MBA Urges Changes to FHA Loan Review System
The Mortgage Bankers Association, in an Oct. 27 letter to HUD, offered comments and feedback on the new FHA Loan Review System, saying “necessary changes” are still required to improve the system.
The LRS, implemented in May, includes a final Defect Taxonomy, a platform designed to provide more transparent methodology for FHA loan reviews of single-family mortgages. It automates many previously manual processes and streamlines quality control processes for both lenders and FHA, including post-endorsement loan reviews, Direct Endorsement authority test cases, lender monitoring reviews and a list of defect codes that identify source and cause of the defect as well as defect severity.
In the letter, MBA Senior Vice President of Public Policy and Industry Relations Stephen O’Connor said MBA continues to believe “necessary changes are still required to include the assignment specific remedies for each tier of defect severity,” noting MBA “has confidence that the LRS demonstrates a positive movement towards providing greater certainty and clarity regarding the types of errors that can expose lenders to False Claims Act risk.”
MBA said the new LRS has increased efficiency and decreased finding notification delays. Lenders have explained the LRS is a modern and streamlined system. However, it noted lenders have also found the LRS to be less user-friendly than Neighborhood Watch with necessary additional enhancements required. “MBA encourages FHA to maintain an ongoing dialogue regarding LRS implementation feedback,” O’Connor wrote.
The letter provides a summary of lender feedback on issues that continue to provide challenges. It recommends, for example, that increased lender response times to FHA are critical, especially the five calendar days for the second rebuttal period. “In some cases, lenders can’t obtain the information in that allotted time frame find themselves escalating the issue to headquarters,” the letter said. “By escalating the issue, a few more days are granted and that is not always enough time to resolve the issue, forcing lenders to indemnify.” It also noted lenders are experiencing intermittent technical issues and are required to exit the program, wait and try again.
Other lender feedback suggests the FHA reviewer is “more interested in escalating the review through the stages rather than working collaboratively with the lender to resolve the issue. In addition, there is a trend wherein the FHA reviewers introduce new, additional findings in their responses, rather than listing all issues up front in the initial finding. This is highly problematic because when an FHA reviewer introduces a new finding within a response, the lender does not receive the maximum time allotted to resolve the issue.”
The letter also recommends FHA reviewers should cite specific numbered sections from the 4000.1 handbook when posting any LRS material finding. “That step will save time for both sides of the process,” MBA said. “After all, FHA’s analysts are already on the page and can capture the citations quickly. Lenders should be able to respond faster and the number of times lenders might need to seek clarification could be reduced.”
