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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
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
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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.
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Lender Indemnification for Insurance Claims
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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.
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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.
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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.
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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.
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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.
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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)].
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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.
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Professional Assistance
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LIBRARY
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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)
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