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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410

January 31, 1983
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING - FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 83-2
     TO:  ALL APPROVED MORTGAGEES
     SUBJECT:  Quality Control Plan
 
          As required by HUD Mortgagee Approval Handbook 4060.1, all
     approved mortgagees must maintain an adequate written Quality
     Control Plan for their loan origination and servicing
     activities.  The Department does not prescribe specific
     standards for a quality control plan.  It is the responsibility
     of each approved mortgagee to maintain a Quality Control Plan
     sufficient for its scope of operations including branch offices.
     Suggested guidelines are contained in the Handbook.
 
          Attached is a letter dated September 27, 1982, issued by
     the Federal National Mortgage Association (FNMA) setting forth
     its quality control program guidelines.  This is to advise all
     approved mortgagees that the Department considers the FNMA
     quality control program to be sufficient for purposes of
     compliance with Handbook 4060.1 .  Approved mortgagees that have
     a quality control program which is satisfactory to FNMA are not
     required to maintain a separate Quality Control Plan in order to
     meet HUD's requirements.  This change is intended to reduce
     unnecessary costs to approved mortgagees by eliminating
     duplication with respect to quality control.
 
          If you have any questions, please contact Andrew Zirneklis,
     Office of Lender Certification, at (202)426-3976.
 
                                 Sincerely,
 
                                 Philip Abrams
                                 Assistant Secretary for
                                 Housing-Federal Housing Commissioner
 
Attachment
 
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                  Outline of Essential Elements of
 
                      a Quality Control System
 
Purpose
 
     o  To verify existence and accuracy of legal documents, credit
        documentation, property appraisals and underwriting
        decisions.
 
     o  To assure that mortgages:
 
        -  conform to company policy and procedures;
        -  are generally acceptable to private institutional lenders;
        -  comply with insurer/guarantor requirements; and
        -  meet specific investor requirements.
 
     o  To evaluate and monitor the overall quality of loan
        production.
 
System Integrity
 
     o  System should be independent of the production department.
 
     o  Standard operating procedures should be made available to
        involved employees
 
        - procedures should include specific guidelines for
          informing investors of results.
 
     o  Results should be regularly reported to management.
 
     o  System should provide sufficient controls to measure results,
        discrepancies and actions taken in a timely manner (within
        2-3 months of loan origination).
 
     o  System should provide for communication between departments.
 
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Procedures
 
     o  Specific areas of investigation:
 
        -  legal documents
 
           a.  note
           b.  mortgage insurance or guaranty certificate
           c.  recorded mortgage or deed of trust
           d.  assignment (recorded if applicable)
           e.  title evidence
           f.  plat of survey
           g.  truth-in-lending disclosures
 
        - origination documentation
 
           a.  loan application
           b.  credit report
           c.  verification of employment
           d.  verification of deposit
           e.  other sources of funds
 
        -  property appraisals
 
           a.  value conclusion
           b.  appraisal data
           c.  validity of comparables
           d.  occupancy verification
           e.  quality of appraisal
 
        -  underwriting decisions
 
           a.  compliance with investor programs and requirements
           b.  sufficiency of documentation
           c.  reliability of underwriting judgements
 
     o  Scope of Investigation
 
        -  number of cases to be reviewed based on:
 
           a.  areas and size of operations
           b.  geographical area of operation
           c.  number of branch offices
 
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                                  3
 
        -  sampling technique
 
           a.  should guarantee a representative sampling is made
           b.  should assure that the method is truly random
           c.  should also allow for discretionary sampling, if
               needed
 
     o  Mechanics of Investigation
 
        -  will vary depending on size and nature of operation
 
        -  should be performed by "disinterested" third party
 
        -  should generally follow "audit" theory.
 
     o  Results of Investigation
 
        -  discrepancies must be analyzed to determine cause
 
        -  results must be properly recorded
 
        -  appropriate action must be taken
 
        -  report to management and investors any major discrepancies
           and action taken.
 
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