As published in Scotsman Guide's Residential Edition, July 2011.
Whether you’re a mortgage broker or lender, an audit by the U.S. Department of Housing and Urban Development (HUD) could shake your world if you’re not prepared. Repurchase requests from investors could create similar effects. By preparing a robust quality-control plan, however, you can protect your company on both fronts.
Nothing is guaranteed, but a good plan can help you survive many threats, including those related to Federal Housing Administration (FHA) loan production.
At the start of this year, HUD changed the face of FHA lending by placing brokers under the oversight of lenders, ending HUD’s practice of directly approving FHA loan correspondents.
By eliminating brokers without also reducing its audit staff, HUD has more time to check up on the FHA-approved lenders that remain. This will directly affect loan correspondents working under these lenders, many of whom can expect closer reviews of their delinquencies, claims and early payment defaults.
Early this year, HUD issued Mort-gagee Letter No. 2011-02 (sctsm.in/ML2011-02), which emphasized what lenders can expect from HUD going forward. Though the letter addresses FHA-approved lenders (aka mortgagees), HUD’s intent seems clear: to audit mortgage professionals, including mortgage brokers who fall under the scope and responsibility of approved mortgage lenders.
The letter states that all FHA-approved mortgagees must implement a quality-control plan that requires the review of loans originated or underwritten. When mortgagees sponsor third-party originators, their plan must review those originations, as well.
Lenders’ quality-control plans represent the best way for HUD to determine whether a company is policing itself and correcting underwriting and operational errors. The best plans also will require submitting monthly reports to senior management for review and response. Competent managers should be able to identify areas of risk and any violations of FHA guidelines.
Mortgagee Letter No. 2011-02 goes on to state that mortgagees using third-party originators must determine the appropriate loan-review sample size; document their review methodology, results and corrective actions; and make their records available upon HUD’s request for two years after loan origination.
The letter makes it clear that HUD will look for lenders to be more proactive and to follow established guidelines for lending and quality-control plans.
The letter also includes specific guidance on early payment defaults, stating that mortgagees must review such defaults within 45 days from the end of the month in which the loan is reported as 60 days past due. (Note: Early payment defaults are defined as loans that become 60 days past due within their first six scheduled payments.) Again, mortgagees must maintain two years’ worth of records.
The 45-day requirement proves HUD will have the time and staff necessary to pay close attention to early payment defaults.
In addition, Mortgagee Letter No. 2011-02 requires rejected mortgage applications to be reviewed within 90 days from the end of the month in which the decision to reject was rendered. It’s likely that HUD will pay more attention to fair-lending issues moving forward.
HUD’s efforts to emphasize quality-control-plan requirements likely mean brokers and lenders working with FHA-insured loans can expect more reviews and audits. If your company lacks a quality-control plan that takes Mortgagee Letter No. 2011-02 into account, make a point to update it as soon as possible.
Also, make sure your plan is written to your specific business model. If and when HUD comes knocking, it will want clear evidence that your plan reflects the way your company originates, processes and underwrites loans.
The better your plan is written and follows your business model while also adhering to FHA guidelines, the more protected your company will be from sanctions and the more likely you’ll avoid repurchase requests.
George H. Marentis is president and CEO of Mortgage Compliance Consultants LLC. MCC provides the mortgage-lending industry a wide range of compliance-related services, including due diligence and quality-control reviews, policy reviews and creation, and state and national licensing services. Marentis has a law degree and more than 18 years’ mortgage-lending experience, ranging from frontline operations and originations to regulatory and legislative compliance.
For more information, visit www.mortgagecomplianceconsultants.com, call (303) 859-8550 or e-mail firstname.lastname@example.org.