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FHA Clarifies Bank Liability For Mortgage Errors

checklistThe Federal Housing Administration (FHA) Head and Principal Deputy Assistant for Housing, Ed Golding, announced the latest loan-level and annual lender-level certifications on Wednesday.

The FHA hopes this added clarity will appease banks and large lenders that have pulled out of the FHA loan program or implemented harsher credit standards fearing lawsuits and penalties over troubled loans.

"These certifications are key tools that help to ensure lenders comply with our policies, including those that are designed to protect borrowers and ensure quality lending practices," Golding said. "We recognize the important role these particular certifications play for the industry, and believe we have achieved the clarity that we and the industry sought while maintaining accountability."

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Ed Golding

Annually, lenders are required to submit certification that it and its officers are qualified to originate FHA-backed loans. In addition, they must also certify that the loan meets FHA standards, according to the Scotsman Guide. Now, lenders are speaking up to say that the wording in these certifications is "overly vague and exposes them to buyback demands and other penalties if the loans default."

Golding noted in his release that the FHA identifies what lenders will be held accountable for only those mistakes that would have altered the decision to approve the loan. Minor mistakes that do not affect the loan decision will not be the focus of their compliance efforts.

The new language reinforces FHA’s longstanding position that lenders should not be penalized for minor mistakes. "Clarifying that we are interested only in errors that would have altered a decision to approve the loan should put to rest any confusion regarding FHA compliance policy," Golding said.

Golding also pointed out two additional changes to the certifications:

  1. Changes that clarify the lender is certifying to what they know to be true to the best of their knowledge. The certification is not intended to hold lenders responsible for mistakes or fraud committed by a third party that the lender did not or could not have had reason to know of. Our goal is to make sure that lenders make every effort to obtain accurate information and to validate that information but also recognize that due to the complexity of putting a home loan together, minor errors in information may occur from time to time.
  2. Additionally, we have removed references to the pre-endorsement review requirement and have made the certification consistent with the policies in our updated FHA Handbook.

"Revising the lender-level certification in this manner responds to concerns that changes made to the loan-level certification had the unintended impact of weakening HUD’s enforcement authority," Golding explained. :That is not, nor has it ever been, our intention. None of the changes to either of the certifications hinders or undermines our ability to take action against any bad actors in the industry."

He continued, "Overall, these certifications increase clarity and protect FHA, taxpayers and lenders. We also believe that improved clarity makes compliance easier for lenders and strengthens our ability to hold them accountable. We are confident that the proposed revisions to the loan-level and lender-level certifications reflect a significant step forward for the FHA program and responsiveness to industry concern."

Hear more about government policies from Ed Golding at the 2016 Five Star Government Forum on March 31, 2016 in Washington, D.C.

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