www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 February 6, 1992 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 92-5 TO: ALL APPROVED MORTGAGEES SUBJECT: MORTGAGEE MONITORING - Significant, Reoccurring Findings Originating quality loans is critical to the success of any mortgage company, as well as to HUD/FHA. Collectively, we must make every effort to minimize losses resulting from improperly originated and/or serviced loans, or fraud related activities. Additionally, the Department is concerned with mortgagees' compliance with all reporting and program requirements. What follows is a brief summary of many of the significant findings identified by HUD/FHA's Monitoring Division while conducting its on-site monitoring reviews. The Department urges you to review your company's procedures and to notify your employees of the findings listed below to make certain that similar problems do not occur within your operation. Also, it is critical that all mortgagees amend their respective quality control plans, if necessary, to incorporate procedures to effectively identify and correct these types of findings. ORIGINATION ISSUES HOME MORTGAGE DISCLOSURE ACT (HMDA) and TIERED PRICING PROHIBITION - Failure to report data to HUD regarding mortgage loan originations, purchases and rejected applications. The data is to include details on census tract, loan type and applicant information. - Mortgagees have established minimum loan amounts, "floors," below which they will not lend. - Violation of "tiered pricing" limitations. Lenders may not vary their mortgage charge rates" by more than two percent in an area. _____________________________________________________________________ QUALITY CONTROL PLANS - Failure to implement and maintain the required Quality Control Plan. - Quality Control Plans which do not contain procedures for: -reporting findings to senior management; -implementing corrective actions resulting from quality control findings; -reviewing rejected loans; -reviewing the listing of persons suspended, debarred or issued a Limited Denial of Participation; -assuring that MIPs are properly paid. DOWNPAYMENT/MONIES TO CLOSE - Processing loan applications without ensuring that mortgagors have sufficient monies to close the loan. - Processing loan applications without ensuring that the source of the monies used for the downpayment and closing costs complies with HUD/FHA's requirements. - Failure to properly document and/or resolve any discrepancies dealing with an unusual source of funds. For example, selling personal property (e.g. coin collection, jewelry), using promissory notes on other real estate, and using an equity trade or exchange of the mortgagor's current residence, should be fully documented in accordance with Departmental requirements. INCOME/ASSETS/LIABILITIES/CREDIT - Processing loans without reconciling discrepancies in file documentation. Too often on-site monitoring reviews identify situations where there is conflicting information regarding a mortgagor's income/asset/liabilities/credit or where the file documentation simply does not make sense. For example, debts on the credit report, original application and HUD 92900 must all be consistent. It is the mortgagee's responsibility to resolve any and all discrepancies of this nature. _____________________________________________________________________ OVER-INSURED LOANS - Not adjusting the loan amount (downward) to take into consideration any seller credits to the mortgagor. - Failure to consider builder/seller sales inducement in determining the maximum loan amount. - Lack of assurance that the mortgagor has made the required minimum investment in the property. - Failure to properly calculate the maximum FHA loan amount. IMPORTANT MISCELLANEOUS FINDINGS - Failure to remit the required MIP within the required 15 days from the date of closing. - Failure to conduct the required face-to-face mortgagor interview. - Violation of the Department's "anti-kickback" requirements. Specifically, mortgagees are paying non-employees (e.g. real estate brokers, mortgage brokers) to assist in the preparation of the HUD/FHA application. - Allowing interested third parties to handcarry verifications of employment and deposit forms. - Failure to resolve discrepancies or inconsistencies regarding owner occupancy by the mortgagor. - Excess and unallowable fees being charged to mortgagors. Examples include charging discount points not disclosed on the HUD 92900 or firm commitment, charging larger fees than permitted by HUD/FHA and charging excess interim interest. SERVICING ISSUES QUALITY CONTROL PLANS - Failure to implement and maintain the required Quality Control Plan for loan servicing. _____________________________________________________________________ DELINQUENT SERVICING - Failure to institute early and adequate collection efforts including the following actions: -reasonable efforts to conduct face-to-face interviews; -mailing the HUD 426-H pamphlet (Avoiding Mortgage Default); -institution of a reasonable forbearance plan. - Lack of required inspections. HUD ASSIGNMENT PROGRAM - Lack of pre-foreclosure management review prior to issuance of HUD letters. - Failure to individually evaluate assignment criteria, stating the proper reasoning for denying an assignment request. - HUD letters which do not contain the mandated language from HUD Handbook 4330.1. - Continuing collection efforts, including issuance of demand letters, before completion of the assignment process. - Failing to initiate foreclosure action in a timely manner after all collection efforts have been exhausted. HUD'S SECTION 235 LOAN PROGRAM - Utilizing incorrect income figures which results in improper subsidy calculations. This includes failure to recertify mortgagors with income increases of $50 per month for loans insured after 1/4/1976. ESCROW ACCOUNTS - Commingling of mortgagor funds with general operating funds. - Upon completion of the annual analysis, mortgagors are not being advised of all options available to them when there is a surplus in their account. _____________________________________________________________________ The Department is continually expanding the number of on-site reviews at mortgagee's home and branch offices. Careful review of these findings and full implementation of quality control plans should aid in improving the quality of HUD-insured mortgages. Mortgagees are reminded that recent legislation provides for the assessment of a Civil Money Penalty for many of the above listed violations. Additionally, sanctioning by HUD's Mortgagee Review Board may also be considered. Questions regarding mortgagee monitoring may be directed to J. Parker Deal, Director, Monitoring Division, (202) 708-2830 Sincerely, Arthur J. Hill Assistant Secretary for Housing-Federal Housing Commissioner