Pre-closing Quality Control Plan

QUESTION         

What are elements of a Pre-Closing Quality Control Plan? Also, how should these audits fit into the process flow?

ANSWER             

Fannie Mae, Freddie Mac and FHA all require mortgage lenders to perform pre-closing, or pre-funding, reviews prior to loan consummation. The quality control plan should encompass the following elements:          

How and when the loan selected will be audited

The loan selection process for pre-closing reviews should meet the company’s need and focus on areas that pose the most potential for misrepresentation and fraud.

The audit must be conducted when there is sufficient documentation in the file and prior to loan consummation. Ideally, it should be early enough to allow the review and any corrections and/or revisions to be made and at Clear to Close. Keep in mind the TRID timing schedule with respect to rate lock and contract expiration, in order to ensure the pre-closing audit is performed with enough time to cure any defects without a delay in closing. Establish realistic turn times for the selection and review.

Who performs the audit

Although the written guidelines for who performs the pre-closing audits are not as clear as the post-closing audit, it is suggested the same criteria be applied. A department that is separate from Operations (Processing and Underwriting) should perform the review.

Identify the components of the review

• Loan Origination System data entry review
• Social security and borrower identification review
• Income calculation
• Asset verification
• Collateral review
• Fraud detection

Mortgage lenders can create their own Pre-Closing Quality Control Plan or retain a third party to write the policy and perform the reviews. In either case, agencies will look for these audit results when the company is reviewed or subject to an annual audit.

Brandy George

Executive Director/LCG Quality Control

Director/Underwriting Operations Compliance

New FHA System Updates

QUESTION

We recently heard FHA implemented a number of updates and revisions to its systems. What are the changes and when will they take effect?

ANSWER

On March 14, 2016, FHA’s Office of Single Family Housing published an update to its Single Family Housing Policy Handbook 4000.1 (“Handbook”). This update included several key changes to the Origination through Post-Closing/Endorsement for Title II Forward Mortgages section. 

We highlight certain salient changes below:

• New requirement that for Limited 203(k) mortgages the contractor’s written proposal must indicate what work items require permits and state that the repairs are non-structural. This is effective for FHA case numbers assigned on or after June 30, 2016. [Handbook § II.A.8.a.vii.(H).(2)]
• New requirement for repair escrow account closeout for all 203(b) products and programs where escrows are established. After the repair escrow account is closed, the mortgagee must complete the Escrow Closeout Certification screen in FHA Connection within 30 days of the escrow account being closed. This is effective for FHA case numbers assigned on or after October 31, 2016. [Handbook section II.A.6.a.viii.(B)].
• FHA updated its guidance for refinance transactions when an existing debt is used to determine the Adjusted As-Is Value. Specifically, FHA clarified that the mortgagee has the option of using the existing debt plus fees associated with the new mortgage or obtaining an as-is appraisal to determine the Adjusted As-Is Value. This is effective for case numbers assigned on or after March 14, 2016. [Handbook section II.A.8.a.viii.(A).(2).(b).(i)]

FHA also made changes and enhancements to the FHA Connection system including a new 203(k) calculator that now provides automated calculation of the maximum allowable mortgage amount for 203(k) and Steamlined 203(k) mortgages. This functionality became available on April 18, 2016. Although available for use now, mortgagees must use the calculator prior to endorsement for all 203(k) transactions with case numbers assigned on or after October 31, 2016. The calculator is accessible from FHA Connection’s Case Processing page. Based on information entered, certain fields will pre-populate in the calculator from the Case Number Assignment, Appraisal Logging, and/or FHA TOTAL Mortgage Scorecard screens in FHA Connection. Upon successful processing of the 203(k) Calculator page, the calculator saves the results and uses data from the calculator to pre-populate certain fields in the FHA Connection Insurance Application Screen.

In addition to the 203(k) Calculator, FHA implemented changes to the Escrow Closeout screen in FHA Connection. Changes include additions and modifications of fields, as well as additions and revisions to drop-down menus to accommodate escrow closeout policies announced with the March 14, 2016 Handbook update. Mortgagees may begin using the Escrow Closeout functionality in FHA Connection as of April 18, 2016, but must use this functionality for all case numbers assigned on and after October 31, 2016.

Finally, it is important to note that FHA’s Electronic Appraisal Delivery (“EAD”) portal becomes mandatory for all appraisal submissions for new originations with case numbers assigned on and after June 27, 2016.  Mortgagees may already use this portal for appraisal report submissions to FHA and FHA encourages all mortgagees that have not yet transitioned their operations to the EAD portal to begin the process now to avoid potential disruptions when the portal becomes mandatory. As of June 27, mortgagees will no longer be able to (i) manually enter appraisal information in the FHA Connection Appraisal Logging Screen for data fields that are designed to be pre-populated by appraisal data submitted through EAD; or (ii) submit appraisal reports for new originations to FHA through any other method.

Michael Barone

Executive Director &

Director/Legal & Regulatory Compliance

Reinstating Credit Privileges

QUESTION

We are a bank that received a warning from our regulator regarding the fact that we had suspended credit privileges for a borrower but did not restore the credit privileges in a timely manner. The borrower did not request the suspense. We made the determination based on some concerns involving their handling of the credit extension. What I want to know is this: when do we have to restore credit privileges?

ANSWER

Creditors must restore credit privileges as soon as reasonably possible after the condition that permitted the suspension of credit privileges cease to exists. [12 CFR Supp. I to Part 226 – Official Staff Commentary, § 226.5b(f)(3)(vi)-4]

If a consumer requested the suspension of credit privileges, a creditor must reinstate the privileges upon request of the consumer, provided no other circumstances justifying a suspension exists at the time. [12 CFR Supp. I to Part 226 – Official Staff Commentary, § 226.5b(f)(3)(vi)-5]

As to monitoring for a reasonable period of time after the condition that permitted the suspension ceases to exist, one method the creditor may use is to monitor the account on an ongoing basis to determine when the condition permitting the suspension ceases to exist. The creditor must investigate the account on a frequent enough basis to assure itself the condition continues to exist. [12 CFR Supp. I to Part 226 – Official Staff Commentary, § 226.5b(f)(3)(vi)-4]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Disparate Impact: Use of Criminal Records

QUESTION

I understand that the U.S. Department of Housing and Urban Development recently released “Guidance on the Application of the Fair Housing Act Standards to the Use of Criminal Records by Providers of Housing and Real Estate-Related Transactions” (the “HUD Guidance”). Can you please provide an FAQ on the content of the HUD Guidance?

ANSWER

The following are some important FAQs.

Q: What does the HUD Guidance address?

A: The HUD Guidance addresses how the “disparate impact” theory of liability applies “in Fair Housing Act cases in which a housing provider justifies an adverse housing action–such as a refusal to rent or renew a lease–based on an individual’s criminal history.”

Q: What is the “disparate impact” theory of liability?  

A: “Disparate impact” occurs when a housing or lending policy, which appears facially neutral or seemingly non-discriminatory, has a disproportionate adverse effect or impact on members of a protected category under the Fair Housing Act and there is no legitimate, non-discriminatory business need for the policy or practice. The United States Supreme Court (the “Supreme Court”) in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (the “Texas Dep’t of Housing”) upheld “disparate impact” as a viable theory of liability under the Fair Housing Act.

Q: Are persons with a criminal history a protected category under the Fair Housing Act?

A: No, persons with a criminal history are not a protected category under the Fair Housing Act. Rather, race is the relevant protected category addressed in the HUD Guidance. This is because certain racial groups are “arrested, convicted and incarcerated at rates disproportionate to their share of the general population.” Thus, “criminal records-based barriers to housing are likely to have a [disparate] impact” on these racial groups.

Q: Must there be intent to discriminate in order for a court to impose liability under the Fair Housing Act based on a “disparate impact”?

A: No. In Texas Dep’t of Housing, the Supreme Court ruled that a consumer may bring an action claiming fair housing discrimination based on “disparate impact” even if no intent to discriminate exists.  Further, the Supreme Court upheld that liability may be found where a legitimate business interest for the policy or practice exists but there was a less discriminatory option available. Thus, a housing provider may violate the Fair Housing Act if his or her “policy or practice has an unjustified discriminatory effect, even when the provider had no intent to discriminate.”

Q: Does the Fair Housing Act completely prohibit housing providers from considering an individual’s criminal history?

A: No. The Fair Housing Act only prohibits arbitrary and over-broad bans related to criminal history. Thus, housing providers should revise the policies they have in place in order to undertake a holistic approach to evaluating candidates. Any policy that prescribes for an absolute ban on applicants with a criminal history will violate the Fair Housing Act. According to the HUD Guidance, “Policies that exclude persons based on criminal history must be tailored to serve the housing provider’s substantial, legitimate, nondiscriminatory interest and take into consideration such factors as the type of the crime and the length of the time since conviction.”

Q: What must a housing provider show in order to establish that its policy does not violate the Fair Housing Act?

A: The HUD Guidance explains that there is a three-step framework used to judge claims against a housing provider’s allegedly discriminatory policy. Within this framework, the housing provider only has the burden of proving the second step. In the first step, the claimant must show that a disparate impact has actually resulted from the policy. Then, in the second step, “the housing provider must be able to provide evidence proving both that the housing provider has a substantial, legitimate, nondiscriminatory interest supporting the challenged policy and that the challenged policy actually achieves that interest.” Finally, “In the third step, the burden shifts back to the [claimant] to prove that such interest could be served by another practice that has a less discriminatory effect.”

Q: Does the HUD Guidance make a distinction between policies that impose restrictions based on arrests versus those that impose restrictions based on convictions?

A: Yes. The HUD Guidance explains that a housing policy which excludes individuals because of an arrest history is never “necessary to achieve a substantial, legitimate, nondiscriminatory interest.” Thus, housing providers may not use prior arrest history as a proper basis for denying an individual access to housing.

Neil Garfinkel

Executive Director

Realty Compliance Group

Title Services Compliance Group

Director

Legal & Regulatory Compliance

Lenders Compliance Group