MBA Urges Tighter FHA Loan Level Certification Guidelines

The Mortgage Bankers Association, in a letter to HUD, said current FHA loan-level certification rules fall short in providing safeguards for responsible FHA lenders and urged FHA to adopt a “meaningful” quality control program.

MBA commended FHA for its consideration of industry concerns as it revises its processes for loan-level and annual lender-level certifications to provide greater certainty and clarity regarding types of errors that could expose lenders to False Claims Act risk.

“Despite these efforts, the certifications still fall short of providing the necessary safeguards for responsible FHA lenders with high-performing and low-defect programs,” wrote MBA Senior Vice President Residential Policy and Member Engagement Pete Mills. “Though significant progress has been made, both certifications continue to lack meaningful changes to positively influence the current lending environment. The certifications are only a portion of a larger process and full implementation of the intent of the certifications requires additional changes.”

To truly improve and expand access to credit, MBA said HUD needs to take necessary steps to circumscribe the Department of Justice’s ability to use subjective judgments of what constitutes a “material” false claim under the False Claims Act by:
–Completing full implementation of the Single-Family Loan Quality Assessment Methodology (Defect Taxonomy); and
–Adopting a meaningful Quality Control program that is comprehensive, transparent and predictable.

MBA noted on the same day FHA released its final loan-level certification, DOJ published a statement on its website defending its previous investigations of FHA lenders and the pursuit of certain lenders under the False Claims Act. In this statement, DOJ reaffirmed its current position, stating that “[t]he department will continue [its] enforcement efforts by using the False Claims Act, and will continue to be guided by the language of the act that prohibits the submission of knowing and material false claims.”

“Despite DOJ’s affirmation that ‘the False Claims Act requires more than mere negligence or a simple mistake to hold a person liable,’ the industry finds little comfort in this premise due to the lack of a defined metric to classify varying levels of loan defects,” MBA said. “This mixed messaging illuminates the complicated enforcement relationship that still exists between HUD and DOJ. In the absence of a resolution through a clear and unambiguous metric for measuring different variations of loan defects and a mechanism for validating the effectiveness of lenders’ programs, participating FHA lenders will continue using cautious, ‘defensive’ underwriting to mitigate the risk of excessive enforcement actions for minor mistakes.”

MBA urged HUD to complete and operationalize its Defect Taxonomy, which it called “critical” to establishing a regulatory declaration of the meaning of “material” when applied under the False Claims Act. “While HUD is reluctant to use the term ‘material,’ instead using proxies for the concept, the False Claims Act explicitly uses this term as a statutory standard,” MBA said. “Unless HUD’s new initiatives can be directly synchronized with the statute that DOJ uses to prosecute the lending industry, HUD’s laudable initiatives are not likely to offer meaningful relief. Consequently, even perfected certification language would leave HUD vulnerable to a misinterpretation of its regulatory intentions across Agencies.”

MBA also encouraged HUD to create a comprehensive, transparent and predictable QC program. “HUD already has a solid initial framework to support a more holistic approach to ensure the quality of FHA loans through the development and implementation of a robust upfront QC program,” MBA said. “This program would provide timely and meaningful feedback to lenders on HUD’s interpretation of its underwriting guidelines and lenders’ adherence to those guidelines.”

MBA also provided comments on certifications from a multifamily view, noting that a Comparison Document of proposed revisions to the FHA Lender-Level Certifications explains that addition of the words “guidebooks” into the proposed revised Certification is intended “to cover policy issued by FHA’s offices of Multifamily Housing Programs and Healthcare Programs.”

“This reference creates confusion,” MBA said. “MBA strongly recommends clarification specifying that the revisions apply to FHA Single Family programs.” MBA also urged HUD to re-issue Mortgage Letters and similar guidance (or issue a blanket waiver or clarification issued by HUD) to confirm the inapplicability of certain Single-Family guidance to Multifamily lenders, from both a retroactive and prospective standpoint.

MBA also requested that HUD determine, prior to clearance and public comment process, whether a particular policy change applies to FHA Single-Family, Multifamily and/or Healthcare Lenders/Mortgagees. “This will help avoid confusion and unintended consequences,” MBA said.