HUD Keeping Tabs on Performance of FHA Lenders
The Department of Housing and Urban Development is sticking to its regulatory agenda of making Federal Housing Administration lenders more accountable for the performance of their originations.
HUD is very close to issuing a controversial final rule that would make FHA lenders accountable to the quality of the appraisals they use to approve a loan.
The department also is signaling its plans to impose a new FHA approval process for servicers. The details are very sketchy. But it appears HUD wants to monitor FHA servicers for defaults, foreclosures and their loss mitigation efforts.
At the same time, HUD has beefed up the quality control efforts it expects from FHA lenders. And for the first time, it spelled out the quality control efforts it expects from FHA servicers.
On Christmas Eve, HUD sent to the Office of Management and Budget a final rule on lenders responsibility for appraisals. OMB reviews and clears all regulations before they can be published in the Federal Register.
The proposed rule drew sharp opposition from lender groups because it would require lenders to indemnify HUD for losses due to inflated appraisals.
"Lenders understand and will step up to the plate when it comes to being accountable for the actions of their employees and even their loan correspondents," said mortgage banking attorney Phillip Schulman.
"But it is totally inappropriate to hold them accountable for the actions of independent, licensed third-party appraisers. In fact, it is suspect as to whether HUD has the legal authority to hold lenders to such a standard," he said. Mr. Schulman is a partner in the Washington law firm Kirkpatrick & Lockhart.
Mr. Schulman expects there will be a backlash if HUD finalizes the appraisal rule. "The backlash and risk that HUD runs if it pushes accountability too [far] is that lenders will stop doing as many FHA loans."
Bud Carter, a Washington consultant with Potomac Partners, also expressed concerns that lenders may reconsider their participation in the FHA single-family loan program if HUD continues to move ahead with its agenda. "There are certain lenders who are not going to want to take the risk of making FHA loans," the former FHA staffer said.
HUD recently released it regulatory agenda, which lists several proposals the agency plans to issue in the next six months that address accountability and compliance issues. These include a proposal that would limit the ability of FHA lenders to evade Mortgagee Review Board sanctions by selling their addresses, names and assets to another FHA-approved lender.
Other proposals would set new restrictions on who can be an owner or officer of an FHA-approved lending company, spell out the responsibilities and duties of FHA-approved loan correspondents and sponsors, and establish a loan officer registry to monitor their performance and ensure loan officers are employed by only one lender.
The semiannual agenda also revealed that HUD wants servicers to enter into an agreement with the FHA. "The department believes that the servicing agreement would enhance its authority to supervise the servicing of FHA-insured loans and to take action against mortgagees that fail to perform required servicing functions," according to HUD's regulatory agenda.
"It is unclear what kinds of penalties HUD is considering," Mr. Carter said. "I think this is being modeled off the Credit Watch program for originators," he added. Under the Credit Watch program, branch offices with excessive default rates are suspended from originating FHA loans for at least six months.
Meanwhile, HUD did a "good job" in revising it quality control requirements, Mr. Schulman said. HUD has "tweaked and fine-tuned" the quality control plan requirements for lenders and defined what FHA expects from servicers, he said.
HUD identified 16 areas of servicing that needed to be reviewed on a regulator basis, including three areas - delinquent accounts, foreclosure processing and claims - that must be reviewed monthly.
The major servicers have very extensive quality control departments, Mr. Schulman said. "I don't think this is going to be that much of a burden." He advised lenders to update their quality control plans immediately. "This is a kind of preventive medicine," he said to avoid liability.
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