FHA Clarifies Lender Indemnification Process and Performance Expectations
The Department of Housing andrnUrban Development (HUD) is preparing to take another step toward tighter authority andrnoversight of its approved lenders. The FHA has requested comment on regulatory changes that will strengthen its ability to force lenders to indemnify or reimburse the FHA for claims against the insurance fund. HUD is also proposing newrnrules that would increase performance standards for FHA’s authorized lenders. </p
LastrnJanuary, FHA announced a series of policy changes to address risk andrnstrengthen the financial position of its insurance fund and the agency has alsornmoved to fine and sanction many of its lenders. The latest proposed changes are intended to createrna regulatory framework and codify the legal authority FHA currently has underrnthe National Housing Act. </p
The proposed changes werernpublished in the Federal Register on Friday and stakeholders are invited torncomment. One area in which changes arernproposed is lender indemnification to HUD of insurance claims where the lenderrnis guilty of fraud, misrepresentation or noncompliance with applicable loanrnorigination requirements. Under existingrnrules, indemnification is required when a claim arises in connection to arnmortgage that was not “originated” in accordance with FHArnrequirements. The new rule would expandrnthe definition of “originate” to include the entire process fromrnapplication to the endorsement of the mortgage note. Indemnification is required at any time whenrna mortgage loss results from fraud, however, indemnification in other casesrnsuch as non-compliance is currently limited to “a reasonable timernperiod” after origination. The newrnrules will codify the time limit at five years.</p
The specific instances of failingrnto comply with FHA requirements which can result in a demand for indemnificationrnare a failure to: </p<ul class="unIndentedList"<liVerifyrnor analyze creditworthiness, income and/or employment of the mortgagor;</li<liVerifyrnthe source of assets used for a down payment and/or closing costs;</li<liAddressrnproperty deficiencies identified in the appraisal which could affect the healthrnand safety of the occupants or the structural integrity of the building</li<liCertifyrnthat the appraisal was done in compliance with FHA appraisal requirements. </li</ul
HUD may seek indemnification whetherrnor not the violation caused the mortgage default. </p
The current method of definingrnacceptable default rates for initial lender approval sets a two year baselinernfor defaults and claims based at or below 150 percent of either the nationalrnaverage rate of defaults and claims for all insured mortgages or, if the lenderrnoperates in a single state, that state’s average default rate. This methodology may disadvantage lendersrnoperating in multiple states (and thus using the national average) where one ofrnthose states has an unusually high default rate. The proposed rule will set default ratesrnstate-by-state for multiple state lenders. rnThe new rules will also require that lenders continually maintain the claimrnand default rates that were required when their authority was initially grantedrnand requires that HUD continually monitor the lender’s performance. </p
Under current rules, thernlack of a proven track record makes new lenders ineligible for Lender Insurancernauthority however this also applies to new entities that are created by merger,rnacquisition or reorganization even where one of the participating partiesrnpreviously had Lender Insurance approval. rnApproval in such cases required an individual waiver. Under proposed rules, HUD would be able tornevaluate the potential performance of the new entity based on the performancernof the predecessor corporate entity or entities providing it held LenderrnInsurance approval at the time of the acquisition or merger.</p
“It’s important thatrnour expectations are crystal clear,” said FHA Commissioner David H. Stevensrnof the changes. “We need to clarify which circumstances we’ll require indemnification and the level of loan performance we expect lenders tornmaintain.”</p
In addition to solicitingrncomments on the changes outlined above, HUD is also seeking input on a proposalrnto require mandatory electronic submission of case binders. The current regulation requires thatrnmortgagees maintain records, including origination files, and submit them tornHUD within 60 days of the loan closing. rnCustomarily these case binders are maintained and submitted to HUD inrnhard-copy paper format. HUD is nowrnconsidering requiring that all case binders be submitted electronically afterrnJune 2012.</p
Comments on any of thernproposed changes will be accepted from interested parties until December 7,rn2010. Here’s how you can provide feedback:</p<ol
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