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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
 
_____________________________________________________________________
 
            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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                                                               2
 
               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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                                                                  3
 
          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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                                                                 4
 
               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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                                                             5
 
              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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                                                                6
 
              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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                                                               7
 
          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.
_____________________________________________________________________
 
                                                                8
 
              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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                                                                9
 
              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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