4000.1 Revisions Making Your Teeth and Hair Hurt?

Please be calm - the changes are mostly cosmetic

As we reported earlier, there should be no real surprises in the 9/14/2015 4000.1 release. The only area that seemed to cause some alarm related to the pre-closing audit rigor. If you are a Quality Control Plan customer of ours, you know that we have ALWAYS recommended this as a standard process.

Then you have to parse the guidance to understand the percentages, To reiterate:

10% of all production gets audited
10% of all AUDITS must be pre-closing/in-process audited

If you originate 100 loans, you must audit 10 (in addition to ensuring that you capture all sources in an audit cycle). Of that 10, 1 may be a pre-closing/in-process random audit. It seems like chicken and egg, but you have to look back at your total audit percentages to make the determination that you have conducted enough pre-closing/in-process audits.

Here is a sample policy that addresses 4000.1 Requirements for your QC Plan.

1-19-1 QC HUD 4000.1 Requirements

The requirements listed in Quality Control Plan requirements are referenced below as to how we comply in our procedures.

In general, the 9/14/2016 Update to the HUD/FHA Single Family Handbook re-organized standards into a new format referred to as the 4000.1 Revision. Although HUD’s requirements for quality control did not change substantively, the new policy manual opens QC reviews to a broader definition, by referring the examiner back to the Underwriting or Delivery requirements. Single elements no longer get addressed as minutiae, rather the entire guide is incorporated by reference.

A reiteration of HUD/FHA QC Review Area. This shows with some clarity that the scope and scale of "In-Process/Pre-Closing Review" is the same as the Post-Closing Review.

1-19-2 Referrals for Elements Specified in HUD 4000.1

We have located specific elements queried by examiners in the QC Plan for ease of reference.

4000.1 Section	Requirement	Location in QC Plan
A.3.a iv(A)	Sampling Methodology	1-22 QC DEL – Loan Selection Methodology and 1-23 QC DEL - Loan Sampling/Selection Procedure
A.3.a i(A)	Pre-closing reviews	1-20-1 In-Process Quality Control Audit 1-40 QC DEL – In Process Loan Level Quality Control Review Process
A.3.a i(C)	Early Payment Default (EPD) reviews	1-22-2 Early Payment Default

1-19-21 Terminology – Pre-Funding, Pre-Closing and In-Process Reviews

Please note that terminology may vary with all of the variation between industry standards regarding the Pre-Closing, Pre-Funding and In-Process reviews.

The terminology is so close as to cause confusion among lenders and reviewers.

·         Pre-Funding reviews refer to the review of Loan Quality Initiative and similar fraud detection elements conducted on EVERY loan before it closes.

·         Pre-Closing/In-Process reviews refer to the concealed selection of individual loans in process to identify potential fraud within the production process.

·         10% of ALL audited loans should be sampled. Example: If you fund 100 loans, 10 total loans should be audited and 1 should be pre-closing audited.

·         Loans PRE-CLOSING AUDITED do NOT have to be re-audited post-closing and count toward the 10% of ALL LOANS audited.

·         The ONLY DIFFERENCE between the pre-closing and post-closing audit is that the reviewer does NOT HAVE TO WAIT for re-verifications to come in. We still request third party verifications, but we do not have to wait to close the loan.

·         Post-Closing Audit is the full scope audit conducted by lenders and delegated correspondents. 

Unlike Pre-Closing/In-Process Audits, Post-Closing Audits MUST WAIT for Third Party Verifications before completing review.

MortgageManuals.com customers may download the update here.  If your numeration doesn't match the items shown here, you have missed the past updates and need to request a complete update

Beware of Pirated Manuals

Recently we have received a large number of calls from clients whose policy and procedures manuals are outdated. They are being rejected by their lenders, investors or regulators. Speaking to the customer we learned something shocking.  They recently purchased the products from a consultant who assured them that the product was current.  Not only were the products outdated, but they were stolen, so did not qualify for any warranty or service.

Here's how it happens.  A client orders a product, but they don't want the normal information services we give to customers.  We call and make sure they understand the license - that it can't be transferred - and they state they understand: it's only for their own purposes.  We have a reason we don't sell to consultants - they pirate our product and then don't stand behind it.

Who pays the price?

You do.  You buy a product which was good at the time, but 1/2 year later it is outdated.  You submit your product to an investor, regulator or wholesaler and now you look like you don't know what you are doing. Worse than the wasted time and prestige, you now likely have to fix the problem on your own.

Make Sure Your Product is Not Pirated

Questions to ask:

Is the consultant in the regular business of providing materials, or did the product emanate from a request from you?  If it's not something the consultant does as a main line of business, it is more likely that the consultant borrowed the product from another company.  Beware.
Does the consultant publish examples and samples of the work online?  If the consultant is overly protective of the content before you purchase it, it is likely that the work would be similar to other widely available products, or that it is, in fact, another company's work.  Legitimate companies don't need to hide their content, because they know it changes so much that even if you did borrow a swath of it, you would have to come back for updates later.
Are you getting e-mails from the publisher? Or is there silence after the purchase.  If it's the company's mainline business there is always a stream of information (welcome or not) that accompanies this type of purchase.

REMINDER: Phase 2 of HUD Adjusted Net Worth Requirement Goes Into Effect 5/20/13

If you cannot comply:

If at any time the net worth or liquid asset requirements fall below the required minimum, the lender or mortgagee must notify the Lender Approval and Re-certification Division within 30 days, and provide a Corrective Action Plan describing steps taken to correct the net worth or liquid asset deficiency.  Lenders and mortgagees non-compliant with net worth or liquidity asset requirement must notify HUD by sending an e-mail to recert@hud.gov. The e-mail should contain a letter signed by a corporate officer describing the corrective action that has been taken to correct the net worth or liquid asset deficiency.  The e-mail should also contain a copy of the lender or mortgagee’s un-audited financial statements for the most recent quarter certified by management.  The letter should be addressed to:

Director, Lender Approval and Recertification Division

451 7^th St SW, Room B133/P3214

Washington, D.C. 20410

Failure to comply is grounds for an administrative action by the Mortgagee Review Board.  

Phase Two of the net worth requirement was published in Mortgagee Letter 2010-20 dated June 11, 2010.  The requirement is provided below:

·         Participation in Single Family Programs. The final rule provides that, irrespective of size, all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA single family programs must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one percent of the total volume in excess of $25 million of FHA single family insured mortgages originated, underwritten, purchased, or serviced during the prior fiscal year, up to a maximum required net worth of $2.5 million.  Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

·         Participation in Multifamily Programs with Engagement in Mortgage Servicing. The final rule provides that, irrespective of size, all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA multifamily programs, and that engage in mortgage servicing, must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one percent of the total volume in excess of $25 million of FHA multifamily insured mortgages originated, underwritten, purchased, or serviced during the prior fiscal year, up to a maximum required net worth of $2.5 million. Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

·         Participation in Multifamily Programs without Engagement in Mortgage Servicing. The final rule provides that all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA multifamily programs, and that do not engage in mortgage servicing, must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one half of one percent of the total volume in excess of $25 million of FHA multifamily insured mortgages originated, underwritten, or purchased during the prior fiscal year, up to a maximum required net worth of $2.5 million. Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.