On Thursday, the FHA released proposed clarifications to its annual and loan-level certification requirements, as well as updated language describing what constitutes a defective loan and how such problems can be remedied.
Since the housing market collapsed, the number of banks participating in FHA’s single-family mortgage insurance programs declined, as many feared that a small misstep could result in a harsh penalty for violating the False Claims Act.
FHA Commissioner Brian Montgomery said banks now contribute to just 13% of FHA’s origination volume, down from about 44% in 2010.
“We are looking to bring clarity to our compliance rules that continue to discourage many lenders – including banks – from doing business with FHA,” Montgomery said on a call with reporters. “We’re hoping to be more transparent in how we do business with lenders by letting them know what the potential remedies are for mistakes or errors they may make in the origination and servicing of FHA loans.”
To provide that clarity, Montgomery said the agency is proposing to replace the “jumbled legalese” in its certification and compliance documents with “plain English.”
“Banks have said time and time again that the reason for their limited participation in FHA is the legal liability associated with enforcement actions stemming from the False Claims Act,” Montgomery said. “They have expressed concern that even minor errors could expose them to severe penalties.”
The agency said its initiative includes revisions to its “defect taxonomy,” which will clarify categories of defects and explain how the severity of each is weighed to shed light on the fact that enforcement actions will be appropriately dependent on the gravity of the infraction.
“A key focus of this administration and of my tenure at HUD has been to improve the clarity, certainty, and transparency of our regulations and requirements,” Housing and Urban Development Secretary Ben Carson said in a statement. “While HUD will preserve its strict enforcement authority where our requirements are violated, we will continue to reduce unnecessary burdens on stakeholders across our programs.”
Thus far, the FHA’s efforts appear to be well received.
Ed DeMarco, president of the Housing Policy Council, said the council appreciates the proposed changes to three areas of long-standing policy concern.
“These particular policy documents and tools are well overdue for review and revision, and HPC appreciates that FHA is dedicating resources to focus on this important upgrade to their policies and practices,” DeMarco said. “Successfully addressing these issues will give lenders more confidence in participating in the FHA program and enable participating lenders to better serve homebuyers seeking an FHA loan.”
The FHA’s proposed clarifications are available for public comment for a 30-day period before they are finalized.