HUD Proposal Leaves Questions Unanswered, Lawyers Say
The Department of Housing and Urban Development’s (HUD) proposed changes to how Federal Housing Administration (FHA)-approved lenders operate have far-reaching consequences the department hasn’t fully considered, according to an analysis of the proposals by global law firm K&L Gates. The proposal would eliminate the HUD regulation for correspondent lender approval and rely on FHA-approved direct lenders to ensure the correspondent firms they do business with are originating compliant loans. The proposal would also increase the net worth requirement for approved lenders ten-fold from $250,000 to $2.5m. These changes would shift “the risks associated with FHA-insured loans from the department, and thus the American taxpayer, to FHA-approved mortgagees, which the department expressly characterized as the party that ‘bear[s] the greatest responsibility for the validity and eligibility of the loan for FHA insurance,’” said K&L Gates partner Phillip Schulman and associate Krista Cooley. But there are many unanswered questions, the lawyers wrote. “The changes would subject FHA-approved mortgagees to penalties for any violation of HUD requirements committed in connection with an FHA-insured loan, whether committed by the FHA-approved lender or the un-approved loan correspondent, regardless of whether the sponsor knew or should have known of the violation.” In addition, the lawyers wrote, “the proposed amendments would create significant changes to the current FHA approval structure, and FHA-approved mortgagees who pride themselves on maintaining sponsor/loan correspondent relationships with hundreds, or even thousands, of mortgage brokers may want to rethink taking on full responsibility and liability for the FHA-insured loans originated through these relationships.” FHA hasn’t raised the net worth requirement since 1993, and raising it to $2.5m would bring it in line with the requirements for government-sponsored enterprise (GSE)- and Veterans Administration (VA)-approved lenders. FHA maintains 60% of FHA-approved lenders already have a net worth of $1m and the net worth increase will not restrict any currently FHA-approved mortgagee from the opportunity to participate in FHA programs. To reach the new net worth requirements, HUD projects lenders would likely increase net worth largely by changing the title of existing assets from the individual holdings of a mortgagee’s owners to those of the institutions. But the lawyers argue “HUD provides no support for how the Department arrived at this conclusion and does not provide any discussion of economic or legal considerations that an FHA-approved entity’s ownership would make in determining whether such an asset transfer was in these entities’ best interests.” The lawyers also question the impact to lenders who are unable to raise net worth by the three-year deadline and how it would change these businesses. Potentially, a previously approved FHA lender who can’t raise net worth could significantly influence the business structure, regulatory compliance requirements and revenue streams of FHA-approved entities. Write to Austin Kilgore.