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HUD Clarifies Reporting Requirements for Mortgagees

Mortgagee letter discusses FHA procedures

Nov. 15, 2013

By Mortgage Daily staff

The Department of Housing and Urban Development has outlined reporting requirements for mortgagees that discover noncompliance, fraud or misrepresentation on endorsed loans.

Federal Housing Administration lenders are required to include procedures for reporting findings from quality control reviews to senior management in their quality control plans.

The plans also need to address taking corrective actions and notifying FHA within 30 days of completion of the initial findings report.

Findings are reported through the Neighborhood Watch Early Warning System, and paper reports are not accepted.

HUD clarified the reporting requirements in Mortgagee Letter 2013-41, and the requirements are immediately effective.

If a HUD employee or contractor is suspected of involvement, then the findings must be reported directly to HUD's Office of Inspector General. The Neighborhood Watch system cannot be used in these cases

All findings of fraud and material misrepresentations must be immediately reported to FHA. This includes findings that would have altered an approval or endorsement decision. A mortgagee's final report must identify actions being taken, the timetable for completion and planned follow-up activities.

Such findings include failure to ensure that the borrowers meets FHA eligibility requirements; failure to verify credit, income or assets; failure to verify the correct FHA loan amount; failure to ensure appraisal satisfies FHA requirements; and failure to address deficiencies outlined in the real estate appraisal.

Findings that were discovered and resolved prior to funding don't require reporting as long as fraud or material misrepresentations were not involved. But all documentation of such needs to be retained for at least two years and made available to FHA on request.

HUD allows findings to be mitigated by adequately addressing the deficiencies and remedying them. But circumstances that change subsequent to submission for endorsement cannot mitigate a loan.

In the case of fraud or material misrepresentation, mortgagees cannot solely mitigate; FHA must be involved in an potential mitigation. Corrective action must be taken by lenders in these cases to ensure they don't do business with irresponsible parties.

Once FHA reviews reports from lenders, it might request more documentation. In some cases, FHA could provide lenders the opportunity to mitigate or resolve the findings.

But mortgagees could be hit with an indemnification demand if FHA finds the lender has not satisfactorily mitigated or resolved the findings.

"FHA monitors lender self-reporting on a monthly basis," the mortgagee letter stated. "Failure of an FHA-approved lender to comply with FHA requirements may result in FHA taking administrative action against the lender."

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