MBA Cites Concerns over FHA Lender-Level Certification Proposal
The Mortgage Bankers Association, in a letter this week to HUD, expressed concerns with a proposal to change FHA annual lender-level certification forms and offered recommendations to improve the loan-level certification process.
HUD in August proposed changes to its loan-level certification form, HUD 92900-A, HUD/VA Addendum to Uniform Residential Loan Application aim to clarify the scope of liability associated with errors that can occur in the origination of Federal Housing Administration-insured mortgages.
MBA reiterated its concerns that the proposed changes, while designed to safeguard lenders, consumers and FHA, do not help FHA meet these objectives. In particular, MBA said Section 10 of the annual lender-level certification should reflect existing quality control self-reporting standards required of lenders throughout the year that call for reporting of only fraud, material misrepresentation or material findings.
“The proposed language requires lenders to report all errors, regardless of their materiality to compliance,” wrote MBA Senior Vice President of Residential Policy and Member Engagement Pete Mills. “Under this strict standard–meeting all requirements at all times–the FHA certification does not recognize good faith compliance by the majority of its approved lenders and causes them to qualify certifications under a more stringent and inconsistent annual reporting standard.”
Under the rule, lenders must make lender-level certifications annually to attest to an entity’s compliance with FHA program requirements, including net worth and quality control requirements. Every year, a lender must certify its compliance with FHA program requirements within 90 days of the end of the prior fiscal year. Lenders unable to certify on their FHA annual renewal must supply HUD with a written explanation of the reasons for its inability to certify compliance.
MBA pointed out lenders review these certifications carefully, as a failure to comply with these requirements has serious ramifications including, reputational damage, loss of FHA-approval and the possibility of legal liability that results in steep fines. MBA noted liability under the False Claims Act remains a “significant concern” for lenders.
“Use of the False Claims Act by the Department of Justice has had a significant effect on lenders’ willingness to expand access to credit to borrowers with less-than-pristine credit,” MBA said. “As a direct consequence of the uncertainty surrounding legal liability, lenders have begun to impose new credit overlays and/or limit involvement in FHA lending in an attempt to minimize risk. Additionally, many responsible lenders with high-performing, low defect FHA programs have chosen not to sign the annual loan-level certifications and provide extensive clarifying explanations due to the risk and uncertainty of legal liability.”
MBA encouraged FHA to revise the certification so that lenders can sign this document “with confidence.”
Additionally, MBA expressed concern that section 10 of the proposed version of the annual certification does not include a materiality standard.
“This standard is important for consistency among certification and reporting requirements as the reporting of ‘material’ findings is already a standard used in quality control reporting throughout the year,” MBA said. “The current broad language in the lender-level certification, requiring each lender to attest to compliance with every single HUD/FHA requirement at all times, opens the door for lenders to either over report or refuse to certify in order to shield themselves from financial liability for even minor errors. The addition of a materiality standard would ensure that lenders and HUD are able to conduct more focused compliance reviews and still hold lenders to high standards.”
MBA recommended that annual certification language should mirror the self-reporting standards that tie into the existing QC process, which requires the reporting of fraud, material misrepresentation or material findings as set forth in HUD Handbook 4000.1. “Otherwise, the annual certification should include an explicit materiality standard.”
Additionally, MBA said HUD should streamline its certification clearance process through reliance on the lender’s certification statement, or on lender information disclosed throughout the normal reporting process to reduce review burdens on HUD and reporting burdens on mortgagees. “Without this streamlining, lenders must re-report all findings that have not received clearance from the Department regardless of whether the findings were reported throughout the year,” the letter said.
