The U.S. Department of Housing and Urban Development (HUD) is proposing revisions to the Federal Housing Administration's (FHA) loan and lender certifications, including the addition of a new provision in the loan-level certification that would require lenders to certify they have completed a pre-endorsement review of all loans and that no deficiencies or defects were found that would render a loan ineligible for FHA insurance.
HUD also wants to reinstate a provision requiring those directly involved with the borrower and the loan application to certify they have not participated in a prohibited activity. In addition, the agency wants lenders to certify that they have not been barred or suspended by any federal department or agency and that they have not been indicted or convicted of any wrongdoing that would affect their ability to work with the FHA.
The goal of the proposed revisions is to give lenders greater clarity in terms of FHA's requirements with regard to loan quality.
‘From the beginning, our goal has been to develop new certifications that clarify the lender's role in verifying a borrower's information and to use common sense when deciding to take corrective actions against lenders for making minor mistakes that do not affect the insurability of the mortgage,’ Edward Golding, the principal deputy assistant secretary for HUD, said during a press conference on Tuesday.
The proposed revisions are a good example of the tightrope HUD and the FHA are walking with regard to freeing up more credit for underserved borrowers while at the same time ensuring loan quality and reducing risk for taxpayers. On the one hand, HUD wants to give lenders greater clarity as to what the requirements are so that they stay within the guardrails of the regulations; on the other hand, HUD officials say they are willing to work with lenders to address minor loan defects without necessarily bringing enforcement action, thus helping lenders feel more at ease with regard to increasing loans to the underserved.
Golding told the Wall Street Journal (WSJ) that the revised policies leave room for minor errors while still letting the Department of Justice and regulators pursue damages in the event a lender exhibits a pattern of errors.
‘In the end, we believe our efforts to expand access to credit for responsible borrowers are making a difference,’ Golding told WSJ's Joe Light.
Shortly after notice of the proposed revisions was released, David Stevens, president and CEO of the Mortgage Bankers Association (MBA), issued a statement noting the language, as currently written, ‘lacks clarity as to the insurability of a loan and doesn't embody a reasonable diligence standard for FHA underwriters.’
‘[The] MBA appreciates FHA's efforts to provide the industry the opportunity to comment on the revised certifications,’ Stevens said. ‘As the entry point for homeownership for so many first-time home buyers but also borrowers who often have higher risk, clarity and confidence for lenders are critical concerns.’
Stevens noted that the proposed language also does not ‘address the significance of any errors in terms of risk to the FHA or allow for an opportunity for lenders to correct any mistakes, regardless of how minor they may be.’
‘This lack of clarity continues to leave the door open to possible enforcement actions and also encourages federal agencies, other than FHA, to take action against lenders,’ Stevens said. ‘Absent clarity, some lenders may continue to re-evaluate which borrowers they are willing to extend FHA-backed lending to and at what prices.’
If approved, the proposed revisions will take effect early next year.