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HUD proposes new rules for FHA loans

Restores stipulation that lenders must certify they weren’t disciplined by government

The U.S. Department of Housing and Urban Development announced Tuesday a series of proposed changes to the rules for lenders that remit loans to the Federal Housing Administration.

Answering questions raised by, amongst others, leading Democrats on the Senate Banking and House Financial Services Committees, HUD released a revision to its previously announced proposal to change the FHA loan level and lender certifications that each lender must adhere to.

The previous proposal eliminated the requirement that lenders approved by the FHA certify on each loan application that they are not, or have not recently been, subject to certain charges or penalties.

The removal of that stipulation irked Sen. Sherrod Brown, D-Ohio, the Banking Committee’s senior Democrat; Rep. Maxine Waters, D-Calif., the senior Democrat on Financial Services, and Sen. Elizabeth Warren, D-Mass., who outlined their concerns in a letter to HUD and the Office of Management and Budget.

In their letter, the lawmakers called on HUD to provide a thorough explanation for its proposal to lower the lending standards and give the public an opportunity to comment on whether the changes are appropriate.  

“We are concerned that the proposed changes, the most significant of which were not described in the notice, would make it easier for lenders who have engaged in illegal behavior to obtain FHA insurance – insurance that is ultimately provided by American taxpayers,” the lawmakers wrote.

The new proposal from HUD reinstates that stipulation, but made it part of the annual lender certification instead of the loan level certification, as it was prior to the first round of proposed changes.

In an announcement from HUD, the provision would require lenders to certify they have not been barred or suspended by any Federal department or agency, and that they have not been indicted or convicted of any wrong doing that would call into question their ability to carry out the responsibilities of the FHA program.

On Tuesday, FHA head Edward Golding said HUD was reinstituting that stipulation after some raised concerns that the removal of the provision would limit HUD’s enforcement abilities. 

“Holding lenders accountable is a central pillar of this administration’s work and we will not back away from these efforts,” Golding said Tuesday.

“None of the changes to the either of the certifications hinder or undermine our ability to take action against bad actors,” Golding continued. “In fact, we are confident that the proposed revisions continue to hold lenders appropriately accountable and provide greater clarity into our expectation of lenders.”

The proposed lender certification is open for a 60-day comment period, beginning Sept. 1. After the close of that comment period, HUD will post a revised notice that addresses the received comments for an additional 30-day comment period.

HUD anticipates this change going into effect “sometime in early 2016.”

But that wasn’t the only change to the FHA rules HUD announced Tuesday.

Golding said that the series of revisions will help to ensure that lenders are complying with FHA polices designed to protect borrowers and to uphold quality lending practices while giving greater clarity to lenders without weakening enforcement standards.

Additionally, HUD announced a proposed provision in the loan level certification that would require lenders to certify they have completed a pre-endorsement review of all loans and that no deficiencies or defects were revealed that would render the loan ineligible for FHA insurance.

HUD also said that it added language to the loan level certification, requiring those directly involved with the borrower and the loan application to certify they have not participated in a prohibited activity.

The proposed loan level certifications are open for public comment, beginning Sept. 1.

Golding said that in an attempt to provide lenders with sufficient time to adopt the new forms, HUD anticipates these stipulations becoming fully effective by the end of the year.

“From the beginning, our goal has been to develop new certifications that clarify the lender’s role in verifying a borrower’s information and to use common sense when deciding to take corrective actions against lenders for making minor mistakes that do not affect the insurability of the mortgage,” Golding said.

“The Administration has worked hard and will continue to put in place strong consumer protections and improvements in financial stability,” he continued. “We have never supported a return to the lending standards and origination practices that prevailed in the build-up to the crisis and nothing in the actions we are taking today would support such a notion.”

The Mortgage Bankers Association, which previously said that it had concerns with the proposed changes, said Tuesday that it still has concerns that were not addressed with the revised FHA rules.

“MBA appreciates FHA’s efforts to provide the industry the opportunity to comment on the revised certifications,” MBA President and CEO David Stevens said Tuesday.

“As the entry point for homeownership for so many first time homebuyers but also borrowers who often have higher risk, clarity and confidence for lenders are critical concerns,” Stevens continued.

“The language in the certification, however, lacks clarity as to the insurability of a loan and doesn’t embody a reasonable diligence standard for FHA underwriters, address the significance of any errors in terms of risk to the FHA, or allow for an opportunity for lenders to correct any mistakes, regardless of how minor they may be,” Stevens said.

“This lack of clarity continues to leave the door open to possible enforcement actions, and also encourages federal agencies, other than FHA, to take action against lenders,” he continued.

“Absent clarity, some lenders may continue to re-evaluate which borrowers they are willing to extend FHA backed lending to and at what prices,” Stevens concluded. “MBA looks forward to providing further comment and will continue to work with various stakeholders, including FHA, to foster a lending environment which protects consumers and encourages lenders to lend to responsible, qualified borrowers.”  

[Correction: This article has been updated to clarify the MBA's position on the FHA rules.]

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