FHA Proposes New Lender Certification Requirements

The Federal Housing Administration last Thursday proposed to overhaul its lender certification requirements, aimed at providing lenders and servicers greater certainty in how to satisfy the agency’s compliance requirements.

FHA provided a Single-Family Housing Policy Draft (https://www.hud.gov/program_offices/housing/sfh/SFH_policy_drafts) proposing “significant changes” to its loan-level and annual lender-level certifications to provide more precision and needed clarity to compliance documents. Specifically, FHA is proposing revisions to its Addendum to Uniform Residential Loan Application (Form 92900-A) and to its annual lender certification form.

In addition, FHA is revising its defect taxonomy to clarify various loan defect categories and how the agency weighs the severity of each defect.

The proposed changes come at a critical time for FHA, which has seen bank and non-bank participation in FHA programs decline. FHA acknowledged since the housing crisis, the number of traditional banks participating in FHA’s single-family mortgage insurance programs has declined, resulting in a growing share of non-bank lenders originating FHA-insured mortgages.

In its Fiscal Year 2018 annual report to Congress on the fiscal health of its Mutual Mortgage Insurance Fund, FHA telegraphed its intent to clarify the perceived severity of defects and certain types of noncompliance. Combined, said Acting Deputy Secretary and FHA Commissioner Brian Montgomery, the proposed changes will provide lenders “additional certainty and clarity on FHA’s requirements, and help FHA quickly recognize when lenders are failing to meet those requirements,” adding that the changes will facilitate more competition in the market and result in more financing choices for borrowers, especially first-time and minority homebuyers.

“It has become clear that our lending partners are seeking clarity and greater certainty when documenting compliance with FHA requirements,” Montgomery said. “We are proposing a new, more transparent set of requirements that will preserve our enforcement authority. We anticipate that this will encourage more lender participation in FHA business, thus increasing competition in the market and resulting in greater choices for borrowers. While HUD will preserve its strict enforcement authority where our requirements are violated, we will continue to reduce unnecessary burdens on stakeholders across our programs.”

In a media conference call, Montgomery added he believed the proposed changes are a “step in the right direction,” noting it builds on changes first proposed during the Obama Administration.

“We are trying to eliminate the roadblocks that prevent lenders from doing business with FHA,” Montgomery said. “Banks have said time and time again that the reason that they are reluctant to work with FHA is the uncertainty over requirements and potential penalties. We are trying to provide plain-English guidelines. We want to make sure banks and non-banks alike understand how they can comply with FHA lending requirements. Our goal is to increase transparency and increase encourage greater participation among depository institutions. We’ve heard there is too much ‘legalese’ and too many gray areas in the taxonomy.”

Mortgage Bankers Association President & CEO Robert Broeksmit, CMB, commended FHA on its proposal. “We appreciate the increased clarity, transparency and certainty these changes will bring to the program,” he said. “We are confident that the changes will lead to more lenders participating fully in the FHA program, making these mortgages available to even more Americans–particularly first-time homebuyers. We look forward to reviewing the revisions in detail and presenting our comments.”

FHA will hold a 30-day comment period on the proposed changes through June 9.