The Mortgage Bankers Association said the Federal Housing Administration‘s proposal to hold lenders financially accountable for faulty loans is cloudy and penalizes lenders that follow guidelines. In October, the FHA proposed a new regulation forcing lenders to reimburse the government for insurance claims on defaulted mortgages that did not meet its guidelines within five years of the endorsement. It would require all new and existing lenders with the ability to insure loans on behalf of the Department of Housing and Urban Development to meet stricter performance standards. The MBA said the proposal would help strengthen the FHA’s reserve fund, which an independent study showed would return to the congressionally mandated 2% in 2015. But the MBA said the rules are “overly strict.” “Many of the proposed policy changes are extremely subjective and provide FHA with the authority to apply rules with the most rigid interpretation, at the administration’s discretion,” MBA said in a letter to the FHA signed by MBA CEO John Courson. HUD would require a “continual” review of lenders that the MBA says does not take into account market fluctuations, remediation time or even a definition of the phrase “continual.” This, according to the letter, holds lenders to an unrealistic standard that most companies would have difficulty complying with. The MBA also said the five-year timeline is too long and recommends shortening the proposal to three years. Five years after origination, the MBA said, problems can occur that cannot be derived from underwriting standards. The trade group went on to say a number of other rules such as claim and default rate limits and HUD’s ability to review and terminate a lender’s approval, are too harsh and vague. “MBA is concerned that FHA has the latitude to become overly technical and apply unrealistic standards to lenders, in an effort to protect its own financial security,” Courson said in the letter. The FHA had no comment on the letter. Write to Jon Prior.