Friday, December 30, 2011

FHA Revises Lender Approval Requirements

Mortgage Letter 2011-34 was issued in late September, but didn’t get a lot of attention.

In this month’s article, I’ll point out the highlights of the update. The update announced changes to the Federal Housing Administration (FHA) requirements for obtaining, maintaining and utilizing a lender’s FHA approval.

Identifying officers
The lender must list all of its corporate officers who will be managing, overseeing or conducting the FHA business of the lender. Unless the applicant is a supervised lending institution, the applicant must submit a credit report for each corporate officer listed and a resume for the senior officers with FHA origination experience (Handbook 4060.1, 3-2.A.4 and 3-2.A.5). The term “Corporate Officer” is now defined as a “natural person who is an owner, president, vice president, chief operating officer, chief financial officer, director, corporate secretary, chief executive officer, chairman of the board, or member or manager of a limited liability company (LLC).

Identifying owners
The following list defines which of the owners must be listed on the application for FHA approval according to the type of company and the owner’s percentage of ownership:

►Publically traded company or corporation; if 10 percent or more ownership
►Non-publically traded company or corporation; if 25 percent or more ownership
►Limited Liability Company; all members
►Partnerships; general partners

Office facilities
An approved FHA lender may originate and service loans from its home office, branch office and direct lending branch office. All office facilities, regardless of type, must comply with all state licensing requirements within the jurisdiction in which the office is located. In addition, the U.S. Department of Housing & Urban Development (HUD) is no longer regulating branch offices facilities and lenders are no longer required to submit evidence of acceptable home office facilities. However, the FHA will verify compliance with these requirements through on-site visits to the home office to assure that the lender has acceptable office facilities as outlined in 2-11.A of Handbook 4060.1.

Conversion of FHA lender approval type
Lenders that want to convert their FHA approval type must submit a new lender approval application package with all required exhibits, and pay a new $1,000 lender approval application fee. Previously, a lender had to submit certain forms and documents along with a $300 fee.

Prohibited branch arrangement
Approved lenders must directly pay all expenses for the operation of their home, branch and direct lending offices, and may not create “net branching” arrangements in which a party, other than the approved mortgagee, pays some or all of the branch office expenses.

Single-family loan origination lending area
FHA has expanded the single-family origination lending area of each home office and registered branch office to include all HUD jurisdictions throughout the country. Lenders must bear in mind that they must also meet each state’s origination and licensing requirements.

Business changes subsequent to approval
The FHA now requires that mortgagees notify HUD within 10 business days if the lender or any officer, partner, director, principal, manager, supervisor, loan processor, underwriter or loan originator of the lender or mortgagee:

1. Has been suspended, debarred, under a limited denial of participation (LDP) or has been debarred or suspended by HUD or by any other federal agency.
2. Has been indicted for, or convicted of, an offense that reflects adversely upon the integrity, competency, or fitness necessary to meet the responsibilities of the lender to participate in FHA programs.
3. Is subject to unresolved findings as a result of HUD or other governmental audit, investigation, or review (see ML 2010-38 for clarification on meaning of “unresolved findings”).
4. Is engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility.
5. Is convicted of, or pled guilty or no contest to, a felony related to participation in the real estate or mortgage loan industry within seven years prior to the date of the application for licensing and registration, or for any felony at any prior time that involved an act of fraud, dishonesty, or a breach of trust or money laundering.
6. Is in violation of provisions of the Secure and Fair Enforcement (SAFE) Mortgage Licensing Act of 2008 or any applicable provision of state law.

Use of DBA names
FHA now requires lenders to register all of their DBAs though FHA Connection rather than just those used for advertising FHA programs. FHA Connection has been modified to allow the registration of up to seven DBAs for each home office or branch. If a lender has more than seven DBAs, its remaining DBAs must be registered with the FHA by submitting the additional DBA names and documentation authorizing their use to HUD (see ML for address).

Officer changes
FHA-approved lenders are now required to report to any changes in the identity of corporate officers, as defined above, to the FHA.

Ownership changes
FHA now requires approved lenders to report all ownership changes, including new owners and changes in ownership interests, in accordance with the ownership requirements for their business form as detailed above.

Note that number four above has broad application in terms of administering the law and gives HUD a great deal of latitude to revoke a lender’s FHA approval status. Let this be a clear warning to companies that walk the line in any of their business practices and want to take advantage of FHA programs. It has been easy for companies in the past to hide their unethical business practices with FHA programs, but things have changed and HUD has worked very hard at leveling the playing field for reputable lenders by removing unethical companies and their leaders.
This update is not only important for owners of companies but also MLOs. Knowing these criteria can help you make better decisions about which companies to work for, and can assist you in judging the integrity of the individuals that run your company. It’s important to know that you are working for a company that has solid leaders. And, if you are considering joining a company, it’s fair to ask questions about its leaders so that you can have peace of mind that you are joining a reputable company—or know that you need to look elsewhere!

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