MBA Offers Recommendations to HUD Defect Taxonomy, Loan Review System
The Mortgage Bankers Association, in a letter to HUD, offered a series of recommendations to improve the departments’ Single-Family Loan Quality Assessment Methodology and Loan Review System.
The recommendations center on ensuring lender accountability for the quality of their loans, protecting consumers from lender noncompliance with FHA regulations and assisting FHA in managing its financial risks.
The Single-Family Loan Quality Assessment Methodology, also known as Defect Taxonomy, is designed to provide process improvements for both lenders and FHA.
“MBA believes that these developments demonstrate positive movement towards providing greater certainty and clarity regarding the types of errors that can expose lenders to False Claims Act risk through the implementation of both the new LRS and the Defect Taxonomy,” wrote MBA Senior Vice President of Public Policy and Industry Relations Steve O’Connor.
MBA offered the following recommendations that emphasize the need for continual improvement and clarification of the Defect Taxonomy and response timelines under the new LRS.
Defect Taxonomy
MBA said without formal guidance that defines: 1) specific remedies for each tier; 2) which tiers will require indemnification; 3) which tiers will never require indemnification; and 4) what remedial actions will be necessary to resolve issues under each tier (i.e. monetary vs. non-monetary), participating lenders will not be able to lend with certainty under the FHA program. MBA urged HUD to take necessary steps to limit the overly broad certification regime that can lead to subjective judgments of what constitutes a “material” false claim under the False Claims Act by completing the full implementation of the Defect Taxonomy through clear and formal guidance.
“Creation of a known standard is critical to achieving a concrete definition to which lenders can point if [the Department of Justice] asserts a False Claims action for an immaterial error,” MBA said. “To this end, MBA recommends that the implementation of the Defect Taxonomy include publication of the Taxonomy’s parameters through formal guidance, such as a mortgagee letter, that includes specific tiers and remedies.”
MBA also recommended FHA allow lenders to provide a formal response for loan file deficiencies categorized under any defect tier should FHA plan to consider findings from every tier in the determination of its lender ratings.
Additionally, MBA recommended FHA include guidance regarding a revised appeals process for determinations under the Taxonomy’s defect areas that allows for lenders to resolve discrepancies in opinions between FHA and the participating lender.
Loan Review System
MBA recommended FHA seek additional industry feedback before revising its mitigation response timelines. “Though MBA acknowledges that the new LRS will increase efficiency and decrease finding notification delays, shortened timeframes will create challenges for companies that operate multiple origination channels,” MBA said. “Subsequently, MBA recommends that FHA use business days as opposed to calendar days for its response timelines, as this would allow more time and flexibility for lenders to respond to mitigation requests.”
