Outline
I. Internal Controls Data Collection Due Diligence Subcontractor Form Loan File Information Form Due Diligence Database Collateral and Comparable Inspections Estimated Sales Value Process Bid Process Marketing Closings Information Control Training
II. Quality Control Organization of the Quality Control Team Checklists and Review

 PROJECT TIMELINE
1995            1996
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              (10/15-5/15)

This chapter is organized into two sections: Internal Controls and Quality Control. The Internal Controls section identifies the potential risks associated with each component in the process of FHA Single Family Mortgage Loan Sale #2 and the controls established to detect or minimize the potential risk. The Quality Control section describes the process by which the various components will be monitored and tested for accuracy, consistency, and completeness.

I. INTERNAL CONTROLS

The sale of single family mortgage loans requires contact with a large amount of data, gathering information from various sources, and communicating with various personnel and potential buyers. Accordingly, a system of controls must be established and adhered to by all parties involved in the asset sales. Policies and procedures have been established for each applicable section; however, this section will identify the potential risks associated with each process and the system of controls intended to minimize and detect possible errors and inconsistencies.

1. DATA COLLECTION

Risk 1: Files are not transferred in a timely manner resulting in a delay in the initiation of the due diligence process

Internal Controls:

a. Contact the designated person at each location and establish and communicate what files are to be transferred and a required transfer schedule.

b. Establish procedure for documenting the receipt of all files.

Risk 2: Inadequate or incorrect listing of files is maintained and files are unknowingly misplaced or lost

Internal Controls:

a. Prepare and maintain a list of documents to be obtained from all locations.

b. Compile a complete listing of all loans from HUD (control list), to be maintained by one responsible party.

c. Upon receipt of files, compare to the control list.

d. Organize all files by FHA case number and assign each loan a control number.

Risk 3: Information is not collected in a comprehensive manner resulting in incomplete files and loss of control over information provided to investors

Internal Controls:

a. Establish clear cut-off dates for the receipt of additional information.

b. Establish and maintain system to segregate and identify information received after each cut-off date.

c. Provide appropriate supervision for the collection of information subsequent to cut-off date.

2. DUE DILIGENCE SUBCONTRACTOR SELECTION

Risk 1: Unqualified subcontractors are selected to perform required services

Internal Controls:

a. Require potential bidders to submit their qualifications before being added to the solicitation list.

b. Require bidders to submit self-certifications regarding ethics, and 8(a) or MWOB status.

c. Check references of finalists.

Risk 2: Subcontractor selection process is hampered by protests and undue scrutiny due to inconsistency and bias

Internal Controls:

a. Develop the criteria to judge the solicitation responses prior to reviewing proposals.

b. Develop a solicitation package that provides bidders with enough information to prepare a proposal responsive to the project's needs, minimizes bidders' confusion and questions, and allows bidders to submit their proposals in a timely manner.

c. Establish a standard form of subcontract agreement for each type of service to be contracted.

d Establish a protocol to ensure that all bidder's questions, whether directed to HUD, the financial advisor, or the due diligence contractor will receive the same treatment.

e. Require best and final offers from finalists, if appropriate.

f. Release the names of the successful bidders. Debrief unsuccessful bidders.

Risk 3: Subcontractor proposals are difficult to evaluate because they are unresponsive, inconsistent, unclear, or not submitted in a timely fashion

Internal Controls:

a. Evaluate the need for a bidders' conference in lieu of bidders submitting written questions.

b. Conduct and document a preliminary review of each proposal to verify that it is complete and responsive to the solicitation requirements.

Risk 4: Selection of a subcontractor is not supportable or documented

Internal Controls:

a. Document scope of services to be provided as a basis for the statement of work to be included in the solicitation package. Identify the task list, deliverables, timing, description of expertise required, and size of the project.

b. Establish an evaluation committee to score each proposal and rank and prepare a list of finalists.

3. SHORT FORM FILE ABSTRACT - ("SFFA")

Risk 1: Inaccurate or incomplete information is entered on the SFFA form resulting in inaccurate pricing and information to investors

Internal Controls:

a. Provide appropriate database designers to establish electronic edits regarding programs, access to the database and reporting, and assist with data entry process.

b. Insure instructional sheet and adequate training for completion of the SFFA form is received by all subcontractors.

c. Insure SFFA form contains questions that specifically relate to FHA and HUD forms.

d. Provide process for the due diligence subcontractor to sign and date the SFFA upon completion.

Risk 2: Loan modifications made during the life of the loan are not extracted resulting in incorrect information to investors

Internal Controls:

a. Provide section in database to disclose modifications made during the life of the loan.

b. Check due diligence database against HUD servicing system to check for additional modifications.

Risk 3: Due diligence contractor does not communicate exceptions or items that require additional research resulting in inaccurate information provided to the database

Internal Controls:

a. Provide area on SFFA to discuss items that may require research by the CT or other personnel.

4. DUE DILIGENCE DATABASE

Risk 1: Improper supervision given to uploading information into the due diligence database resulting in errors in the entire reporting system

Internal Controls:

a. Insure adequate training for data entry into the database is received by all personnel and that the system is constructed to conform with FHA/HUD forms.

b. Establish method for determining who entered data and when data was recorded, whether by the DDS or CT.

Risk 2: Database system is not monitored for deficiencies and missing information

Internal Controls:

a. Provide for database monitoring and identify data deficiencies by use of exception reports that reveal missing documents and data, and loan status reports that track what information is completed and what information is open.

b. Initiate edits to be performed after asset review file information is input by the due diligence contractor and after the contractor updates the data.

c. Establish an asset tracking database to report information on file status, date and time entered, and user name relating to source documents.

d. Establish a report to identify information that is inconclusive or not available.

5. BROKER PRICE OPINIONS AND CREDIT REPORTS

Risk 1: All properties are not included

Internal Controls:

a. Appoint team leader who will establish assignments and record BPOs and credit reports upon completion, using the control list to ensure all properties are included.

Risk 2: Information is incorrect or unacceptable resulting in the possibility of erroneous market and value information

Internal Controls

a. Compare BPO values to UPB and review loan-to-value ('LTV") ratios for reasonableness. If very low UPB, determine current UPB and original loan amount. If loan has had considerable amortization, a low UPB would be reasonable. If a very high UPB, determine the condition of the property. A property with considerable damage would likely have a low BPO value resulting in a high LTV ratio.

b. Insure that all credit scores are within the ranges set by the provider. Any score outside of the range is likely to be an error.

6. BID PROCESS

Risk 1: Bids will be received from bidders unqualified to purchase loans from HUD

Internal Controls:

a. Require bidders to submit self-certified qualification statements.

b. Review bidder qualification packages against the debarred list maintained by HUD.

c. Require substantial initial deposit as assurance of ability to perform.

Risk 2: Bids are difficult to evaluate or not evaluated effectively in order to insure maximum recovery to HUD

Internal Controls:

a. Develop model that evaluates any combination of bids.

b. Provide specific format and procedure for submitting bids and bid packages.

c. Conduct and document a preliminary review of each bid to verify that it is complete in response to the bidding requirements.

d. Establish evaluation committee composed of HUD and CT members to approve successful bids and notify successful bidders.

Risk 3: Bid process is not tracked efficiently resulting in confusion regarding losing bidders and return of earnest money deposits.

Internal Controls

a. Compile a list of bids received and identify personnel to initiate and track the return of earnest money deposits.

b. Establish a communications center and identify personnel to answer questions from bidders regarding the status of their bids.

8. MARKETING

Risk 1: Marketing strategy is ineffective, i.e., a retail market is not created resulting in less competition, low bids, and a negative image of FHA's ability to conduct successful nonperforming single family sales.

Internal Controls:

a. Establish various forums to insure communication to all applicable markets, to include mailings, regional and trade press publications, trade associations, industry groups, and on-line systems, including the website and Bloomberg news systems.

b. Establish a communications center and identify trained personnel to answer all incoming calls and requests for bidder information packages.

c. Insure that all information provided to bidders is uniform, complete, and consistent.

d. Establish system for ensuring that confidentiality agreements are received and documented in the database and that bidder information packages are mailed in a timely manner.

9. CLOSINGS

Closings are handled by HUD personnel and, therefore, no internal controls are established for the CT in this area.

10. INFORMATION CONTROL

Risk 1: Nonpublic information is disclosed, resulting in confidential information being made available to unauthorized individuals

Internal Controls:

a. Train all personnel on the importance of maintaining confidentiality of nonpublic information.

b. Insure all members of the CT and its contractors, sign a confidentiality agreement forbidding them from disclosing nonpublic information.

Risk 2: Release of information is not controlled or information is incorrect, resulting in inaccurate information being made available to outside parties.

Internal Controls:

a. Designate and provide training to the appropriate members of the CT who will be responsible for providing information to outside parties.

b. Establish system for logging in all inquiries received from, and responses made to, third parties. Insure system provides for tracking follow up, if required.

c. Compile and distribute to all interested parties, a uniform information package maintained by the appropriate CT member. Insure all updates are made available to all parties on a regular basis.

d. Obtain appropriate approval from HUD and the CT prior to releasing any information regarding the timing or terms of the sale not previously published.

11. TRAINING

Risk 1: Training is insufficient to adequately educate all personnel resulting in inefficient operation of entire project

Internal Controls:

a. Identify all personnel and all functional areas for which training is required.

b. Identify qualified instructors who will provide training.

c. Develop program for establishing training location, dates, subject matter, instructor, method and format of training, and the distribution of any educational material required.

d. Establish system for notifying all designated personnel of their training schedule and tracking their attendance at the appropriate sessions.

II. QUALITY CONTROL

1. ORGANIZATION OF THE QUALITY CONTROL PROCESS

A Quality Control ("QC") Team, composed of a team leader and, when appropriate, team members selected by the CT, is assembled. All participants must be familiar with loan sale activities or have relevant experience in the designated areas.. The team's primary goal is the early detection of any weaknesses in data integrity. It is critical that errors in due diligence data collection be identified early to prevent the problems from being repeated with additional assets.

The QC team leader is assigned to review each section of the project on a sample basis, and provide a written report of the review results and findings to a QC Committee composed of CT members. A high incidence or severity of exceptions may result in a higher percentage to sample, or all items being rechecked for a particular function. Initially, the team leader meets with the QC committee on a bimonthly basis, with subsequent meetings on an as-needed basis to be determined by the team leader . If any serious problems are discovered, the QC team leader works with HUD, the task leader and/or the due diligence subcontractor to resolve the issues.

The CT and QC team leader must work closely together to insure the loans are properly prepared for sale in accordance with policies and procedures and that all information available is accurate and complete.

A checklist has been developed to document the quality control review of the SFFA forms. In addition to questions that prompt specific responses, the checklist directs the reviewer to provide comments for any exceptions not covered by the checklist. Each checklist must be completed in its entirety and signed by the reviewer.

2. CHECKLISTS AND REVIEW

Checklists are designed to review completion of the short form file abstract.

The results of the reviews are discussed with the task leader responsible for the area reviewed. There may be matters of interpretation where two answers are supportable by the available documentation. In such instances, an agreement should be reached on the best answer based on the reliability of the source of the information. In all instances, the resolution of the exception must be documented and, if changes are necessary, the correction must be confirmed and documented. Any serious exceptions are communicated to the CT immediately.

Summary reports of the results of the quality control reviews are submitted to the CT upon completion of each review. The report indicates the area reviewed, the sample size, the scope of the review, the nature and extent of exceptions or discrepancies, and the corrective action recommended. This information will assist in structuring future loan sales.