Housing Secretary Dr. Ben Carson and U.S. Attorney General William Barr issued a Memorandum of Understanding (MOU) between the two agencies this week that establishes new guidance on the appropriate use of the False Claims Act for violations committed by FHA Mortgagees.
According to a HUD press release, the MOU is intended to address concerns that uncertain and unanticipated FCA liability for regulatory defects led to many well-capitalized lenders, including many banks and credit unions, to largely withdraw from FHA lending. This has dramatically shifted FHA’s lender base during the last decade. Today, depository institutions originate less than 14 percent of FHA-insured mortgages, down significantly from approximately 45 percent in 2010.
In addition to the MOU, FHA is simplifying the certifications that lenders make in connection with the FHA program. The certifications will better track statutory requirements and address materiality and culpability considerations. FHA is also refining its defect taxonomy that it uses to assess the appropriate remedies for identified loan underwriting defects.
Together, these new and revised components are intended to make affordable FHA-insured mortgages more accessible to qualified borrowers, reduce risks within the FHA program, and preserve appropriately tailored remedies.
Annual Lender Certifications
On Friday, October 25, 2019, FHA published the final Paperwork Reduction Act (PRA) notice (Docket No. FR-7111-N-38A) for its approved annual lender certification in the Federal Register. The notice incorporates feedback and public comments received since it first posted on the Single Family Housing Drafting Table (Drafting Table) in May 2019, and in subsequent Federal Register notices. The changes better align the certification statements with HUD’s statutes and regulations while continuing to hold lenders accountable for compliance with FHA’s eligibility and approval requirements.
The new annual lender certification, which can be viewed on the Annual Recertification web page, will be effective for the Certification Period ending December 31, 2019.
Also, on Friday, October 25th, FHA published a 60-day Federal Register PRA notice (Docket No. FR-7014-N-26), which proposes revisions to FHA’s loan-level certification. Building on feedback received on the proposed draft posted to the Drafting Table earlier this year, FHA made significant revisions to the Form HUD-92900-A (Addendum to Uniform Residential Loan Application), including incorporating materiality into the certification as defined in the Defect Taxonomy.
The public may provide comments on FHA’s loan-level certifications PRA notice until Tuesday, December 24, 2019. After considering any comments received, FHA will publish a subsequent 30-day notice on the proposed changes.
Defect Taxonomy and Loan Review System
On Thursday, October 24, 2019, FHA posted its updated Single Family Housing Loan Quality Assessment Methodology — more commonly known as the Defect Taxonomy — on its Loan Review System (LRS) web page. This approved Version 2 reflects public feedback received on the proposed draft posted to the Drafting Table earlier this year. The revised Defect Taxonomy provides more clarity and transparency into FHA’s loan-level quality assurance processes, and includes: clarification of Severity Tier definitions; potential Remedies that align with Severity Tiers; revised Sources and Causes in certain Defect Areas; and incorporation of HUD policy references.
Additionally, FHA is making system enhancements in LRS to allow lenders to submit responses to Tier 3 and 4 findings. Until the enhancements are implemented, lenders may continue to submit appeals to deficient findings by contacting the FHA Resource Center at email@example.com or by calling 1-800-CALL-FHA (1-800-225-5342).
All Defect Taxonomy changes will be effective for loan reviews as of January 1, 2020.