While the final rules are not yet in effect, it appears they will be implemented after a “notice and comment period.” Although these changes raise many questions which will require upcoming information from HUD/FHA, the following reflects our views on how this will affect lenders and brokers.

It is clear from the language of the press release that HUD is trying to make it easier for brokers to do FHA business, while at the same time putting more responsibility and accountability on both the broker and the Sponsor to make justified loans. HUD stated in the press release that “these lenders must have skin in the game,” which seems a clear indication that brokers and Sponsors will be held more accountable for loans produced than in the past.

Given the apparent intent of this new rule, it seems that the Sponsor will now be responsible to see that brokers are in compliance with the Quality Control expected by FHA, and presumably desired by the Sponsor. These Quality Control programs help ensure loans that comply with all regulations and laws, as well as minimize losses from bad loans. It is likely that even though the net worth requirements for brokers will be reduced or eliminated, Sponsors will continue to require Quality Control Plans and Quality Control audits in order to do business with them.

As HUD/FHA comes out with further announcements, we will keep you updated through our newsletter and social networks. Visit HUD’s website to read the entire press release from September 18, 2009.

Keeping up with changing regulations can be a daunting task. Mortgage Compliance Advisors offers lending manuals for FHA, VA, and HECM that are easy to use and updated quarterly. For more information, visit www.MortgageComplianceAdvisors.com or call 877-226-3152.

FHA has grown rapidly in the past few years, fueled largely by tightening credit. In fact, over 20% of new home purchases are currently through FHA. As the volume of FHA loans increases, more lenders across the country are becoming FHA approved. However, the FHA approval process and paperwork can appear overwhelming, especially to smaller companies. To help lenders understand the guidelines, below is a brief summary of FHA’s approval requirements. (For a detailed list of all requirements, visit www.hud.gov.)

Organization Requirements

In order to reduce risk, FHA limits its approval to experienced, well-established organizations; the officer in charge of an organization’s FHA operation must have at least three years of mortgage experience. Furthermore, to be considered for FHA approval, an organization cannot be a sole proprietorship. Corporations, partnerships, LLC’s, chartered financial institutions, and government agencies are acceptable. Along the same lines, FHA approved organizations must have at least two full time employees and a commercial office location (not a home office).

Paperwork

Each prospective FHA lender must fill out the HUD 11701 application. FHA also requires certain letters and other documents, depending on the desired type of FHA approval (non-supervised loan correspondent, investing lender, etc.). For example, brokers wanting to become FHA approved must submit a sponsor/funding letter, whereas lenders need a funding program. For a list of all required documents by FHA approval type, see FHA Lender Approval Requirements.

Finances

Excluding “Government Mortgagee,” the application fee for all FHA approval types is $1,000. Additionally, lenders must submit audited financial statements with the application. The lender’s financial statements need to show at least $63,000 net worth with 20% liquid assets.

Quality Control Plan

Finally, FHA approval requires organizations to submit a quality control plan, in order to mitigate fraud and errors. Organizations can create a quality control plan themselves, or purchase one from a third party. As part of the quality control plan, lenders must audit 10% of the FHA loans they originate. These audits need to be performed regularly—within 90 days of the end of the month in which the loan closed.

Quality control audits may be performed in-house, if the lender properly trains and establishes a unit solely for quality control. The staff must not be involved in loan production. Alternatively, lenders may have a third party, such as Mortgage Compliance Advisors, LLC, perform the quality control function, as long as it meets HUD’s requirements.

For more information on FHA approval services or quality control audits, visit www.MortgageComplianceAdvisors.com or call 877-226-3217.

About Mortgage Compliance Advisors (MCA):

FHA insured mortgage loans experienced phenomenal growth in 2008. After a large drop in its share of new mortgages in the early ‘90’s, tightening credit has caused an upsurge in FHA loans. In fact, FHA’s share of insured mortgages increased to 26% in 3rd quarter 2008, up from only 3% in 2007. As the volume of FHA loans increases, more lenders are becoming FHA approved. Once approved, they are met with the task of staying in compliance with FHA guidelines. In Mortgagee Letter 09-12 published for FHA approved lenders, HUD stresses the requirement to “implement and maintain a comprehensive quality control plan.” HUD further explains in Letter 09-01 that if a lender “fails to comply with HUD’s policies and procedures, HUD will take the appropriate action…which may include termination of mortgagee [FHA] approval.” (To view all HUD mortgagee letters, visit HUD’s official website.)

According to FHA guidelines, before a lender can become FHA approved, they must submit a quality control plan. As stated in chapter 7 of the HUD 4060.1 handbook, a lender “must review [audit] 10% of the FHA loans it originates,” as part of its quality control plan. These mortgage audits can either be performed internally or by a third party provider. If done internally, the lender must establish and properly train a unit dedicated to quality control. FHA guidelines go on to explain that the staff must not be involved in loan production.

Third party providers can also perform these mortgage file audits, and even provide quality control plans that meet FHA guidelines. For example, Mortgage Compliance Advisors, LLC, can provide a quality control plan and perform the required quality control file audits for an FHA approved lender. When the file audits for a certain period are complete, the audit findings are compiled in a management report and sent to the lender. Third party providers do not report to HUD/FHA. Instead, it is the responsibility of management to review the findings and make any necessary changes to prevent similar findings in the future. When FHA conducts an audit, they want to see in writing what actions have been taken by the lender to stay in compliance with FHA guidelines.