The Federal Housing Administration is working to revamp its loan quality review program so that lenders will gain confidence in originating more single-family loans backed by the agency, officials said Wednesday.

Major FHA lenders such as JPMorgan Chase have come under scrutiny by the Department of Justice and others for allegedly conducting faulty underwriting of legacy FHA loans. JPMorgan paid $614 million to settle the dispute.

The HUD IG recently informed BB&T Corp. that the Winston-Salem, N.C.-based bank will be audited soon. In response to the notice, BB&T said it would establish a $53 million reserve.

"While there are no findings from HUD at this time, in light of announcements made by other financial institutions related to the outcomes of similar audits and related matters, and after further review of our exposure, we believe it is prudent to establish reserves," said BB&T chairman and chief executive Kelly King.

The Department of Housing and Urban Development is trying to address the problem by updating its lender handbooks and instituting early reviews of newly originated loans to detect any problems upfront that lenders need to correct.

Agency officials believe this expanded sampling and timely notice of any underwriting defects will give lenders more confidence in approving FHA-insured loans. It should also reduce the fear that institutions will be hit two, five, or 10 years down the road for costly mistakes, officials said.

However, lenders appear to be apprehensive about this new loan review process. One trade group declined to comment on the issue because it has become such a contentious issue for its members.

HUD's goal is "admirable," according to mortgage consultant Brian Chappelle. "But I have real concerns about the ability of FHA to implement a process that does not quickly deteriorate into a hyper-technical game of 'gotcha' where penalties are proposed for minor underwriting or document errors."

Meanwhile, HUD wants to have this new loan sampling review process in place by yearend and it needs additional funding to support it.

The department is seeking congressional approval to charge lenders an administrative fee that could cost the industry up to $30 million a year when loan production is high. But getting congressional approval in this election year could be difficult.

An administration fee is about the only way congressional appropriators will provide FHA with additional resources, a HUD official said.

"We need the administrative fee to support broader sampling," the official said, speaking on condition of anonymity.

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