HUD requires the audit system to review mortgage loan files to evaluate the loan origination and underwriting functions. The review must determine, at a minimum, whether the following requirements have been met:

 

Applications. The information in the preliminary loan application, final application and all credit documents is consistent or reconciled.

 

Appraisal. The valuation used reasonable comparables, reasonable adjustments and required appropriate repairs needed to meet FHA safety and soundness requirements.

 

Signatures. Loan documents requiring signatures were signed by the borrower or an employee of the lender only after completion and all corrections were initialed by the borrower or the lender's employee.

 

Handling verifications. No verification of employment, verification of deposit or credit reports was handled by an interested third party or the borrower.

 

Self-employment. The loan file contains any required financial statement, tax returns and the appropriate type of credit report if the borrower is self-employed.

 

Multiple credit reports. If more than one credit report was ordered, all credit reports were submitted with the loan package to FHA or the direct endorsement Underwriter.

 

Judgments. Any outstanding judgment shown on the credit report were shown on the Form HUD-92900 (Mortgage Credit Analysis Worksheet) and acceptably explained in accompanying documentation.

 

Source of funds. The loan file documents the source of the borrower's funds for the required investment, the acceptability of that source and that any obligation to repay the funds is included on Form HUD-92900.

 

Resolution of discrepancies. Any conflicting information or discrepancies in the application file were resolved and documented in writing before underwriting.

 

Debt ratios. If the debt ratios exceed FHA limits there are sufficient and documented compensating factors.

 

Underwriting. The underwriting conclusions and mortgagee documentation are accurate and complete.

 

Conditions. Any underwriting conditions were cleared prior to closing.

 

HUD-1 settlement statement. The HUD-1 was accurately prepared and properly certified. It shows that the borrower only paid FHA allowable fees and charges. The borrower made the required minimum investment and the mortgage was not over-insured.

 

Documents. The loan file contains all required loan processing, underwriting and legal documents.

 

Late submission for endorsement. If the loan was submitted for insurance more than 60 days after closing it included a payment history showing the loan was current when it submitted for mortgage insurance.

 

Property flipping. The seller did not acquire the property at the time of or soon before closing, indicating a possible property flip.

 

Strawbuyer. No indication that the borrower transferred the property at the time of closing or soon after closing, indicating the possible use of a strawbuyer in the transaction.

 

Record retention. All items requiring documentation have been properly evidenced and retained in the file.

 

No ineligible employees. No employee involved in FHA origination, processing, underwriting or servicing is debarred, suspended, subject to a limited denial of participation or otherwise restricted from participation in HUD programs.

 

Automated underwriting. For lenders using an automated underwriting system the QC program must include loans underwritten in this manner. Among other requirements, it must verify that correct information has been provided to the automated underwriting system, including data identifying the borrower, property, mortgage, income, assets and source of funds. It must verify that applications receiving a "refer" are reviewed by an underwriter before a final decision is made on the application. If a manual downgrade or override is applied, it must verify that no pattern of illegal discrimination against the loan applicant is revealed and that the downgrade or override was proper.

 

Streamline refinances. The QC sample should included mortgages made under FHA's streamline refinancing requirements but they should comprise a very small proportion of the sample unless streamline refinances are a significant proportion of the lender's production. The reviews may be limited to the functions performed when originating such loans and confirmation that the loan was eligible for streamline processing.