FHA Bill Outlines Indemnification Standards for Bad Loans

A section of the Federal Housing Administration’s (FHA) reform bill sets standards that allow the agency to seek indemnification for loan losses.

Section three of the FHA Solvency Act of 2013 gives FHA the authority to seek indemnification from losses if the mortgage has a “material defect that would have prevented the loan from being insured or have involved fraud or misrepresentation.”

Currently, FHA only has the authority to seek indemnification from lenders under the lender insurance program or the direct endorsement program.

Except in cases of fraud or misrepresentation, the indemnification standard states that the loan in question must have been delinquent within 36 months and resulted in a default. 

The Secretary of the FHA is also required to issue regulations governing requirements for lenders, public reporting of loans subject to indemnification, and an appeals process.

Last month in a written testimony submitted to the Senate Committee on Appropriations, FHA Commissioner Carol Galante proposed several legislative requests targeted at strengthening the FHA.

Including indemnification authority for direct endorsement lenders, Galante also proposed authority to terminate origination and underwriting approval, as well as authority to change the Home Equity Conversion Mortgage (HECM) program via a mortgagee letter.

The bipartisan FHA bill is scheduled to appear for a vote before the Senate Banking Committee  on July 31.

Written by Jason Oliva

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