The Department of Housing and Urban Development has finalized a rule to clarify and strengthen its authority to seek indemnification from its largest lenders for making bad loans.
In general the rule requires lenders to reimburse the Federal Housing Administration insurance fund for losses on defaulted loans.
HUD will seek indemnification for "serious and material" violations of FHA underwriting requirements, as well as in cases involving fraud and misrepresentation, according to the rule.
Commenters to the rule requested more guidance with respect to violations. HUD answered by saying its standards are well understood. Its thinking is based on the premise that the lender never should have endorsed the loan "because FHA would not have insured the loan under the direct endorsement process."
The rule is aimed at "Lender Insurance" funders that have special endorsement powers granted by FHA. These LI lenders originate more than 80% of all government backed mortgages. The new rule also reduces the ability of lenders to forestall indemnification by taking a case to the Mortgagee Review Board.
If HUD determines indemnification is warranted, the LI lender will "not be able to negotiate the settlement," the final rule says. HUD also is imposing stricter performance standards for lenders to gain and maintain their LI approval status.
"Taken together, the changes announced today will protect FHA's insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD's underwriting expectations," FHA acting commissioner Carol Galante said Friday.
The indemnification rule goes into effect 30 days after being published in the Federal Register.
