A proposed rule on Federal Housing Administration loans could have mortgagees on the hook for five years even if their mistakes were not responsible for the defaults or losses. Mortgage bankers are concerned that, in addition to extended liability for indemnification, lenders aren’t afforded an adequate appeals process under the proposal.
The rule was proposed by the Department of Housing and Urban Development and seeks to increase lender oversight and enforcement and provide tougher indemnification requirements for mortgagees that participate in the Lender Insurance process, according to a letter Monday from the Mortgage Bankers Association to FHA Commissioner David Stevens.
In addition to impacting mortgagees who participate in the Lender Insurance process, the trade group speculates that HUD’s guidance for its Single Family Insurance Process: Eligibility, Indemnification, and Termination is “establishing the groundwork for future, more widespread changes for all FHA lenders.”
On HUD’s proposal to hold lenders liable for five years if they knew, or should have known, of a serious and material violation even if the violation didn’t cause the default, MBA recommends a three-year term — which is better aligned with FHA underwriting requirements.
“The ‘serious and material’ definition should specifically exclude errors that have no effect on the eligibility or default of the loans at the time of origination (i.e. delivery data errors, non-critical missing documents, etc.),” the letter said. “The indemnification provision for serious and material defects should not state that it be applied ‘irrespective of whether the violation caused the mortgage default.'”
In addition, no appeals process is outlined for lenders to refute an indemnification request, and no cure period is specified for inconsequential infractions. The group is calling for an appeals process that is clear, efficient and transparent as well as examples of violations for loans that aren’t approved through the Technology Open to Approved Lenders — or TOTAL– Mortgage Scorecard.
A requirement that lenders “continually” maintain acceptable claim and default rates is “too absolute” given current volatility, and lenders have no reasonable chance of meeting such standards. It also doesn’t give lenders time to address the issues themselves.
Lenders shouldn’t be held to the same credit standards on streamline refinances — which are based on FHA criteria, require less borrower documentation than standard refinances and can be insured without appraisals.
MBA said that the lender termination proposal is too abrupt, and the group “is disturbed that FHA does not include a cure period or an appeals process for a lender to contest violations.” In addition, even though participation as a direct endorsement lender would still be available –losing Lender Insurance authority could immediately impact staff and customers.
The group is also concerned that FHA could start targeting small, irrelevant issues in pursuit of lender indemnification even though other factors contributed.
“MBA’s general concern with this proposed rule is that it penalizes responsible lenders by requiring them to indemnify FHA for loans regardless of cause or materiality, and without a well-defined, clear, and transparent appeals process,” the letter said. “Many of the proposed policy changes are extremely subjective and provide FHA with the authority to apply rules with the most rigid interpretation, at the administration’s discretion.
“Making the rules overly strict and incontestable only serves to heighten all lenders’ reservations in originating FHA loans through the Lender Insurance process.”
The association cited a required continual review of lenders that does not consider market fluctuations, remediation time or clarity about the meaning of “continual.” MBA said that even the most conscientious company would have difficulty attaining such an unrealistic standard.
Another position promoted by the association was the continued ability by FHA to grant reasonable exceptions to the agency’s policies on mergers and acquisitions. MBA is concerned transactions that are beneficial to mortgagees and not detrimental to FHA stability will be allowed to proceed.
