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WHAT TO EXPECT DURING A HUD "QUALITY ASSURANCE DIVISION" AUDIT

So you want to know what to expect during a HUD Audit.   This page is dedicated to helping you understand the what, why and how it all works when HUD comes knocking on your door to do an audit.

AUDIT TRIGGERS

The first thing you probably want to know is why and how has your company has been selected for an audit.   There are four main factors that HUD uses in selecting your company. These are not the only reasons and they are not listed in any particular order or priority.

1) New Lender License - HUD eventually audits every new Mortgagee. You can expect typically within your first 5 years of operation to be audited directly by HUD's Quality Assurance Division.

2) Delinquent Loans - Mortgagee's and their branch office(s) are tracked through Neighborhood Watch. Those that have a high percentage of defaults over the past 24 months and/or claims on insured mortgages are typically going to be scheduled for an audit by HUD's Quality Assurance Division. It doesn't matter if you are a mortgage broker and the loans were underwritten by your sponsor.  In addition, a spike in business tied with delinquent loans could also be a reason for HUD to come knocking on your door.

Depending on your delinquencies HUD could terminate your license automatically, without even coming in to do an audit.  However, that does not mean you have escaped getting audited, there is a very strong probability you will be audited by HUD's Quality Assurance Division and they will be looking specifically for fraud. 

3) Complaints - A number of complaints have been made against your origination.  Often there has to be a significant complaint against your company.  Reported Fraud or illegal activity will usually trigger an audit. 

4) Follow-up Audits - Going through your first audit as a new licenses doesn't mean that you are not going to ever get audited again.  The above mentioned triggers could cause you to be audited again, or based on what is found during your first audit, the Quality Assurance Division will most likely come back at some point and check to see how you are doing and has your Corrective Action Plan effectively improved your process and loan performance.

HOW TO PREPARE FOR A HUD AUDIT REVIEW

It is important that you prepare for your audit.  The more you prepare the better the results will be. 

Here are some common violations found by HUD's Quality Assurance Division:

1) The number one found issue is within you Quality Control Plan - It is generally not in compliance with HUD current requirements.  If you haven't updated your quality control plan since August 2006, it is not in compliant with HUD's Handbook 4060.1 Rev-2 Chapter 7.   In addition, not preforming Quality Control Reviews, which is required for both mortgage brokers and mortgage bankers is another serious issue.  Reviews are to be conducted on 10% of your orginatons, within 90 days, and preformed either monthly or quarterly depending on volume.

There are about 40 new elements required for your Quality Control Plan, here are some of them:

  • Include random audit process and procedures - Fraudmit can help!
  • Early Payment Default Reviews
  • Fraud detection.
  • All HUD Approved Mortgagees and Loan Correspondents MUST pay their employee's including loan officers on IRS form W-2.
  • Employee's are not working for another; Real Estate or Mortgage Company.
  • 50% of all HUD Approved Mortgagees and Loan Correspondents gross revenues must
  be derived from Mortgage Lending Activities.
  • Human resources management components.
  • Written policy regarding the negotiations of fees and arrangments in compensation for loan officers.
  • Employees being checked against the LDP list.

This is just a sample!  To learn about Fraudmit's Quality Control Plan - Click Here.

2) Loan documents in the Origination File are not complete.  Frequently, Loan Correspondent files are missing the signed Final HUD-I, Final signed MCAW, the final Loan Application, LI Review Checklist, and where AUS (The Total Scorecard) is used the underwriting results showing the loan was Refer or Approved.  If you don't have these in your files it is vital that you contact your sponsor or lender that funded the loan to get these documents.  HUD requires that Origination files are maintained by a Loan Correspondent for 2 years.  HUD has been known to allow Loan Correspondents to recreate the loan file for their review, this would however require their approval.

3) On Purchase Transactions the Down Payment must be verified and a paper trail exists  and that Gift are verified and a paper trail exists, both in accordance with HUD's Handbook 4155.1 Rev-5.   Regardless of who underwrites the file, both mortgage brokers and mortgage bankers equally share the responsibility of each loan file.

4) Failure to establish borrower's relationship with Non-occupying Co-borrower as defined in HUD's Handbook 4155.1 Rev-5.

5) That only FHA allowable fees are charged to the borrower and reflected on the HUD-I.  Currently a Tax Service Fee is the only non-allowable fee.  On 203b loans the max loan origination fee is 1% and on Reverse Mortgage the max origination fee is 2% on the first $200k and 1% above with a cap of $6000.   FHA does allow other reasonable fees, however each HOC office has the authority in determining which fees are reasonable. 

6) Mortgagee failing to comply with Home Mortgage Disclosure Act (HMDA). You must comply even if it's a negative HMDA.  To learn more about HMDA read "Getting it Right" - Click Here

7) Documents signed by the borrower are blank.

8) Mortgagee's sharing office space with another business without adequate separation.  Other office space issues include non-identifing signs allowing borrowers to know who's office they walked into and dealing with.

These are just some of the violations that can cause your organization to indemnify loans or pay HUD penalties. Are you in compliance?

HOW TO RESPONSE TO HUD'S FINDING LETTER - CORRECTIVE ACTION PAN
 
1. Format of a Response. There are a minimum of three elements that your Corrective Action Plan should include:

  • Comments on the Findings and Recommendations - You should provide a statement of concurrence or nonoccurrence with the findings and recommendations.  If you do not agree with the findings, specific information should be provided to support the position. 
  • You should detail actions taken or planned to correct deficiencies identified in the report from HUD.  Appropriate documentation should be submitted for actions taken.  For planned actions, you should provide projected dates for completion of the task.  You should identify in your response the individuals who will be responsible for completing the proposed actions. If you believe a corrective action is not required, a statement describing the reason should be included.  The old saying "Inspect what you expect" is never more true than here.
  • Follow-up procedures - You should address when writing your response planned follow-up procedures and actions you will be taking to ensure that the defect is no longer a challenge.

PENALTIES FOR FAILURE TO COMPLY

If there are sever findings, you could receive a "Letter of reprimand". Here are some of the actions that could be taken against your originations

  • Suspension
  • Probation
  • Withdrawal of approval
  • Settlement agreement with mortgagee
  • Loan indemnification
  • Cease and desist order
  • Debarment of individuals as well as withdrawal of approval
  • Civil money penalties up to $5,000 per violation to a maximum of $1 million per year in addition to suspension, withdrawal of approval

STAY OUT OF TROUBLE!

Make sure that you are doing the following:

  • Reviewing 10% of your FHA loans within 90-days of closing. This must be done on a monthly basis or quarterly depending on volume.
  • Reviewers should:
a) Be familiar with FHA underwriting guidelines and be properly trained to do quality
  control reviews.
b) Prepare "Sr Management Reports" based on the findings of each audit
c) Prepare "Loan Summary Reports" detailing the findings in each loan
  • At least every six months verify employees not debarred, suspended, under LDP, under criminal indictment or other investigation.
  • Insure all loan originators, underwriters, processors, are solely employed by you and not working in a related field elsewhere and that they are all paid on IRS form W2. 
  • Reverse Mortgages - Be certain face to face interviews on the 1009 are conducted by licensed employee or counselor.

MORAL TO THE STORY

Fraudmit can help! We are specialists in FHA Quality Control Reviews and QC Plans
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Information herein is for educational purpose only and is not meant to be a complete statement regarding what to expect during a HUD "Quality Assurance Division" Audit, or claim to be legal advice.  If you need further information, we would encourage you to contact us directly or contact an attorney.