Loan Modification

How Long Should FHA Lenders Be Accountable?

By Peter G. Miller

A few weeks ago HUD announced new standards that it wanted to establish for FHA loans, standards which would hold lenders more accountable than in the past.

Of particular interest was HUD’s idea for a reasonable window to get back money if a loan failed because a lender violated underwriting standards. HUD wanted to ?seek indemnification in cases of fraud or misrepresentation at any time.” But what about cases that did not involve fraud or misrepresentation? What about situations where paperwork was not properly completed or FHA guidelines were not met? Then HUD wanted a five-year window to recover any losses.

The MBA Response

The Mortgage Bankers Association has now responded this way:

“The proposed new section states that the mortgagee is required to indemnify HUD for an insurance claim paid within five years of the endorsement if the mortgagee knew or should have known of a serious and material violation irrespective of whether the violation caused the default. FHA then provides examples of ‘serious and material’ violations, such as verifying creditworthiness, verifying assets, etc. MBA believes that five years is too long a time period from the date of origination and recommends an alternative standard of three years. After five years, problems that occur with the loan typically are not due to underwriting or other origination issues, but are due to life changing events beyond the lender?s control, such as loss of employment, divorce, or death. MBA recommends three years because it is aligned with the underwriting requirement that FHA expects of its lenders.”

That the MBA would propose a three-year window of liability reflects the reality that originating lenders do have a significant responsibility for events after a loan is originated. However, the catch is that lenders should not be responsible in all cases; not all loan failures should automatically be blamed on lenders. There are life events which cannot be anticipated and which make the payment of a mortgage impossible.

Other Damages

But what if a loan has been originated with a serious and material violation of FHA guidelines and no foreclosure or claim against the FHA results? The MBA position seems to be no harm, no foul, after three years.

But even if there has been no claim against the FHA, what about the borrowers? Did they get the best possible loan or are they paying more than they should each month? What if they had financed with a lender who played by the FHA’s rules?

HUD should retain the proposed five-year standard but lenders should not be responsible for events beyond their control. That seems to be a fair balance.

As to material lender violations of FHA benchmarks, the issue should not be restricted to whether or not a foreclosure took place. Weight ought to be given to the question of whether a borrower was injured as a result of an improper origination. After all, the FHA is not the only party with a stake in this matter, borrower interests should also count.

Full post as published by FHA Mortgage Guide on December 08, 2010 (boomark / email).