FHA and State Examinations

Transcription

1 How to Prepare for FHA and State Examinations October 14, 2008 Dial In No.: 1 (616) Access Code: Help Desk No.: 1 (866) option 3 LogicEase Solutions Inc. TOTAL Compliance Webinar Series

2 Welcome to Today s s Webinar Moderator: Jason Roth Senior Vice President ComplianceEase Speakers: Darlin McRoyal President The Darlin Company, Inc. Shannon O'Toole Director of Quality Assurance U.S. Dept. of Housing and Urban Development (HUD) Chuck Cross Vice President Conference of State Bank Supervisors (CSBS) 2

3 Discussion Topics How industry can prepare for examinations How US Dept. of HUD examines FHA lenders How State regulators are modernizing exams Q & A - Send questions to the speakers by entering them on the Question and Answer box on the right panel 3

4 Darlin McRoyal More than thirty years in the financial services industry Focus on risk management, credit and compliance, systems and product development, mortgage banking operations, project management and systems analysis Extensive experience in Federal and State laws and regulations Particular expertise in Government/Agency guidelines and regulation: FHA, VA, Ginnie Mae, Fannie Mae, Freddie Mac 4

5 Shannon O'Toole Director of Quality Assurance for HUD Santa Ana Homeownership Center Previously Dept. Head of REO for FDIC and RTC Appeared before U.S. Congress to advise on Government Lien Recoveries Developed pilot programs for U.S. and CA State Treasuries Project Manager for FEMA s Inspector General s office, auditing Congressional grants for earthquake retrofitting Developed programs for CA Department of Insurance, examining fraud, waste and abuse 5

6 Chuck Cross Vice President for Mortgage Regulatory Policy for the Conference of State Bank Supervisors (CSBS) Oversees development of examination protocols and coordinated multi-state supervision Formerly of Washington DFI Div. of Consumer Services Served as President for the American Association of Residential Mortgage Regulators (AARMR) Former subject matter expert and instructor for National White Collar Crime Center Certified Fraud Examiner 6

7 Are You Prepared? Darlin McRoyal

8 Don t Wait Until the Audit to Find Out! Read and understand the rules before obtaining license and/or FHA authority Post all licenses and other notices (HUD, State, Federal, HMDA, etc.) 8

9 Check Hiring and for transferring individual licenses, if applicable. Provide timely notification of changes and terminations; file required reports and pay fees Compensation FHA requires W2 employees, as do many States Requirements for disclosures, fees, other charges, advertising and record retention 9

10 Perform Background and reference checks as required and document the employee file. For FHA, also check CAIVRS and the government lists Quality control and compliance reviews (manual, automated or both); and check systems periodically to assure that tests are being performed accurately Branch, broker (if applicable) and other third party reviews Management reporting and follow up 10

11 Maintain Files with State and/or FHA correspondence, approvals, licenses, updates, audits and response Files of consumer complaints and resolution Lists of investors, lenders, brokers and vendors; keep copies of all contracts and agreements Copies of all advertising (including websites), format, dates advertised and the marketing area. Assure that all advertising meets Federal and State requirements Uniform file stacking order; include rate sheets, invoices, reconciliation and disbursements. Assure that all files contain legible copies of all documents and disclosures Sample loan disclosures and documents (tested versions, including changes/updates) Quality control and compliance, internal audit, investor/agency; other due diligence reports 11

12 Document Policies and procedures, including but not limited to Fair lending, predatory lending, pricing and methodology, third-party approval (appraiser, broker, title, settlement, etc.), quality control, compliance, underwriting, loan program guidelines (including Nontraditional), privacy, consumer complaints, red flags, and HMDA Accessibility to all employees Training Monitoring, corrective actions, reporting and management response 12

13 Before the Exam Ask questions, know the rules, and be cooperative. During an examination, try to clear all questions and provide any missing documentation while the examiner is performing the review 13

14 14 Systems and Data Not all systems are created equal. Prior to the examination, you may need to gather information from various areas, both systematically and manually Ensure that you can provide accurate data such as borrower name and property address, occupancy, loan originator, loan number, loan program and documentation type, term, lien position, interest rate, fees, APR, funding and closing dates, and other party information (appraiser, settlement, title, broker, lender, etc.)

15 Loan Files locate all files Funded/closed, and Withdrawn/cancelled/denied State and/or FHA required stacking order legible Final HUD-1, application (initial/final), disclosures and documents, title policy, invoices, rate sheets, compliance tests, evidence of refunds Signatures, dates, evidence of timely disclosure 15

16 Policies and Procedures Are they current and in writing? 16

17 Other Documentation May be requested Recent balance sheets and financials Trust accounting documentation Bank statements and reconciliation Cancelled checks Warehouse bank and investor information Third party/vendor lists Employees (evidence of background checks and compensation) Originator contracts Investor and secondary market agreements Loan documents and disclosures, and more You may also be asked for foreclosure, delinquency and servicing information 17

18 FHA Will also review Underwriting FHA Connection data (accuracy) MIP and timely payment of premiums Insuring NOR s (Notice of Reject) Neighborhood Watch/Credit Watch delinquency/default, EPD (early payment default) other documentation required in lender file but not submitted for insuring file (i.e. new construction, condo) FHA does not permit net branches or dual employment 18

19 FHA Examinations Shannon O'Toole

20 Compliance and Monitoring Risk Factors Compare ratios National, regional, zip code comparisons Early defaults and claims Processing and underwriting referrals High risk programs Late mortgage insurance premiums Volume Industry referrals, tips, OIG, FBI Routine and sample Delinquent or incomplete Lender Data Reporting 20

21 21 Neighborhood Watch

22 Mortgagee Notification The Love Letter as some of my monitors refer to it, is our notification to the mortgagee that they have been selected for a review 22

23 23 HUD Will Request Quality control reviews and reports to management for the past 12 months A list of all employees and positions to include terminated employees Funding Log Loan files where a repurchase request has been made for the last 12 months Any FHA loan for which payments are being made to investor for early payment defaults Will probably select additional files upon arrival from Funding Log Provide the date, time and point of contacts for HUD (we are generally flexible)

24 Examination Activities On-site Opening interview Monitor reviews selected files Off-site Conduct face-to-face and telephone interview with borrowers and other parties Reverify employment, source of funds, gift, mortgage, rent and alternative credit information Prepare the Report (Findings Letter or Referral) Address final report to President, CEO or designee 24

25 25 Lender Quality Control Plans

26 Data Analysis Case # LO Appraiser Seller Default Units 1 Valdez Barney Kopple Smith King Jones 3 3 Valdez Barney Kopple 1 4 Smith King Rogers Valdez Barney Garcia 4 6 Valdez Barney Burnett 0 7 Wegman Reed Muncie 2 8 Johnson Lacey Martin Legg Hergert Kane 7 10 Valdez Barney Andre 4 11 Lombardi Nichols Garcia, M 2 12 Bonorden Edmunds Hunsaker 0 13 Smith King Bacon Flemming Johnson Martinez 2 15 Nichols Barney Dale 0 26

27 Reverifications 27

28 Reverifications Employment Gift letters Deposits from acceptable sources Bank statements Funds from acceptable sources Budget letters Credit reports Careful examination of HUD-1 s 28

29 Operations W-2 Employees Verifications of Licenses, dual employment No third party originators No non-approved FHA entity participation Registered branches Registered relationships Correspondent/ Sponsor/Principal/Agent Licenses 29

30 Common Findings Origination Insufficient funds to close Improperly documented gift Non-exclusive employees originating loans Inaccurate HUD-1 line item documentation issues Prohibited branch arrangements Lack of or inadequate QC plan and reviews Servicing Failure to review loan for, or document, loss mitigation actions Failure to report or inaccurate SFDMS reporting Unrealistic forbearance 203k Release Issues Inadequate QC reviews 30

31 Close Out Meeting Discuss findings Resolve findings Improve operations/procedures Develop remedial actions Advise of further investigations Findings letter to follow 31

32 QAD Findings Letter The violations that were found during the review are listed below and in the Attachment to this letter: Finding No. 1: Lender failed to adopt, implement and maintain a QC Plan in compliance with HUD/FHA requirements. Lender s QC Plan is deficient in several elements required by HUD Handbook REV-2, Chapter 7. Finding No. 2: Lender failed to document the transfer of gift funds in accordance with HUD/FHA requirements. HUD-1 Settlement Statement reflects that the source of funds to close were from a non profit organiziation, but the file did not include a copy of the wire transfer of the gift funds. Refer to HUD Handbook REV-5, paragraph 2-10C the FHA TOTAL Mortgage Scorecard User Guide and Mortgagee Letters and Finding No. 3: Lender failed to ensure that its employees underwrote FHA insured loans. Refer to Handbook REV-2, paragraph 2-9G. Please provide your response to this office within 60 days from the date of this letter. 32

33 What is Next? Mortgagee Board Referral State Regulator Referral Inspector General Referral 33

34 Corrective Actions Suspension Limited Denial of Participation (LDP) in HUD programs Debarment from future participation in HUD programs Civil money penalties Loss mitigation 34

35 Ongoing Communication Lender response Open communication Application of Remedies Follow up 35

36 State Examinations Chuck Cross

37 A Responsive State System IDENTIFIED NEED RESPONSE (INITIATIVE OR PROCEDURE) IMPLEMENTATION 37

38 Major Examination Initiatives Model Examination Guidelines (MEGs) for the implementation of Guidance and Statement Nationwide Cooperative Protocol and Agreement for Mortgage Supervision Fed/State Pilot Examination project Development and implementation of examination software 38

39 Model Examination Guidelines (MEGs) Genesis was in the 2006 Guidance on Nontraditional Mortgage Product Risks and the 2007 Subprime Lending Statement The need was an interpretive tool and guide for examiners and financial institutions to use in complying with the Guidance and Statement 39

40 MEGs Concept A top down versus bottom up approach to examinations Policies, practices and business culture Management, management, management A template of questions triggering examiners to think and respond to an institution s compliance, consumer protection and safety and soundness risk Compare management intentions to institution performance 40

41 Goals of MEGs Create efficiency in examination process Lenders know what is expected of them Examiners have standard methodology to follow Guidelines are available to the industry Institutions can use guidelines and available technology in-house as self-regulation Enables management to prepare for new exam process Drive uniformity, standardization, and objectiveness in examinations 41

42 Modular Design Module 1 Instructions and Scoping Module 2 Examiner Checklist Module 3 Company Information Module 4 Management Questionnaire Module 5 Examination Software Module 6 Report Writing and Follow-Through 42

43 Module 5 Examination Software Genesis for regulators was Loan Portfolio Causeway in 2004 Genesis for industry predates this The need was an examination tool that could: Conduct a 100% portfolio review Quickly scan electronic data for apparent violations and problems Return concise information for a more focused examination 43

44 Evaluation and Implementation CSBS began vetting vendor products in states tested 3 vendors over an 8 month period In the end, the states chose ComplianceEase s ComplianceAnalyzer & RegulatorConnect solutions CSBS signed up in May 2008, AARMR in Sept 2008 State-by-state implementation commenced in June Target to have all 50 states and DC implemented by end of

45 How It Works Data Submission Institutions respond to the state s Entry Letter by uploading transaction level data through a secure portal called RegulatorConnect.org The examiner retrieves the data and uploads to ComplianceAnalyzer software Employs rules engine of laws, regulations, and calculations (e.g. APR, Truth-in-Lending, Sec. 32, etc.) Identifies apparent violations of law and regulation or highlights potential trouble areas 45

46 How It Works Audit Reports A report of analytical findings is produced The examiner reviews the findings and uses the information: To identify the necessity of an onsite exam or to narrow or broaden the exam focus To focus resources on potential problem areas To assist in making recommendation 46

47 Benefits of Software Time and cost savings for both regulators and industry Companies with few exceptions may not even be examined Facilitates offsite exams The ability to do more with less 100% file review Checking APRs or High Cost loan limits System performs the legal research and remembers all of the laws and regs so the examiner doesn t have to 47

48 48

49 Multi-agency Examination Genesis was the realization of a fractured or segregated system of regulation Develop a better way of supervising in the modern regulatory world Nationwide Cooperative Protocol and Agreement Focused on multi-state mortgage entities (MMEs) Creates an oversight board 4 Federal/State pilot examinations conducted in

50 How Can Companies Prepare for the Future of State Exams? Know the rules Build procedures to put rules into practice Employ technology to understand your data Conduct loan-level self-examination Be receptive to change and new ways of conducting exams 50

51 Q & A Send your questions to the Speakers by entering them on the Question and Answer box on the right panel 51

52 Speaker Contacts Darlin McRoyal The DARLIN Company, Inc Shannon O'Toole Department of HUD Ext Chuck Cross Conference of State Bank Supervisors (CSBS)

53 Evaluation and Webinar Archive An Event Evaluation will be sent to you after this Webinar. Your feedback is very important for us to improve our future events. Archived Webinar will be ready for download on October 16 th at ComplianceEase.com 53

54 Thank You for Your Participation! Ease ComplianceEase.com LogicEase Solutions Inc.