As the number of FHA loans rapidly increases, HUD stresses the requirement to implement and maintain a comprehensive quality control plan that follows FHA guidelines.
FHA insured mortgage loans experienced phenomenal growth in 2008. After a large drop in its share of new mortgages in the early ‘90’s, tightening credit has caused an upsurge in FHA loans. In fact, FHA’s share of insured mortgages increased to 26% in 3rd quarter 2008, up from only 3% in 2007. As the volume of FHA loans increases, more lenders are becoming FHA approved. Once approved, they are met with the task of staying in compliance with FHA guidelines. In Mortgagee Letter 09-12 published for FHA approved lenders, HUD stresses the requirement to “implement and maintain a comprehensive quality control plan.” HUD further explains in Letter 09-01 that if a lender “fails to comply with HUD’s policies and procedures, HUD will take the appropriate action…which may include termination of mortgagee [FHA] approval.” (To view all HUD mortgagee letters, visit HUD’s official website.)
According to FHA guidelines, before a lender can become FHA approved, they must submit a quality control plan. As stated in chapter 7 of the HUD 4060.1 handbook, a lender “must review [audit] 10% of the FHA loans it originates,” as part of its quality control plan. These mortgage audits can either be performed internally or by a third party provider. If done internally, the lender must establish and properly train a unit dedicated to quality control. FHA guidelines go on to explain that the staff must not be involved in loan production.
Third party providers can also perform these mortgage file audits, and even provide quality control plans that meet FHA guidelines. For example, Mortgage Compliance Advisors, LLC, can provide a quality control plan and perform the required quality control file audits for an FHA approved lender. When the file audits for a certain period are complete, the audit findings are compiled in a management report and sent to the lender. Third party providers do not report to HUD/FHA. Instead, it is the responsibility of management to review the findings and make any necessary changes to prevent similar findings in the future. When FHA conducts an audit, they want to see in writing what actions have been taken by the lender to stay in compliance with FHA guidelines.