I was somewhat taken aback by a comment made by a mortgage professional during a recent holiday gathering. In essence, they said, "Besides, now that we are all TPOs, it is all the lenders’ responsibility and problem – they will tell us what to do, we just originate and process …”
My reaction was a nervous thought: How many other mortgage professionals feel similarly?
Have we gotten to a point where our ability to participate and perform in an industry has been so conflicted by change that – somewhat in desperation – the production force has embraced a mindless approach to doing business?
Contrary to the opinion that day, I believe there remains a much-focused approach to doing business, which we must all be aware of and participate in. The implementation of regulatory and legislative reform that will unfold over the months to come has some very serious consequences for originators. One key area of focus that will be evolving is that of quality control.
Clearly the information contained in ML 2011-02, Quality Control Requirements for Direct Endorsement Lenders, reconfirms a quality control perspective that directly places compliance and diligence on the third-party originator (TPO).
My underwriting experience with TPO-originated files has been a mixed bag. Most, if not all, lenders require a copy of the TPO company quality control policy and procedures at the time of approval. In many cases, some shops have relied upon purchased plans, lender-provided “sample outlines” or “copy and paste” documents.
As time goes by and production builds, each party seems to assume that procedures are in place and the TPO policy and procedure originally provided is being implemented as detailed. Generally, there is no further lender check or “worry” if the files being submitted are of quality and there are no repercussions resulting from either the lender’s subsequent sale/execution or internal QC diligence procedures.
Many lenders take comfort in the fact that quality control is outsourced by their TPOs. Many TPOs take comfort in the fact that they have outsourced their quality control responsibilities. For the most part, the reports come back with few issues. Problem solved?
A past situation comes to mind when reviewing a fraud loan repurchase on a TPO file wherein they outsourced their quality control responsibility after closing. The lender showed no issues resulting from their QC procedure of the file. However, the fraud in this case occurred internally by the originator, who produced a series of borrower-signed documents and disclosures that, when reviewed in final file format, appeared to be consistent with the same quality of loan file submissions the lender had come to know and expect from the TPO.
Further investigation revealed the TPO company had reduced internal staff to manage expenses. Take a guess as to what time and expense was considered dispensable. You are correct if your answer indicates all of those pre-underwriting/pre-funding policies and procedures in the detailed TPO policy and procedure submitted to the lender at the time of relationship approval.
Oh, by the way, policies and procedures were never really fully implemented from the onset, as the owner indicated his experienced processor of 15 years was “very detail-oriented and could catch anything.” He further stated this was confirmed by their excellent (10 percent of loans submitted and funded) post-closing quality control results the lender reported to him.
ML 2011-02 re-emphasizes the lender’s responsibility to establish a documented quality control program for TPO originations. “Consequently, all FHA-approved mortgagees will be responsible for performing quality control reviews of their Sponsored Third Party Originators. The procedures used to review and monitor Sponsored Third Party Originators must be included in a mortgagee’s FHA-approved Quality Control Plan. At a minimum, these procedures must include the requirements outlined in Paragraph 7-6 of HUD Handbook 4060.1, REV-2.”
You as an originator should be prepared for your lenders to re-establish their QC requirements and begin effective monitoring of your files. This monitoring will also determine the effectiveness of the pre-submission QC procedures you have in place.
ML 2011-02 further states: “All FHA-approved mortgagees, including those in sponsored relationships must have a Quality Control Plan that requires the review of loans that are originated or underwritten. For those mortgagees that have Sponsored Third Party Originators, the Quality Control Plan must require the review of loans originated and sold to the mortgagee by each of its Sponsored Third Party Originators. Mortgagees must determine the appropriate sample amount of each Sponsored Third Party Originator’s loans to review based on volume, past experience, and other factors specified by the Department in Paragraph 7-6(C) of HUD Handbook 4060.1, REV-2. In addition, Sponsors must document the methodology used to review Sponsored Third Party Originators, the results of each review, and any corrective actions taken as a result of their review findings. A report of the Quality Control review and follow-up that includes the review findings and actions taken, and the procedural information (such as the percentage of loans reviewed, basis for selecting loans, and who performed the review), must be retained by the mortgagee for a period of two years. Quality Control review records must be made available to HUD upon request.”
In a time when our industry is the focal point for many concerns and criticisms (most of which have resulted from the actions of a slight few), it is important that we continue to work together for quality loan transactions that stand the test of investment quality. “They tell us what to do – we just originate and process” is not going to be the effort and spirit that will maintain an industry statement of professionalism for the borrower and for the lender.