The technical aspects of compliance are most meaningful when they support a consistent and comprehensive program of mortgage quality. Whether mortgage lenders are striving to meet the requirements of HUD, FHA, Fannie Mae, Freddie Mac, or a provincial regulator, the principles of quality control and quality assurance improve or enhance the process. Underwriting reviews, prefunding quality assurance and mortgage post-closing quality control allows the lender or servicer to correct loan processes and information provided to borrowers, helps to mitigate loan file errors that may be discovered during an examination or compliance audit of the files, and provides data upon which compliance solutions can be based.
Chapter 7 of HUD’s 4060.1 Handbook (Handbook) outlines its Quality Control Plan requirements. The handbook states, “All FHA approved mortgagees, including loan correspondents, must implement and continuously have in place a Quality Control Plan for the origination and/or servicing of insured mortgages as a condition of receiving and maintaining FHA approval.” Lenders might create and maintain a Mortgage Quality Control Manual, and loan servicers might create and maintain a Mortgage Servicing Quality Control Plan. In either case, or if the origination and servicing requirements are combined in one manual, HUD requires certain parameters for the mortgage Quality Control Plan (QC Plan):
- The QC Plan must be in writing.
- The QC function must be independent of the lender’s originating and servicing functions.
- Reviews must be within 90 days from the end of the month that the loan closed.
- Reviews must be conducted at least monthly for lenders closing more than 15 loans per month.
- The sample size of loans reviewed must be 10% of loans or a statistical random sampling that provides a 95% confidence level with a 2% precision for lenders that originate more than 3,500 FHA loans per year.
- Quality Control Post Closing Testing – Loans (and denied loan applications) targeted for review should include loans from all Branch Offices and should reflect work from each Loan Processor, Loan Officer, Underwriters, etc., as well as each FHA loan program such as 203(b), 203(k), HECM, etc). Also included should be Early Payment Defaults (all loans going into default within 6 months), rejected loan applications (minimum of 10%) and Compliance Issues (i.e. RESPA, Fair Housing, Ineligible Participants check, HMDA, handling of escrow funds, MIP payments, advertising, etc.).
- Quality control reviews must also address lenders use of Third Party Originators.
Fannie Mae requires compliance with its Loan Quality Initiative (LQI). The LQI emphasizes quality control checks at all stages of the process to meet mortgage lending and mortgage servicing quality control guidelines – mortgage quality control services pre-funding quality assurance, post-closing quality control. Whether conducted to comply with LQI or other quality requirements, reviews of processes, procedures, and documentation are best accomplished by using a mortgage quality control checklist. Due diligence quality control audits may be conducted by third parties or by organizational staff; however, an arm’s length relationship to day-to-day loan origination or servicing adds value to the process.
The mortgage quality control and assurance plans may be designed to a ZERO defect rate target and to achieve ZERO defect quality. The ZERO defect plan should include sampling conducted under a ZERO defect sampling plan. ZERO defect quality is an ambitious goal for loan production and servicing, and it may not realistically be achievable; however, conducting mortgage quality control and assurance practices to a ZERO defect rate target encourages high quality and provides a granular evaluation of each step in the process.
Critical to the quality control and quality assurance process is on-going education and industry knowledge, such as those presented at Quality Assurance Conferences, the MBA’s Quality Assurance Forum, and periodic Regulatory and Quality Assurance Compliance Conferences.