HUD requires the auditing system and procedures component of the lender's quality control program for loan origination auditing to meet certain general requirements:

 

Timeliness. Loans must be reviewed within 90 days of the closing to ensure that problems left undetected prior to closing are identified as soon as possible.

 

Frequency. Lenders closing more than 15 FHA loans monthly must conduct monthly QC reviews. Those closing 15 or fewer may review on a quarterly basis.

 

Sample size and loan selection. A lender originating 7,000 or fewer FHA loans per year must review a 10 percent sample of the FHA loans it originates. A lender originating more than 7,000 FHA loans per year may review 10 percent of the loans or a statistical random sample that provides a 95 percent confidence level with two percent precision.

 

Targeting loans for review. The auditing system should emphasize participants that have large volumes of loans, show sudden increases in loan volumes or loan default rates, have recently begun a relationship with the lender or concentrate in soft market areas. To the extent feasible the sample must include loans from each of the following categories as often as possible:

  • Loans from each branch office, authorized agent or loan correspondent;
  • loans involving the work of each loan processor, loan officer and underwriter;
  • loans involving the work of each roster appraiser, real estate company or builder with whom the lender does a significant amount of business.
  • loans from all FHA programs in which the lender participates.

Early payment defaults. In addition to the loans selected for routine quality control reviews, the lender must review all loans going into default within the first six payments. Early payment defaults are loans that become 60 days past due.

 

Recommendations for selecting individual loans. HUD recommends adding to the sample transactions that involve:

  • two- to four-unit properties,
  • new construction or rehab loans,
  • properties that were transferred within the past year,
  • substantial seller concessions,
  • non-occupying co-borrowers or multiple borrowers,
  • housing expenses increasing by 1.5 times or more,
  • large or multiple earnest money deposits or money orders,
  • large increases in bank account balances,
  • sale of personal property for funds to close
  • gifts or loans of funds to close
  • self-employed borrowers,
  • loans risk-assessed as "refer" by automated underwriting systems.

Documentation review and verification. The QC audit must review and confirm the following information on the loans reviewed:

  • Credit report. A new credit report must be obtained for each borrower whose loan is included in the QC review, unless the loan was a streamline refinance or was processed using a FHA-approved automated underwriting system exempted from this requirement.
  • Credit document reverification. Documents contained in the loan file should be checked for sufficiency and written reverifications obtained including documentation of employment or other income, deposits, gift letters, alternate credit sources and other sources of funds, mortgage or rent payments.
  • Appraisals. A desk review of the property appraisal must be performed on all loans chosen for QC audit except streamline refinances This includes review of the appraisal data, the validity of the comparables, the value conclusion, any changes made by the underwriter and the overall quality of the appraisal. Field reviews are required on 10 percent of the loans in the sample.

Occupancy reverification. Where the occupancy of the property is suspect, lenders must attempt to determine whether the mortgagor is occupying the property.

 

Underwriting decisions. Each direct endorsement loan selected for QC audit must be reviewed for compliance with HUD underwriting requirements, sufficiency of documentation and the soundness of underwriting judgments.

 

Condition clearance and closing. Each loan selected for QC audit must be reviewed to determine whether:

  • Conditions which were required to be satisfied prior to closing were met,
  • the seller was the owner of record, or was exempt from the owner of record requirement in accordance with HUD regulations,
  • the loan was closed and funds disbursed in accordance with the lender's underwriting and closing instructions,
  • the closing and legal documents are accurate and complete.