FHA Bill Sets New Standard for Indemnification for Bad Loans

The Senate Banking Committee is slated to mark up and vote on a Federal Housing Administration reform bill on July 31.

The bipartisan FHA bill is generally aimed at giving the Department of Housing and Urban Development additional tools to manage the FHA single-family program as it rebuilds capital reserves.

The bill, co-sponsored by committee chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, gives FHA more authority to police lenders.

The bill would “better equip the FHA to hold lenders accountable for fraud or inappropriate loans,” Johnson said at a July 24 hearing.

The latest draft of the “FHA Solvency Act” allows FHA to seek indemnification for losses if a loan has a “material defect that would have prevented the loan from being insured.” Such a “loan must have been delinquent within 36 months and resulted in a default.” FHA can also seek indemnification in cases of fraud and misrepresentations.

The bill also allows HUD to terminate a lender’s authority to originate FHA-insured loans on a national basis. Currently, HUD can only terminate lenders with high default rates in specific geographic areas.

HUD must provide an appeals process for lenders who want to contest indemnification or termination orders.

The bill also calls for FHA to move closer to the underwriting standards that the Consumer Financial Protection Bureau spells out in its qualified mortgage rule.

The bill directs the HUD secretary to “evaluate and revise as necessary FHA’s underwriting standards using criteria similar” to the QM rule, according to a section-by-section summary of the bill released Friday.

“Such criteria includes a borrower’s income and financial resources, monthly mortgage payment, other debts, employment status if employment income is included in financial resources, debt-to-income ratio and credit history,” the committee summary says.

The Dodd-Frank Act gave HUD the flexibility to draft its own QM rule for FHA loans and the department is reportedly drafting such a rule.