FHA's Quality Assurance Framework
MBA supports the Federal Housing Administration's (FHA's) development of a quality assurance framework that reduces regulatory uncertainty, provides clarity to lenders, and promotes access to affordable mortgage credit.
- In June 2015, the Department of Housing and Urban Development (HUD) released its final Single Family Housing Loan Quality Assessment Methodology (Defect Taxonomy).
- The Defect Taxonomy is FHA's plan to increase the efficacy of its own Quality Assurance efforts; it addresses FHA's strategy to identify and capture information about defects and severities revealed through an individual loan-level review.
- The final Taxonomy failed to address the concerns MBA raised when commenting on the language proposed in October 2014-the Defect Taxonomy provides for different tiers of defects, but still does not assign any specific remedies to address them.
- In March 2016, HUD released its final loan-level certification, which reflected key MBA recommendations to safeguard lenders from liability for minor mistakes that would expose them to undue false claims risk. Under the new certification, lenders will only be liable for mistakes that would have altered the decision to approve the loan. The new loan-level certification was effective as of August 1, 2016 (for additional information, see Loan-Level Certification Section (h)).
- In August 2016, HUD released its final annual lender certification, which reflected key MBA recommendations to require lenders to certify each year only to those requirements necessary to maintain HUD-FHA approval, rather than all FHA requirements. These revisions narrowed the certification's scope to better suit certifications at the institutional level. The final annual certification was effective the same day of its release-August 1, 2016 (for additional information, see HUD Handbook 4000.1).
- In January 2017, FHA announced the implementation of the Loan Review System (LRS) that operationalized the final Defect Taxonomy on May 15, 2017. While MBA applauds FHA's implementation of the LRS, lenders still support including remedies with the tiers to provide clarity and certainty when originating FHA loans. MBA also urges FHA to continue discussions with lenders and industry stakeholders as lenders are now using the LRS within their companies.
- Uncertainty around the treatment of origination errors creates an environment where lenders fear that even a minor, immaterial error in a loan that has no bearing on actual risk will be sufficient for FHA to request indemnification.
- In some cases, these errors can give rise to possible False Claims Act liability, resulting in the potential for treble damages on claims paid by FHA on defective loans.
- Because of this uncertainty and risk, many lenders have tightened credit standards well beyond FHA's minimum standards.
- These "credit overlays" reduce lenders' exposure to defaults and possible indemnification and false claims risk but also limit credit access for otherwise qualified borrowers.
- Other lenders have sharply reduced their FHA lending because of the uncertain compliance and reputational risks arising out of the False Claims Act, the Program Fraud and Civil Remedies Act, and sometimes-aggressive indemnification requests.
- The new LRS includes the final Defect Taxonomy and provides substantial process developments for both lenders and FHA. However, the Taxonomy and loan-level certifications need further enhancements to achieve HUD's and the industry's objectives.
MBA's Position / Next Steps:
- Creating well-defined standards and expectations for lenders is critical to expanding access to credit. MBA believes that a clear and fair quality assurance program will provide the transparency and consistency lenders need to do business with FHA and provide affordable mortgage credit to low-to-moderate and first-time homebuyers.
- MBA will continue to advocate for the LRS to include a Defect Taxonomy that assigns specific-and appropriately proportioned-remedies to each defect tier. Without the precise identification of potential indemnifiable defects to ensure that lenders have clear expectations of the consequences associated with certain defects, the Taxonomy will not have a meaningful impact on increasing access to credit.
- MBA will also continue working with FHA to develop clear, reasonable and consistent standards that target errors affecting insurability and seek to improve the overall manufacturing quality of FHA-insured lending.
- MBA urges Congress to appropriate the necessary funding to HUD to ensure that the Department can successfully complete and fully implement a quality assurance process that provides clear understanding and certainty to lenders. However, MBA opposes efforts to secure this funding by imposing fees on lenders that will increase costs to consumers.
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