TopMortgage Compliance Update (1)
 

February 1, 2012

 


FHA: Updates Lender Insurance Program


Subscribe-Blue
Newsletter-Blue
 Website-Blue
 Forums-Blue
Twitter-2
Facebook-1
Linkedin-1
Banging Head Let us help!
Isn't it time to bring in the professionals? 
Contact Us-1-Beveled-160

Website Forums

LCG-Square-CC-1  

CFPB Forum-CC-1  

Dodd-Frank Forum-CC-1  

OCC News Forum-CC-(134x134)  

NMLS Users Forum-CC-1  

Mortgage Compliance Forum-Main  

FHA Forum-CC-1  

Veterans Mortgage Forum-Main  

516-442-3456  

Home-Website-LCG(160x27)-1
Compliance-Website-LCG(160x27)-1
Presentations-Website-LCG(160x27)-1
About Us-Website-LCG(160x27)-1
Clientele-Website-LCG(160x27)-1
Articles-Website-LCG(160x27)-1
Newsletters-Website-LCG(160x27)-1
Library-Website-LCG(160x27)-1
Contact Us-Website-LCG(160x27)-1

On January 25, 2011, HUD published a final rule that updates and enhances the Lender Insurance Program, through which the majority of Federal Housing Administration (FHA) mortgages are endorsed for insurance.

 

This final rule follows the proposed rule published on October 8, 2010.

 

Effective Date: February 24, 2012

 

In This Newsletter-1Back
What is the Lender Insurance Program?
Lender Indemnification for Insurance Claims
Discovering Material Noncompliance
TOTAL Score
Purchasers or Servicers
Compare Ratio
Continual Review
Reinstatement
Professional Assistance
LibrarySuite of Services
The Lender Insurance process enables certain mortgagees approved for the Direct Endorsement process to insure single family mortgages originated and underwritten through the Direct Endorsement process without first submitting documents to FHA. Under the Lender Insurance process, a mortgagee conducts its own pre-insurance review and insures the mortgage without a pre-endorsement review by FHA.

In order to be eligible to participate in the FHA single family programs as a Lender Insurance mortgagee, a mortgagee must be an unconditionally approved Direct Endorsement mortgagee that is high performing.
 BACK 
Lender Indemnification for Insurance ClaimsLender

HUD maintains the indemnification requirement to be for a period of five (5) years from the date of insurance endorsement. This is the current standard practice for indemnification in connection with other serious mortgagee program violations, and HUD has apparently taken the position that the adoption of a lesser standard for Lender Insurance would be inconsistent with proper risk management practices.

 

The existing policy for demanding indemnifications remains unchanged; that is, HUD has made it clear that indemnification will be demanded only in cases of serious and material violations of HUD requirements, and, further, intends to demand indemnification for loans where fraud, misrepresentation, or serious and material noncompliance are such that the loans were ineligible for insurance.

 BACK 
HUD's means by which fraud or misrepresentation, or serious and material violations of FHA requirements for purposes of the new regulatory indemnification requirements will be identified in accordance with current standard practice; namely, determination will include, but not be limited to:

(1) post endorsement technical reviews,

(2) quality assurance monitoring reviews,

(3) lender self-reports,

(4) Office of Inspector General audits, and

(5) investigations.

These processes afford mortgagees ample opportunities for meaningful discussion and the submission of additional information. Indemnification will be demanded for cases where the mortgagee knew or should have known of the fraud or misrepresentation.
 BACK 

FHA mortgage loans receiving an Accept/Approve recommendation from FHA's TOTAL Scorecard will not be excluded from indemnifications, irrespective of the fact that, in the case of loans approved by this system, the mortgagee is responsible only for data integrity and not for the creditworthiness of the mortgage loan. According to HUD, mortgagees are responsible for verifying a borrower's creditworthiness, irrespective of the results derived from the use of TOTAL.

 

This is consistent with HUD's view of the TOTAL as a tool to assist the mortgagee in managing its workflow and expediting the endorsement process, and is not a substitute for review of risk and credit worthiness. Direct Endorsement mortgagees using TOTAL remain solely responsible for the underwriting decision.

 

Therefore, HUD maintains that it is a serious and material violation for a lender to fail to verify the creditworthiness, income, and/or employment of the mortgagor in accordance with FHA requirements.

 BACK 
Purchasers or servicers of FHA loans will not be impacted by the indemnification changes.

As with its existing standard practice for indemnification agreements, FHA will pay insurance benefits to the servicer or holder of the mortgage, as long as they are not the same entity that was named in the indemnification agreement.

The indemnification provisions will apply to all demands for indemnification issued on or after the effective date of this final rule.
 BACK 

Acceptable Claim and Default Rate

 

To be eligible to participate in the Lender Insurance program, a mortgagee must have a claim and default rate at or below 150 percent of the average rate for all of the states in which it does business.  

 

In determining eligibility for Lender Insurance, HUD compares the percentage of all claims and defaults on loans underwritten by that mortgagee to the percentage of claims and defaults for all loans underwritten in the states in which that mortgagee does business. In order to retain their Lender Insurance authority, mortgagees must maintain the acceptable claim and default rate required of them when they were initially delegated such authority.

 

HUD uses the 2-year period for determining the claim and default compare ratio. The option to obtain the compare ratio for all states in which a mortgagee does business is available in Neighborhood Watch.

 

So, the final rule contains no change to this metric. As in the current process, HUD considers those endorsed loans underwritten by the lender with a beginning amortization date within the 2-year period of analysis. Further, HUD analyzes these loans to determine claims and defaulted loans from the total number of loans underwritten.

 BACK 
HUD has always reserved the right to monitor the performance of Lender Insurance mortgagees on a continual basis. In our experience with HUD, this continual review policy is adhered to because HUD believes it must be able to respond quickly to poor mortgagee performance in order to fulfill its statutory obligation to safeguard the FHA mortgage insurance funds.

This policy of monitoring performance in an ongoing basis has been extensively elaborated in the FHA Credit Watch Termination Initiative [CFR 202.3(c)(2)].
 BACK 

If a mortgagee has had its Lender Insurance authority terminated, there are reinstatement procedures that are closely modeled on the existing reinstatement process for a mortgagee seeking reinstatement following termination of its origination approval agreement or Direct Endorsement authority.

 

In this final rule, HUD promulgates that a mortgage having its Lender Insurance authority terminated must wait at least six (6) months following termination to apply for reinstatement. The application for reinstatement must be accompanied by a corrective action plan addressing the issues resulting in the termination of the mortgagee's Lender Insurance authority, along with evidence that the mortgagee has implemented the corrective action plan.

 

Termination from the Lender Insurance Program, however, is a process for endorsing loans for insurance only. Therefore, termination of this authority does not impact a mortgagee's ability to seek insurance for a loan originated in accordance with FHA guidelines.

 BACK 
  Professional AssistanceLCG 
Contact Us-2
 BACK 
   LIBRARYLibrary

Law Library Image
Click for Library

Federal Housing Administration
Single Family Lender Insurance Process:
Eligibility, Indemnification, and Termination
Federal Register, January 25, 2012

 

Federal Housing Administration
Single Family Lender Insurance Process:
Eligibility, Indemnification, and Termination
Notice, January 20, 2012

 

Federal Housing Administration
Lender Insurance Guide
July 19, 2007

(Last Update) 

 BACK 
Suite of ServicesSuite
LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the United States specializing exclusively in outsourced mortgage compliance and offering a full suite of services in residential mortgage banking for banks and non-banks.

Pioneers in outsourcing solutions for mortgage compliance.

Professional guidance and support to financial institutions in all areas of residential mortgage compliance, including the following:

Mortgage Compliance
CFPB Examination Preparation
Legal and Regulatory Compliance
State Banking Examinations
HUD/FHA Examinations
Loan Originator Compensation
Licensing Compliance
HMDA/CRA
Information Technology & Security
Quality Control
Prefunding Fannie LQI Audits
Platform Development
Retail and Wholesale Compliance
Correspondent Compliance
Servicer Compliance
Affiliates Compliance (RESPA)
Business Development
Advertising Compliance
Loss Mitigation Strategies
Forensic Mortgage Services
Sarbanes-Oxley Compliance (Part 404)
Audit and Due Diligence Reviews
Regulatory and Sales Training
Portfolio Risk Management
Credit Risk Management
Loan Analytics Audits
Compliance Audits
Policies and Procedures
Due Diligence Reviews
Portfolio Purchase Audits
GSE Applications
Ginnie Mae Applications

This communication is sent to our valued clients and colleagues, who regularly receive our Mortgage Compliance Updates, Compliance Alerts, Commentaries, and related publications.

These publications are free to subscribers. Information contained herein is not intended to be and is not a source of legal advice.

� 2006-2012 Lenders Compliance Group, Inc. All Rights Reserved.