HUD Clarifies New Rule on Approval Standards
by Mark A. Burton, Senior Vice President
Earlier this week, we commented on the new rule by the Department of Housing and Urban Development (Federal Register 24 CFR Part 202) that went into effect on May 20th governing FHA approval standards for lenders (“Mortgagees”) and third party originators (“Correspondents”). Many of our readers called to ask whether HUD had changed its earlier position, expressed on an industry conference call, that implementation of the new standards for the Principal/Authorized Agent relationship would be delayed until September.
While attending the MBA’s Government Housing Conference May 24-26, and since the time of posting our earlier comments on this, we heard directly from HUD that the CFR in its entirety is being implemented with an effective date of May 20, 2010. So to update and consolidate what we know so far about the CFR, here once again are the new rules for FHA approval.
HUD clarified its position on the Principal/Authorized Agent relationship. Rather than delaying implementation, effective for case files opened on or after May 20th under a Principal/Authorized Agent relationship between two Mortgagees, both Mortgagees must have Direct Endorsement status. This stands in contrast to what HUD has traditionally allowed, where Authorized Agents were permitted to perform a portion of the loan process (typically underwriting) that the Principal could not perform. HUD expects to have more guidance on this in an upcoming Mortgagee Letter, and if you don’t see one, please don’t hesitate to contact us. These new requirements will be a burden for at least some of the brokering Mortgagees that do not intend to underwrite or service FHA loans, and HUD has affirmed the alternative of these Mortgagees dropping their FHA status altogether in favor of brokering FHA loans to an approved Mortgagee.
Effective on May 20th, FHA will no longer approve originators that broker FHA loans to Mortgagees. The responsibility for approving these originators will now fall to Mortgagees, each of which will develop its own approval requirements and due diligence processes. Existing Correspondents may retain their status until the December 31st, 2010, at which time they will cease to have authority to originate FHA loans unless specifically approved to do so by a Mortgagee.
Existing Mortgagees and all new applicants for Mortgagee status will see the following changes:
- For new applicants, a net minimum worth requirement of $1,000,000 (of which 20% must be in cash or cash equivalent assets), an increase from $250,000.
- Lenders meeting the definition of a “Small Business” under the Small Business Administration’s rules have a reduced minimum net worth requirement of $500,000.
- For existing Mortgagees (approved prior to May 20th) the new net worth requirement must be met by May 20th, 2011.
- By May 20th, 2013, all Mortgagees must meet a net worth minimum of $1,000,000 plus 1% of the total amount in excess of $25 million of FHA loans originated, purchased, underwritten or serviced during the prior fiscal year up to a maximum required net worth of $2,500,000, of which at least 20% must be in cash or cash equivalent assets.
HUD indicated that it expects to issue guidance soon pertaining to the implications of these changes. We anticipate that the guidance will cover lender due diligence for approving brokers of FHA loans and work flow issues arising from lender-approved brokers originating loans without access to FHA Connection. Keep an eye out for this, as it is still possible additional changes will occur. If we can help you implement solutions to the potential impact these changes will have on your Quality Assurance program, just let us know.
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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