Frequently Asked Questions About
EARLY PAYMENT DEFAULT AUDITS
Q: What does HUD consider to be an Early Payment Default?
A: HUD considers any loan that defaults within the first 24 months after endorsement to be an Early Payment Default.
Q: Why is it in my interest as an approved HUD mortgagee/loan correspondent to monitor and review the reasons for early payment defaults for the loans that I originate?
A: Primarily because HUD monitors these loans and assesses your performance in originating quality loans by the performance of the loans. If the loans that you originate perform poorly, HUD may take one of several actions to address the situation, including placing you on "Credit Watch" status or possibly placing you in a "Termination" status (terminating your authority to originate FHA loans).
Q: How can I monitor the performance of the loans that I originate?
A: You can regularly log onto the HUD Neighborhood Watch web site to monitor the performance of your loans. Loans that are delinquent or have had claims filed against the FHA Insurance Fund warrant your special attention.
Q: How can Early Payment Default Investigations help me to determine how to improve the quality of the loans that I originate?
A: Early Payment Default Investigations provides me with information about my origination procedures that are helpful to me in ensuring I am taking the proper steps to eliminate potential fraud in my operation. These investigations often reveal deficiencies in the source of funds verifications, employment verifications and other procedures. They serve as an indicator that proper safeguards were not taken to avoid originating a poor quality loan.
Q: Why is having an Early Payment Default Investigation done on a loan that has already defaulted helpful to my operation?
A: Although Early Payment Default Investigations are performed after the loans have gone into default, they serve an invaluable purpose. Initially, they provide evidence to HUD that you are taking your responsibilities as an approved mortgagee/loan correspondent seriously and are attempting to determine how to improve your operation to prevent a future recurrence. This helps to defend against possible sanctions HUD may take against your operation. They also provide valuable feedback on how well your existing quality control procedures are working and identify areas of your operation that need revamping. In short, they provide an alternative external method of assessing whether your employees are complying with your policies and procedures to avoid and eliminate fraudulent lending activities.
Q: Why is it better to have Early Payment Default Investigations done by someone outside of the processing, originating and underwriting areas?
A: It is essential that your quality control procedures are performed by someone knowledgeable but not directly involved in these aspects of your company's operations. This is because that person can make a more objective assessment since he/she has an arms-length view of the transaction. Indeed, HUD requires that quality control reviews of closed loan files are performed by persons who meet this criteria (that is, those who are knowledgeable but outside the direct processing, originating and underwriting functions) or by the sponsors or an outside quality control firm on a contract basis. Many small to medium-sized firms do not have persons in their shops who can be dedicated solely to the quality control function. These companies benefit by having their quality control services, including Early Payment Default Investigations, performed by an outside firm with the necessary technical expertise and capability.