The Paperwork Reduction Act

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As we are all aware, there are several pieces that effect FHA mortgage lending. Origination, Processing and Underwriting are all pieces that the production staff are very familiar with. HUD has set many standards which influence how we go about managing these pieces of the processes, from adhering to underwriting guidelines to completing functions such as appraisal logging in FHA Connection, we all comply with these standards in the same manner.

However, there are other pieces to the FHA mortgage insurance process that we as the production staff do not regularly consider and these functions directly effect not only the salability of a case but ultimately the insurance process. Further they can effect how an underwriter is graded during a post closing audit which is a direct effect on all Direct Endorsement Underwriters.

I am talking about the closing and post closing pieces of the FHA mortgage insurance program and that it entails. Closers not only have the responsibility to insure that a lien on the proposed collateral is perfected but to also determine that the borrower has met their minimum required investment by reviewing the HUD I and advising title companies as to what closing costs the borrowers must pay and so on.

This is an obvious point to the closing process which would effect underwriting. Needless to say, if the borrower has not met their minimum required investment, these case could be uninsurable and the responsibility would fall back to the underwriter. If certain closing conditions were not collected and the post closer did not pursue them then the file would contain material deficiencies which could also be viewed as production errors. These are the obvious things however there are some very important items that we are not aware of that and may even be doing correctly that could get the underwriting staff into some trouble, a double edged sword of sorts.

I am talking about the post-closing function of shipping a file to HUD for insuring. The process of shipping the case binder in itself is pretty easy. All information required including the shipping order of the case binder is set forth in HUD Handbook 4165 which tells the post closer how to handle remitting the UFMIP, Insurance Application and ultimately the stacking order of the documents where the case binder is concerned. Better still, the Paperwork Reduction Act of 1995 has made the case binder staking piece even easier, doing away with several pieces of information that a broker or lender would collect to complete the underwriting process.

Under the Act, the post closing is only required to forward in the case binder certain necessary documents that HUD will need in order to determine insurability of the case. These items pretty much consist of copies of the Appraisal, Contract of Sale, Condition Commitment and any other valuation documentation such as a termite inspection and so on and for the credit side, the Mortgage Credit Analysis Worksheet, AUS Findings, Note, Deed of Trust, 1003, 92900a and credit report. Some FHA disclosures are required such as the For Your Protection Get a Home Inspection but not all of them. Sounds pretty great for post closers, you know less is more but the principal is not so great for the underwriter.

A few years back I was reviewing some of my report cards from HUD, you know those lovely things they give DE Underwriters when they audit our cases at the HOC level. Audits are completed on about 10% of files underwritten per lender per year. As I was reviewing them I noticed that I was consistently being written up for material deficiencies that there is no way I could have missed. Things like credit explanations, evidence of sufficient cash to close, VOE etc. As I reviewed the findings on each case I noticed that this stuff was consistently noted as missing on just about all of them. Needless to say I started pulling the cases and sure enough the copy packages contained all of the documentation that the HUD auditors were stating was missing. So I called my HOC and explained that I did not understand how I was being written up for missing items that were clearly in the file.

The individual that I spoke to asked me if the documentation had been included in the case binder and I thought why wouldn’t it have been. The answer: Paperwork Reduction Act. The HUD employee explained to me that other than the credit report the information that I was speaking of was no longer required in the case binder as a matter of insuring and that the Paperwork Reduction Act had done away with the need of most of this stuff so therefore the post closers were no longer required to ship the credit information as part of the post closing insurance process. What this means for the underwriter, however, is that when and if the case is audited, there is no employment, asset or supporting credit documentation in the file which results in serious material deficiencies and not so great report cards.

I checked with my closer and sure enough she was not including this stuff as she was not required to. After several meeting it was determined that although our institution was doing nothing wrong from a post closing standpoint, adhering to the Paperwork Reduction Act was causing problems from an audit standpoint and that the post closers would now include all collected credit, employment and asset information in the file when shipping to HUD for insurance purposes and that policy continues today.

Now some advice for the underwriters out there who are not sure what is going to HUD in the case binders, GO ASK! Sit down with your managers and make them aware of the fallout that can result for not including all documentation collected during the processing and underwriting phase of the mortgage cycle in the case binder when it goes to FHA for insuring. Poor audits not only make the underwriter look bad but makes the institution whom which they are employed by look irresponsible. As usual, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.