FHA Clarifies Stance on Loan Defects

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The Federal Housing Administration revised its proposed lender certification requirements on Tuesday in an effort to assure lenders they won't be penalized for minor loan defects or mistakes.

"The sum of these changes provide clarity to what lenders are certifying to and clearly define the kind of loan-level mistakes that we have no intention of pursuing in an enforcement action," said Ed Golding, the principal deputy assistant secretary for FHA.

The FHA set off a firestorm in September when it released a loan certification plan that appeared to make it easier for the Justice Department to pursue FHA lenders for minor loan defects.

Now, the FHA is trying to reassure nervous lenders that they won't be penalized for minor defects.

The final loan-level certification clarifies that FHA will only hold lenders accountable for "mistakes that would have altered the decision to approve the loan," according to a letter Golding issued Tuesday.

The new certification goes into effect Aug. 1.

FHA is also revising the annual lender certification that company executives are required to sign. This certification is aimed at making sure the company is not involved in fraud or other serious criminal or civil violations. That proposal will be issued for a 30-day comment period.

In issuing the new loan level certification proposal, Golding told reporters that FHA significantly revised the certification to alleviate lender concerns.

"Our goal is to make sure lenders make every effort to obtain accurate information and validate that information. At the same time, recognizing that errors sometimes occur," Golding said.

Over the past few years, almost any loan defect was considered a major defect, according to attorney Phillip Schulman, a partner at Mayer Brown in Washington.

"This is a response by HUD to the concerns by lenders that the definition of a loan defect was too broad," he said Tuesday.

The Justice Department released a blog that backed up the FHA's action, saying that it will "continue to be guided by the language of the" False Claims Act "that prohibits the submission of knowing and material false claims."

"In the FHA context, this means that no lender will face False Claims Act enforcement based on an unknowing mistake or an immaterial requirement," the department said.

The Justice Department's statement may not be reassuring to some lenders, however.

"If DOJ's past conception of materiality will be extended to the future, then we are no better off," said Laurence Platt, an attorney at Mayer Brown. "If, however, the DOJ, like HUD, defines materiality in terms of whether a defect in origination affected the eligibility of the loan for insurance, the industry will be in a better place."

But industry observers said the changes could have an impact, despite the lingering fears prompted by the Justice Department's statement.

"At first blush, the FHA's certification changes appear to meaningfully clarify lender liability which should be viewed as a positive development for mortgage credit availability but not a seismic shift as enforcement anxiety remains," wrote Isaac Boltansky and Amy DeBone, policy analysts at Compass Point Research and Trading, in a note to clients.

Meanwhile, some industry groups were taking a cautious approach to FHA's announcement. "We appreciate FHA's efforts to increase certainty in the underwriting and processing of FHA-insured mortgages, and on first review this language appears to be an improvement over the previous lender and loan-level certifications," said David Stevens, president and chief executive of the Mortgage Bankers Association.

Housing and Urban Development Secretary Julian Castro said the new loan certification proposal shows that FHA is committed to being a good business partner with lenders and opening the door to qualified borrowers with credit scores below 680.

"Now our partners know exactly what we expect when they do business with us," Castro told a National Association of Hispanic Real Estate Professionals conference in Washington on Tuesday.

"And we hope to see more responsible Americans with average credit scores get that email message saying 'Congratulations, your mortgage has been approved,'" Castro said.

Kate Berry contributed to this story

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