Once a file has been insured by HUD, the lender’s job isn’t necessarily over. Even if a file does not receive a Notice of Rejection (NOR) and does get insured, 100 percent of HECM for Purchase loans and a random sampling of non-Purchase loans are still subject to an additional Post-Endorsement Technical Review (PETR) by HUD’s Quality Assurance Division (QAD). The lender must either respond within the required timeframe (typically 45 days) or face an indemnification request from FHA. Indemnifications prevent loans from being eligible for the HUD claims process, and the lender is forced to incur any and all loss expenses associated with indemnified loans at final disposition.
It’s no surprise that FHA’s hot-button HECM topics are also the most common PETR findings. Even though HECM for Purchase loans make up a small percentage of HECM volume, the QAD has made a noticeable shift in its focus toward the program this year. Knowing the common PETR findings can help you submit a cleaner file to HUD and, hopefully, prevent an audit finding—or worse, an indemnification.
HECM for Purchase: Common PETR Stumbling Blocks
Owner’s Title Policy: I think most lenders would agree that the issue of seller- and lender-paid concessions has taken a front row seat this year.
Under Mortgagee Letter 2009-11, “FHA prohibits seller contributions (also known as ‘seller concessions’), the use of loan discount points, interest rate buy downs, closing cost down payment assistance, builder incentives, gifts or personal property given by the seller or any other party involved in the transaction. This includes customary charges that are normally paid on behalf of the borrower by the seller.”
This poses a problem in many areas of the country where it is customary for the seller to pay the owner’s title insurance, ensuring the property is being transferred free and clear of any encumbrances or marketability issues, since buyers are not used to paying this fee. Due to the overwhelming number of PETRs that flooded the QAD, it appears HUD has taken the stance that the lender must reimburse HUD any unallowable fee included on the HUD-1. This includes the owner’s title insurance fees paid by the seller, and a variety of other fees that vary by state.
Personal Property: Under the same HUD mortgagee letter, furnishings or other personal property items left in the property or included in the sale are also considered a seller concession. So keep in mind that any personal property that will be part of the sale must be reduced dollar for dollar from the sale price.
Whether Purchase or Refinance, these PETRs are also likely to occur:
Funds to Close: Any funds that the borrower is required to bring to closing are highly scrutinized and therefore must be verified against HUD’s guidelines for allowable funding sources and thoroughly documented in the insurance binder. All pages of the borrower’s bank statements must be provided, and any large deposits shown on statements must be sourced. The money trail must be adequately documented from each account to the deposit to the title company. For Purchase loans, the HUD-1 from the sale of the departing property and proof that those proceeds were deposited into the borrower’s account must be supplied in the binder, if applicable.
Occupancy: If there are any red flags surrounding occupancy, it’s always better to be on the safe side. Obtain a letter of explanation from the borrower for any discrepancies and include that explanation along with other forms of occupancy proof in the binder to HUD. For Purchase loans, the “intent to occupy” line should be clearly drawn, especially for borrowers moving out of state.
Appraised Values: Even though it’s not required, when it comes to supporting appraised values, the HUD form 54114 is the underwriter’s best friend. This simple document affords the opportunity to explain to HUD exactly why the underwriter feels value is supported, and what additional research was performed to validate that final conclusion of value, the marketability of the property and that the property meets minimum HUD property standards. Completing this form and including it in the submission to HUD reduces the likelihood of a finding, and provides a clear picture to the QAD team.
New Construction: For new construction properties, the Certificate of Occupancy must be issued before any part of
the process begins. That includes taking application, undergoing borrower counseling and signing a purchase contract. To prevent a PETR finding, the Certificate of Occupancy should be included in the insurance binder.
If you follow these recommendations, you should be on the way to an audit-free, FHA-insured loan!
Simple tips for avoiding an NOR or PETR and submitting a clean case binder
For all transactions:
-Title Insurance: Ensure that the title commitment shows the correct title insurance amount, since the title insurance policy will not go with the binder for review.
-Principal Limit: Be sure that a “print screen” of the HECM Calculator is available in the file, so HUD’s insuring group can validate the correct principal limit was used to determine closing figures.
-HUD-1: Verify that the HUD-1 is marked final, and that it correctly reflects the closing and funding dates.
-Payoffs: Include the payoff statements for each lien paid at closing, enabling HUD to easily connect the liens on title to the liens paid on the HUD-1.
-Originator Documents: An NMLS-licensed loan originator must sign the 1009 and include it with the case binder.
-Underwriter Documents: Confirm that the underwriter has signed the final underwriter documents. E-signatures and stamps are not allowed.
For HECM for Purchase transactions:
-Make sure all pages of the contract are complete, legible and included in the package.
-Make sure that all funds-to-close documentation is in the file, including the HUD-1 from the departing residence, if applicable.
-If the borrower retained the departing residence, make sure all income documentation is included in the binder.
-For new construction properties, be sure to include the Certificate of Occupancy dated prior to application.