MBA Letter Cites Concerns Over HUD Loan-Level Certification Changes
The Mortgage Bankers Association, in a letter yesterday to HUD, said many of its concerns about proposed changes to the Department’s loan-level certification forms remain unaddressed.
HUD’s 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; and to foster a strong culture of quality control in the program.
MBA said it continues to support and agree with HUD’s objective of the revisions. However, after reviewing the latest proposed changes to the loan-level certification form, MBA said many of its previous concerns expressed in a July 14 letter remain unaddressed.
“The industry believes that a core principle of the loan-level certification should be that lenders are only liable for significant underwriting errors–errors defined as ones that lenders cannot cure and would render a mortgage uninsurable,” wrote MBA Senior Vice President, Residential Policy and Membership Engagement Pete Mills. “This principle is fundamental to the certification because it provides lenders with a reasonable level of certainty that they will not be exposed to false claims risk due to minor, unintentional errors, specifically those that would not have an impact on a loan’s insurability or risk of loss to the FHA.”
Mills said if lenders continue to be exposed to such legal risk, they will have no choice but to reevaluate how (or if) they conduct business with FHA and whether they can afford to lend to borrowers with less than pristine credit histories. “This outcome is not the one that HUD claims to support,” he said. “It is the evitable outcome, however, given the lack of certainty that exists with the loan level certification today and as it is proposed. Indeed, as a direct consequence of increased compliance costs and the uncertainty surrounding legal liability, MBA has already seen some of its members impose new credit overlays and/or limit involvement in FHA lending.”
Additionally, MBA noted a new provision expands the scope of the certification, undermining the core objective of legal certainty, while increasing compliance costs and creating more confusion as to the scope of liability.
“We recognize and appreciate that FHA recently took an important step in trying to create additional certainty in the quality control process with the release of the defect taxonomy. However, since penalties were not included in the taxonomy, it becomes even more critical that FHA has an alternative solution,” the letter said.
MBA said inclusion of a paragraph referencing Pre-Endorsement review “may be an attempt to provide certainty to lenders without directly addressing the issue of materiality or significant defect; however, it does not effectively address the industry’s concerns and may possibly expand lender liability.” MBA said the proposed language potentially converts this quality control process to another underwriting process that 1) changes the purpose of the function, as it exists today and 2) may expose lenders to false claims liability for any errors in the documents contained in the pre-endorsement review, a process that is not presently tied to a certification requirement in HUD regulations or guidelines.
“The combination of increased false claims liability and operational burdens on lenders…will lead to additional cost to consumers,” MBA said. “If lenders must engage in such a robust certification, they would perform a QC review on every file, which would result in lenders passing this cost to the consumer. While such a cost increase would affect all FHA borrowers, it would have the most adverse impact to underserved communities with smaller loan sizes. MBA recommended HUD remove the paragraph.
MBA also encouraged HUD to revise the lender certification on page three of the Addendum to language that would support the following principles:
–Loan-level underwriting certifications should recognize that underwriting entails subjective judgments.
–Liability should only arise in the event of a) knowing or reckless reliance on false statements, or b) significant underwriting errors, defined as errors that cannot be cured, would render a mortgage uninsurable, or would affect potential loss severity.
–HUD should evaluate loans based on the evidence available to the lender at the time of origination. This policy is key to HUD ensuring that lenders are held to a fair and reasonable standard. A loan should not be subject to indemnification or false claims risk when the lender underwrites a loan based on supported and verified income documentation in the original loan file, but new information becomes available after the closing that may contradict that verified data.
