What HECM Lenders Can Expect from HUD’s New Loan Review System

As the Department of Housing and Urban Development (HUD) readies the roll out of a new loan review system for certain Federal Housing Administration mortgages this year, agency specialists this week discussed what FHA mortgagees can expect under the new guidelines.

Earlier this month, HUD published Mortgagee Letter 2017-03, announcing its plan to implement a new Loan Review System (LRS), which will be used to manage quality control functions for FHA Title II Single Family loan programs.

This includes Home Equity Conversion Mortgages (HECMs), said Justin Burch, director in HUD’s Quality Assurance Division, during a webinar Thursday that discussed the new Loan Review System implementation and process changes.


“We will review HECMs through LRS the same way we would review forward mortgages,” Burch told RMD during the Q&A portion of the webinar. “Just like we will currently review them through the PETR [Post-Endorsement Technical Review] process, we would expect you, even if you are entirely a reverse mortgage lender, to prepare to have access to and use LRS once we go live.”

FHA manages risks to Single-Family insurance programs through various quality control processes. The new Loan Review System is HUD’s latest initiative to minimize and better manage those risks, said Jack Higgins, project manager for the Loan Review System.

“Our various quality control efforts help us to ensure that lenders comply with FHA guidelines, which are designed to protect the insurance fund and borrowers,” Higgins said. “We’re also constantly working to strike the right balance—making sure that our compliance and enforcement efforts are appropriate while maintaining access to credit for qualified borrowers.”

But in order to do that, HUD’s loan review processes, and the results they produce, need to be as consistent and transparent as possible. Enter the Loan Review System (LRS).

First, the LRS unifies various loan review processes that currently fall under either the Quality Assurance Division or the Processing and Underwriting Division in each of FHA’s homeownership centers. Second, the new system allows HUD to implement FHA’s Defect Taxonomy, a simpler, more user-friendly rating system for documenting the results of loan reviews, Higgins said.

“Currently, our loan reviews come in a few different shapes and sizes—and we use different systems to manage them,” he said. “This makes it nearly impossible to consolidate data for reporting.”

LRS will manage test cases for lenders working towards their unconditional Direct Endorsement (DE) authority, however, a much larger volume of LRS reviews will be post-endorsement, plus some loans that HUD selects on an individual basis outside of what is currently known as the Post-Endorsement Technical Review (PETR) process.

“The PETR name is something that you won’t see at all in LRS,” Higgins said. “Under this unified process, a loan review is a loan review.”

This also means that after HUF fully transitions to LRS, the new system will replace the Underwriter Review Functions and eFindings Functions that are currently found in FHA Connection.

It is important to note that LRS will not be used to manage any part of FHA standard loan origination or endorsement processes, such as case number assignment, case processing or appraisal logging.

“LRS won’t change these functions as they are currently carried out in FHA Connection,” Higgins said. “But the vast majority of our post-endorsement reviews processes and data will be consolidated into a single system.”

As HUD continues to work on ongoing system development, the agency intends to confirm the effective date for the new Loan Review System in a subsequent Mortgagee Letter no later than March 1, 2017.

Written by Jason Oliva