Loans selected for field review may be included in the normal
universe of loans selected for quality control.
 
      Home Mortgage Disclosure Act
 
      Based upon our experience in collecting information under the Home
Mortgage Disclosure Act (HMDA), we have found that the information is often
inaccurate.  For this reason we are requiring that HMDA reporting be
included in lenders' ongoing quality control.  The review must ensure that
HMDA reporting to HUD/FHA is being done; the information being reported is
accurate; all required information is being reported; and the information
is reported promptly.
 
      Rejected Loans
 
      A minimum of 10% of total loans rejected must be reviewed,
concentrating on three particular areas.  First, the reasons given for
rejection must be reviewed and determined to be valid.  Second, lenders
must ensure that a senior staff person or officer of the company or a
committee chaired by a senior staff person or officer concurred with the
rejection.  Finally, lenders must ensure that the requirements of the Equal
Credit Opportunity Act were met and documented in each file.  Where
possible discrimination is noted, the lender is expected to take immediate
corrective action.
 
      Alternative Document Loans
 
      Alternative document loans must be included in quality control
reviews.  The requirements for these loans are set forth in Mortgagee
Letters 91-51 and 92-15.
 
_____________________________________________________________________
 
                                   4
 
Loan Servicing
 
      Sampling Requirement
 
      Because much of servicing is computerized, we do not think it is
necessary to review all areas on a monthly basis.  However, we do consider
the following areas of sufficient importance to warrant monthly review:
servicing delinquent accounts, foreclosures, Section 235 loans, MIP
billing, forbearance, claims and reporting under the Single Family Default
Monitoring System (SFDMS).  All other areas such as escrow analysis,
adjustable rate mortgages, paid-in-full mortgages and assumptions may be
reviewed on a quarterly basis.
 
      Other Issues
 
      The Department has found that many lenders are not submitting the
correct monthly MIP to HUD or are failing to submit monthly MIP at all.  It
is the servicer's responsibility to ensure the correct monthly MIP is being
submitted.  It is especially important to determine the correct MIP has
been paid on all loans being purchased from other lenders.  Therefore, your
quality control reviews of escrow accounts must include a review of the
Mortgage Insurance Certificate to check the Section of the Act Code and
date of endorsement.  This will determine whether a monthly or risk-based
premium is due.  This review must include a sampling of recently purchased
loans.
 
      In addition, the Department has found the location of loans to be a
problem.  Therefore, servicers must include a review of the Mortgage Record
Change, HUD-92080, in their quality control reviews to ensure these forms
are completed when loans are sold to another servicer.  It is also
important to review recently purchased loans to ensure the selling servicer
submitted the 92080.  Therefore, your quality control reviews of transfers
of servicing must include a sampling of each recently purchased portfolio.
 
General
 
      Use of Outside Firms
 
      Those lenders who elect to not perform their own quality control are
free to make use of outside firms that provide this service.  Service
provided by these firms must comply with the Department's quality control
requirements, and must provide written reports to management.  The lender
will be responsible for ensuring these requirements are met.  Lenders must
carefully review and analyze the results of these quality control efforts
and take prompt corrective measures when specific deficiencies are noted or
procedural problems are identified.  Also, any instance of mortgage finance
fraud must be reported to the Department.
 
_____________________________________________________________________
 
                                   5
 
      File Retention
 
      The results of quality control reviews, whether performed by the
lender or an outside firm, must be retained by the lender for a period of
one year.
 
      Lenders must have effective Quality Control Plans to ensure that the
Direct Endorsement Program continues to be a success.  The Mortgagee
Review Board has imposed administrative sanctions on lenders for failing
to have or implement a Quality Control Plan.  Referrals may also be made
to the Housing Civil Penalty Panel which may impose monetary penalties
against lenders found to be in noncompliance with the Department's Quality
Control requirements.
 
      If you have any questions on this letter, please contact the Office
of Lender Activities and Land Sales Registration at (202)708-1824.
 
Sincerely,
 

 
Nicolas P. Retsinas
Assistant Secretary For Housing
- Federal Housing Commissioner
 
*U.S. G.P.O.:1993-342-362:80109