HEARTLAND CREDIT UNION Mortgage Loan Quality Control …

Heartland Credit Union

Mortgage Loan Quality Control Policy

HEARTLAND CREDIT UNION Mortgage Loan Quality Control Plan

Dated:

May 24, 2016

Next Review:

May 2017

Responsible Party:

VP Mortgage Lending

Responsible Committee: Credit Advisory Committee

Heartland Credit Union

Mortgage Loan Quality Control Policy

Heartland Credit Union Mortgage Loan Quality Control Policy

1. Purpose and Content It is the intent of Heartland Credit Union, herein referred to as the Credit Union, to monitor the overall quality of loan servicing and to assure that our employees and independent contractors are in compliance with all applicable laws, company policies, and investor mortgage insurer requirements, including the requirements of FHA, VA, Fannie Mae, and the Federal Home Loan Bank of Chicago's MPF xtra program ("Agencies").

The purpose of the Mortgage Loan Quality Control Policy (QC Policy) is to evaluate and monitor the overall quality of mortgage production through prefunding and postclosing review programs, improve loan quality and the loan production process, and verify the existence and accuracy of credit documentation, legal documents, and property appraisals that the Credit Union uses to reach its underwriting decisions.

The QC Policy will ensure that mortgage loans conform to the Credit Union's and Agencies' eligibility and underwriting policies, demonstrate prudent underwriting judgment, and are secured by properties that have adequate value to support the loans.

2. Philosophy and Objectives The Credit Union's procedures for mortgage loan quality control are based on an assessment of the risks presented by the various types of loans, the information obtained during the application process, and the steps taken to obtain and verify this information.

The Credit Union will have two phases of quality control in the form of prefunding and post-closing reviews. All findings from these reviews will be presented to the COO monthly. This report will include defects found (if any) and the corrective actions taken. A copy of this report will also be distributed to the parties responsible for resolution. In addition, performance against the target defect rate will be measured at least quarterly and reported to management. The target defect rate will be evaluated and, if necessary, reset at least annually. The Credit Union will document the rationale for adjusting the target rate.

The goal of the Credit Union is to achieve complete compliance with all Federal, State, and Local regulatory requirements, as well as a:

? 10% gross and 3% net defect rate for audit exceptions rated `Critical' or `Moderate';

? 10% gross and 5% net defect rate for audit exceptions rated `Minor'; ? Guard against fraud, negligence, errors, and omissions; and ? Assess compliance with internal policies.

Heartland Credit Union

Mortgage Loan Quality Control Policy

Critical exceptions are exceptions that will cause a loan to be ineligible for purchase by Fannie Mae. Moderate exceptions are findings that need corrected, but do not prevent the loan from being considered investment quality. Minor exceptions are findings that do not require correction before closing the loan file.

The Credit Union uses a third party quality control company, LoanLogics, to verify the accuracy, validity, and completeness of borrower applications, credit verifications, property appraisals, and closing documentation.

3. Prefunding Quality Control Review Prefunding reviews will be performed on a selection of mortgage loans with adequate time to make any necessary corrections or revisions. The selection of files for prefunding review will be evaluated regularly to ensure its effectiveness. This selection process may include some or all of the following: ? LTV ratios greater than 90% ? Credit scores considered high-risk ? Loans secured by investment properties ? Cash-out refinances ? Loans originated or processed by newly hired staff

Each month, at a time chosen by the reviewer, a file will be randomly selected for prefunding QC. The file will be from varying loan officers and will be selected early enough in the application process to prevent delay of closing.

The Credit Union will use a third party QC company, LoanLogics, to perform monthly prefunding quality reviews. (LoanLogics guidelines are attached and made part of this Policy) Files will be selected based on several key factors. The first factor to consider will be the origination source for the loans. The goal of the Credit Union is to have files reviewed representing all loan originators. The second factor is the level of risk associated with certain transactions. For example, loans to Self-Employed borrowers or with "Other" income typically result in higher overall defect rates. The final factor will be product type. The credit union will consider product types for review to ensure that loan originators have a level of accuracy for all products offered. While other factors may be considered, these will be considered for each review.

The prefunding QC will validate or verify the following information: ? Data entered into the automated underwriting system; ? Borrower Social Security number used to verify borrower identity; ? Income calculations and supporting documentation (including IRS form 4506-T); ? Employment ? verbal verification of employment; ? Assets needed to close or meet reserve requirements; ? Appraisal or other property valuation data; and ? Documentation of adequate mortgage insurance coverage.

Heartland Credit Union

Mortgage Loan Quality Control Policy

All data verification may be obtained either directly from the information source (i.e. Social Security Administration, IRS, employer, etc.) or reliable third parties.

Data verification may be obtained either directly from the source (i.e. Social Security Administration, IRS, employer, etc.) or from a reliable third party. All documentation will be retained for the completed loan file.

Should the prefunding review identify any defects in any of the verified areas, the staff member performing the review should notify senior management about the defects, inform the party responsible for resolving the defects, document the resolution of the defects, and report results of the resolution to senior management and other appropriate parties.

4. Post-Closing Quality Control Review Post funding reviews will be performed on a minimum of 10% of the residential mortgage loans closed. The mortgages selected will represent the overall book of business and include different types of loans offered. Selection will be made on a monthly basis no later than the month following closing. All reviews will be completed and reported within 60 days of the selection. If the QC cycle is more than one 30-day period in arrears (90 days after the selection), the Credit Union will notify the Agencies.

The Credit Union will use a third party QC company, LoanLogics, to perform monthly Post-Closing quality reviews (LoanLogics guidelines are attached and made part of this Policy). All selections will be made by LoanLogics. The Credit Union will send a complete list of all mortgage loans closed in the month no later than five days past the end of the month. Upon notification of the selections made, the Credit Union will send files to LoanLogics for re-verification and reunderwriting. LoanLogics will return a Summary Report and an Individual Loan Report. The Summary Report serves as a compilation of the individual loans reviewed and gives an overview of all loans with risk ratings for compliance, credit and closing/document issues. The Individual Loan Report provides detailed statements on each loan reviewed and loan level detail.

These reports will be reviewed by the VP of Mortgage Lending upon receipt. Once reviewed, the VP will respond to all deficiencies noted from the reports in writing. If required, corrective action will be taken and the file will be noted.

As part of the post-closing QC review, LoanLogics will validate the borrower's Social Security number and ID on loans selected for review either directly with the Social Security Administration or by a third party. LoanLogics will further verify the borrower's identity verification through online sources. The file will also be reviewed to determine whether loan documentation, including, but not limited to, identity verification documents, income documentation, etc., has been altered or forged in any way.

Heartland Credit Union

Mortgage Loan Quality Control Policy

LoanLogics will also re-verify the borrower's income, employment information, and source of funds with the original documentation. The re-verification may be written or verbal; the latter requires documentation recording the name, title, or position, and contact information of the interviewee. If the employer does not provide verification of a borrower's income, the loan file must be documented to state the date the information was requested, but that it was not obtained.

The borrower's credit history will also be re-verified by LoanLogics. A new in-file trimerged credit report will be obtained from a source other than the original credit reporting agency.

In addition to the files selected by LoanLogics, the Credit Union will require a postclosing QC review for all loans with an Early Payment Default (EPD) or other high level concerns. An EPD is defined as any loan for which any of the first five payments due after the purchase date of the loan becomes ninety (90) days or more delinquent. If any common factor is identified among EPDs, the Credit Union will require a post-closing QC for future loans with the same factor until such a time as the pattern of EPDs is stopped.

5. Appraiser and Appraisal Review The Credit Union will continually evaluate the quality of an appraiser's work through the normal underwriting review of all appraisal reports, as well as through the spot-check field review of appraisals performed by LoanLogics.

The appraisal or property inspection for 10% of the mortgage loans selected for post-closing QC review will be verified by LoanLogics ordering a review appraisal, additional appraisal reports, property inspection report, or other appropriate documentation to check the work of the original appraiser. The review appraisal or property inspection--which may be either a new retrospective appraisal or property inspection, or a field review--will be prepared by an appraiser who is not affiliated with the original appraiser or appraisal firm. Any field review must include an exterior inspection and an analysis of the comparable properties, with emphasis on the accuracy of the factual data on the appraisal or property inspection report.

LoanLogics will use a desk review to verify the appraisal or property inspection for the remaining 90% of mortgage loans selected for QC review. This review will be performed by someone competent in the application of basic appraisal theory for assessing market risk, determining if a property meets eligibility requirements, including the LTV ratio and prescribing corrective actions in the underwriting process when defects are identified.

Based on the examination of independent appraisal field review reports, the Credit Union may refer unacceptable appraisal reports to the state appraiser licensing and regulatory boards for investigation and action.

6. Reporting

Heartland Credit Union

Mortgage Loan Quality Control Policy

The results of the QC process will be reported to senior management within 30 days of completion. Any errors or discrepancies will be reported along with the resolutions and corrective actions taken. Management will notify all origination and underwriting staff, if necessary. Amendments will be made to the QC Policy whenever necessary to ensure full compliance. Any material discrepancies or gross misrepresentations will be reported to the Agencies within 30 days of identification.

7. Record Retention The credit union will retain all written and electronic records that are created as part of a QC review process for a minimum of three years. These records include documentation of QC review findings, as well as documentation related to any corrective actions.

8. Training All staff will undergo continuing training and education to ensure that they are aware of any changes in regulations or best practices that directly affect their duties. If staff members continue to have findings in one aspect of the QC Policy, they will be given individual training in an attempt to rectify the findings. Individual training will be documented in the employees file.

9. Vendor Review The credit union will review the QC work done by LoanLogics on a monthly basis. This review will ensure that all requirements and guidelines are applied consistently and that LoanLogics's QC reviews accurately represent the credit union's work.

On a monthly basis, the credit union will review a minimum of 10% of the loan files that LoanLogics has selected and reviewed. The sample will include loans for which defects identified (if any), and files for which no defects were found. These reviews will verify all data that is required as part of a normal QC review. The results of this review will be compared to the review results sent by LoanLogics in order to validate the accuracy and completeness of LoanLogics's review. Any discrepancies will be reported to senior management and an action plan will be developed to ensure that all future reviews are accurate.

10. Audit The QC process and procedures will be audited on a regular basis, no less than annually, to ensure that they followed by all staff, and that assessments and conclusions are recorded and consistently applied. The audit findings must be accurately recorded and consistent with the defects noted in the original QC record.

Results of the QC audit will be distributed to senior management and to the appropriate areas within the Credit Union. An action plan will be established for remediation or changes to policies or processes, if appropriate.

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