The Federal Housing Administration (FHA) has announced several proposed changes to its loan-level certification requirements for both lenders and borrowers, designed to improve clarity of compliance rules, and to expand financing options for borrowers in an effort to bring more depository institutions back into the FHA lending process.
“Today, we are proposing to overhaul the certifications that approved lenders are required to make to FHA both annually, and for each mortgage loan they originate,” said Brian Montgomery, FHA commissioner and acting Deputy Secretary for the Department of Housing and Urban Development (HUD) on a call with media outlets. “In addition, we are proposing to more clearly define what FHA considers a defective loan, and how our participating lenders may remedy those defects.”
Among the key goals that these changes hope to meet is in bringing clarity to compliance rules that discourage lenders and banks from doing business with FHA, and to be more transparent in doing business with lenders who may make mistakes or errors on loan documentation, Montgomery said.
One of the primary reasons that FHA is proposing these changes has to do with a notable drop in participating with FHA on the part of depository institutions, including lenders and banks.
“Over the past decade, the number of banks or depository institutions participating in our single-family mortgage insurance program has dramatically declined,” Montgomery explained. “Depository institutions now represent about 13 percent of FHA’s origination volume. In 2010, the number of bank lenders was closer to 44 percent.”
Additionally, banks have repeatedly expressed that a primary reason for their increasingly limited participation in FHA is the legal liability associated with enforcement actions stemming from the False Claims Act, the statute which imposes damages for defective loan applications, Montgomery explained.
“They have expressed concern that even minor errors could expose them to severe penalties. […] As a consequence, if a borrower today went to their bank for an FHA-insured home loan, they’re likely to hear that they have to go elsewhere,” he said.
FHA hopes to increase the participation of depository institutions and banks by making their documentation clearer, more concise and accompanied by greater certainty on the part of participating institutions.
When asked what these new rules will specifically mean for the reverse mortgage business, Deputy Assistant Secretary for Single Family Housing Gisele Roget responded to RMD by describing how the entire process for lenders can be streamlined through focusing on the larger aims of the changes.
“For the loan-level certification, one of the things that we did when we heard feedback was that in the current form you have certifications for the borrowers and the lenders on the same page,” Roget said in response to RMD’s question. “That’s something that causes confusion for both [borrowers and lenders]. So, what we did in this proposed revision is we put borrower certification on one section of the form, and the underwriter and mortgagee section in a separate section of the form.”
In terms of streamlining for the loan-level certifications, FHA will replace more legalistic terminology with “plain English, direct bullet points” on the newly-proposed form, which references specific, relevant sections of the Single Family Housing handbook, she said.
Industry response to the announcement appears positive, based on statements made by specific trade associations.
“We appreciate the efforts by the Department to add clarity and transparency to the certifications processes,” said Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association (NRMLA) in an email to RMD. “NRMLA is reviewing the documentation on the Drafting Table and will be coordinating a submission of comments with the NRMLA Risk & Compliance Committee and the NRMLA HUD Issues Committee.”
Additionally, Mortgage Bankers Association (MBA) CEO Robert Broeksmit released a statement lauding the agency.
“We appreciate the increased clarity, transparency, and certainty these changes will bring to the program,” Broeksmit said. “We are confident that the changes will lead to more lenders participating fully in the FHA program, making these mortgages available to even more Americans — particularly first-time homebuyers.”
More information about these proposed changes can be found in FHA-INFO #19-18, available on HUD’s official website.