HUD Official: FHA New Lender Rules Will Target Fraud, Excess Risk

The Federal Housing Administration (FHA) has issued a final rule regarding its efforts to strengthen the Mutual Mortgage Insurance (MMI) Fund by tightening Lender Insurance requirements.

Its plans to enact more stringent lender performance standards were reaffirmed earlier this month, and now the new regulations have been posted on the FHA’s website and will soon be published in the Federal Register.

The new rules are intended to “provide greater clarity regarding our expectations for our LI lending partners, as well as actions we will take to prevent losses when those standards are not met,” said the agency’s acting commissioner, Carol Galante, in a letter¬†dated January 23.

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Galante’s letter explains what the new rules will mean, including ongoing evaluations of LI lenders to make sure they’re maintaining the required compare ratio that’s required in order to participate in the program; the process by which FHA-approved mortgagees may still be granted LI authority; and the new standard for what constitutes a “serious and material” violation of FHA origination requirements.

“Serious and material violations, as well as instances of fraud or misrepresentation, will require indemnification by LI mortgagees,” Galante says in the letter. “In providing a standard for these violations, along with a clear process by which FHA will require indemnification for loans that do not meet these standards, FHA is providing a level of certainty to our partners with regard to the types of violations which are actionable under HUD policy.”

The FHA also has plans to issue a revised proposed rule on seller concessions in the near future, “to reduce the maximum allowable seller concession for single family mortgages from its current level to one that is more appropriate and better manages risk.”

At the current level, Galante says, the FHA along with borrowers are exposed to “excess risk by creating incentives to inflate appraised value.”

These new rules and proposed revisions to existing rules will serve to strengthen the FHA’s risk management, says the agency’s acting commissioner. Its previous efforts to implement a “more robust risk management system” have already resulted in insuring the “highest quality books of business in FHA’s history over the past two years,” says Galante.

View the letter here.

Written by Alyssa Gerace