Audit Survival Jon Paukovich Vice President, Mortgage Lending Ent Federal Credit Union Casey Perkins Director, Collections Ent Federal Credit Union
What to Expect Thorough review of quality control plan Documentation in place to support your plan Are you doing everything that your QC plan says you re doing? Thorough review of select files from application to servicing Action plan development based upon findings from audit Follow up documentation to prove that you are following the outlined action plan
The QC Plan Establish standards for quality utilizing a quality control plan as a means for achieving those standards Ensure compliance with regulatory and investor requirements Ensure a pre-closing QC process is in place Utilize Fannie Mae s Desktop Underwriter to ensure conditions have been met Review documentation for accuracy Appraisal, income, assets, title, debt to income and loan to value ratios Review loan quality Undisclosed liabilities SSN and TIN validation Borrower occupancy validation Review of delinquent loan servicing, claims, and foreclosures
Pre-QC Requirements Fannie Mae The lender s written QC plan must include a process for reviewing a sampling of its loans prior to closing. Reviews performed prior to funding provide important and timely feedback to the origination staff and may prevent closing mortgage loans with significant defects such as misrepresentation, inaccurate data, or inadequate documentation. Lenders may choose a method appropriate to their business model for monitoring their origination policies and ensuring the accuracy of the loan data.
At a minimum, Fannie Mae recommends that the lender s discretionary sampling methodology include the following loans with higher risk characteristics, such as: LTV ratios > 90%, credit scores considered in the high-risk range, loans secured by investment properties, and cash-out refinances. In addition, the lender s sampling methodology may include mortgages: originated by third parties; representing all property types including condominiums, cooperatives, leasehold estates, and manufactured housing; originated or processed by newly hired loan officers, processors, appraisers, or other personnel or third parties involved in the loan origination process; and underwritten by all underwriters.
Verification of Data and Documents An effective prefunding QC process includes validation or verification of the following: data entered into an automated underwriting system, borrower Social Security number(s) used to verify borrower identity, income calculations and supporting documentation, employment - verbal verification of employment, assets needed to close or meet reserve requirements, appraisal or other property valuation data, and documentation of adequate mortgage insurance coverage.
FHA Quality Control should verify that correct information has been entered into the origination software system. A data integrity check shall be completed to determine the accuracy of property, mortgage, income, assets, and source of funds data. The review shall include a comparative review of the loan transmittal and the file documentation. The Quality Control auditor will verify that if manual downgrades or overrides are applied, that no patterns of illegal discrimination against loan applicants are revealed and that the downgrade or override was proper.
Ent s Pre-Closing QC Process All files are submitted to a Mortgage Underwriter for a preclosing review Compliance Fannie Mae Desktop Underwriter Title Information Purchase Contract Ent Requirements File is returned to Mortgage Loan Consultant (MLC) with conditions MLC corrects conditions File is submitted to Mortgage Underwriter for closing QC Ensures that conditions have been cleared Closing documents
Post Closing Requirements Fannie Mae, FHA and VA require 10% sample of closed loans Fannie Mae The post-closing mortgage review process must include an evaluation of the following: the underwriting documents, including re-verification of underwriting documents and a data integrity review for mortgage loans underwritten with DU or other automated underwriting systems; compliance with the terms of the Selling Guide, other program requirements, and is in all respects eligible for delivery to Fannie Mae; the appraisal or property inspection report; the underwriting decision; the closing documents; and compliance with all federal, state, and local laws.
FHA Documentation Review and Verification Credit Report Credit Document Re-verification Appraisals Occupancy Re-verification Underwriting Decisions Condition Clearance and Closing
Ent s Post Closing QC Process Third party contractor performs post closing audit (not required) Report of all loans funded and rejected submitted to contractor for selection Contractor selects 10% sampling File selections are re-verified by contractor and findings are delivered Findings are reviewed in house to determine accuracy, as required by Fannie Mae Errors in contractor findings are resubmitted to clear Material defects are reported to Senior Management monthly Quarterly meetings with Senior Management to discuss findings
Monthly Reporting Ensure QC process has the capacity to develop quality and trending reports Pinpoint training needs Monitor files with conditions that have not been corrected Offer monthly non-monetary incentives to employees with the least amount of conditions to maintain a positive environment
Mortgage Loan Review Analyst Mortgage Loan Review Analysis Compliance Purchase Review Foreclosure / Deed in Lieu / Preforeclosures sales / loss mitigation FHA Delinquency Quality Control FHA Quarterly Servicing Review Servicing
Servicing QC Requirements New loans, servicing transfers, acquisitions Customer service Fees and charges Escrow administration; ARM adjustments and disclosures; Assumption processing Handling of prepayments Paid-in-full mortgages Servicing delinquent accounts Loss Mitigation efforts Reporting under the Single Family Default Monitoring System (SFDMS) Foreclosure processing MIP billings Deficiency judgments Claims, and claims without conveyance of title
Servicing Servicing delinquent accounts Must have written procedures to address all aspects of default prevention and servicing Must design, document and implement QA program to ensure complying with government requirements to include quality control reviews for loss mitigation Staff must be adequately trained and knowledgeable Dedicated team or individual required to handle and resolve borrower issues through delinquent management process Loss mitigation efforts Be Proactive - Calls/Outreach made as early as 3 days past due (high risk loans) and continue to foreclosure sale Send Letters (late notices, right to cure default notices, solicitation letters, How To Avoid Foreclosure pamphlets) Establish Quality Right Person Contact promote open and effective communication Face to Face Interview if feasible Review/Qualify borrowers and offer loss mitigation options in a timely manner Assign Field Visits/Property Inspections Not Optional Servicers must utilize loss mitigation whenever possible to avoid foreclosure
Loss Mitigation Written Loss Mitigation Policy and Procedures Must conform with government guidelines Quality control reviews for loss mitigation Documentation of financial analysis Determination of all loss mitigation tools Forbearance, loan modification, HAMP, etc. Must be followed in priority order and documented Assistance provided to remedy delinquencies Foreclosure timeliness Reporting accuracy and timeliness
Loss Mitigation Financial Analysis (documentation required) Proof of income and IRS form 4506T-EZ (FNMA only) Net income calculated for FHA, gross for FNMA Determination of all loss mitigation options (followed in priority order based on FHA/FNMA hierarchy) Short Term Forbearance no payment or partial payments of 75% PITI Repayment Plan regular payment + arrearages paid over a specified period of time Long Term Loan Modification HAMP Strict Requirements Eligibility Loan originated prior to January 1, 2009 Monthly mortgage payment greater than 31% PTI Verified income (no unemployment) Document long-term or permanent hardship Home is owner occupied Terms and conditions
Property valuation must be obtained (BPO, appraisal, AVM) NPV Test performed Arrearage capitalized (interest, escrow advances, no late fees) Reduced interest rate Reduce interest rate in increments of.125% to get as close to 31% PTI, 2% is floor. This rate is in effect for 5 years followed by annual increases of 1% per year until rate reaches interest rate cap (PMMS rate for 30-year fixed rate loan rounded to nearest.125%) Term extension/re-amortization (if necessary) up to 480 months from modification effective date Principal forbearance (if necessary) Trial Period Plan 3 month for default, 4 month for imminent default. If payments not made on time, borrowers fail and are no longer eligible for HAMP Liquidation DIL, Pre-foreclosure Sale, Foreclosure HAFA (Home Affordable Foreclosure Alternative) DIL or pre-foreclosure sale (FNMA only for failed modifications under HAMP) Incentives Determined by completion of program and length of delinquency when program initiated. Ranges from $200 to $1,600 HAMP incentive for borrowers is principal balance reduction of up to $1,000 per year if payment was reduced by 6% or more Foreclosure timeliness Initiated at required number of days delinquent or when servicer is aware home abandoned/vacant with no response from borrower. Servicers to use best judgment
Timely Reporting Delinquency status and reason code Loss mitigation option status Repayment plan, forbearance, loan modification, pre-foreclosure sale, deed-in-lieu Bankruptcy status Chapter 7, 11, 12, 13 Action taken by attorney Foreclosure status Sale scheduled, continued, withdrawn, or occurred Foreclosure timelines FNMA Must be initiated at 120 days past due Sent to FNMA retained attorney (list found on Fanniemae.com) Loss mitigation efforts must continue to avoid foreclosure Property must be maintained and secured if vacant/abandoned FHA Must be initiated at 8 months past due (6 months from date of default) All loss mitigation options have been considered Property must be maintained and secured if vacant/abandoned VA 210 days past due, or best judgment if abandoned, no response, etc.
Fees and Charges Compensatory Fees (FNMA) Foreclosure Delays - Foreclosure did not commence within state allowable timeframe Timeframe begins from last paid installment (LPI) date to Foreclosure Sale Date Calculation UPB x (Daily Pass Through Rate/365) x Number of Days Delayed Liquidation Delays REOGram, conveyances, claim filing Bankruptcy Delays Failure to monitor payments, complete BK process, send to BK attorney for legal action (relief from stay and foreclosure action) Delinquent Status Reporting Delays Failure to report on accurate and timely basis Default Management Delays Performance deficiencies, appropriate actions not taken within specified timeframes VA Violations (fraud, forgery, violation of VA requirements) Transfer of Custody denied Return of Custody to servicer Rejection of claim FHA Violations Violation of FHA Programs, Statutes, Regulations and/or Handbook Requirements Loss of incentive compensation Reduced reimbursement of foreclosure and acquisition cost Interest curtailment related to foreclosure delays Referral to Mortagee Review Board Buybacks
Common Audit Findings Lack of documentation for quality control process Lack of process requirements in QC plan Separation of duties Staff training formally document Deficiencies Loss mitigation Timely reporting Lack of targeted defect rate Track rate of defects in QC process Number of files with 1 or more defects
How to Prepare Develop quality control plan to ensure all aspects are being met Refer to Fannie Mae s (FNMA) selling guide Refer to Federal Housing Administration (FHA) and Veteran s Administration (VA) handbooks Ensure you have reports and spreadsheets to maintain your due diligence Ensure you have knowledgeable staff in place to answer auditor questions Instill with staff the philosophy that audits are opportunities to learn and grow
Lessons Learned Document, document, document Ensure QC plan is being followed QC plan should be reviewed and updated annually to conform with investor requirements Track and train accordingly
Servicer Performance Scorecard Background Focus on delinquent loan servicing with emphasis on loss mitigation Protect borrowers from servicer non-compliance Alert HUD to potential servicer-specific or industry-wide delinquent servicing issues Evaluate servicer s foreclosure initiation timeframes Initiating foreclosure too soon makes it difficult for a borrower to participate in any loss mitigation Assess how long servicers can keep loans out of foreclosure during the 12 month period following the first time ever a loan is due and payable for 2 installments
Scorecard Methodology Points are assessed from 0-12 based on number of months the code for 1 st legal action to commence foreclosure was not reported Bonus points are received if cases had loss mitigation reported as of the 2 nd installment delinquency If case is reported vacant the only reported loss mitigation code is repayment as any other formal loss mitigation requires properties to be occupied
Tips to Increase Score Do more loss mitigation early in the process Do more loss mitigation at any point during the process (even in the foreclosure process) Once a loan goes delinquent, intervene and do not let loan get 90 days down again Utilize special forbearances for automatic 90 day extensions for the first legal deadline File incentive claims (and more of them) as close to reported reinstatement as possible Make sure loan is completely reinstated by the loss mitigation tool Place borrowers on trial payment plans before implementing loan mods or partial claims Perform loan modifications in accordance with Mortgagee Letter 2009-35 Clean-up outstanding defaults per the Neighborhood Watch records Engage in more forbearance activity and report it in SFDMS Minimize number of foreclosure conveyance claims
Questions jpaukovich@ent.com cperkins@ent.com