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Special Alert: Final FHA Rule Available on HUD's Website

April 15, 2010

Final FHA Rule Available on HUD’s Website - Will Increase Mortgagee Net Worth Requirement; Eliminate Loan Correspondent Approval Requirement

As reported in last week’s edition of InfoBytes (InfoBytes, Apr. 9, 2010), on April 5, the U.S. Department of Housing and Urban Development (HUD) announced a final rule that will, among other things, increase the net worth required for approved mortgagees and eliminate the Federal Housing Administration (FHA) approval requirement for loan correspondents. Although the final rule has not yet been published in the Federal Register, HUD has released the text of the final rule on its website. See http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_4281.pdf. This Special Alert summarizes key provisions from the final rule.

Increased Net Worth Required for FHA-Approved Mortgagees

The final rule will increase the net worth requirement for approved mortgagees from $250,000 to a minimum of $1 million over a 3-year period. At least 20% of a mortgagee’s required net worth will need to be liquid assets. The table below describes the timeline for implementation of the new net worth requirements:

  • Upon the final rule becoming effective (30 days from the date of publication in the Federal Register) : 
    • New lender applicants must possess a net worth of $1 million
  • 1 year after effective date of final rule : 
    • Current FHA-approved lenders (except small businesses) must possess a net worth of $1 million
    • Current FHA-approved small business lenders must possess a net worth of $500,000
  • 3 years after effective date of final rule : 
    • Single-Family – Irrespective of size, approved lenders and applicants must have a net worth of $1 million plus 1% of total FHA loan volume in excess of $25 million, up to a maximum required net worth of $2.5 million
    • Multi-Family – Irrespective of size, approved lenders and applicants must have a net worth of $1 million 
      • If performing mortgage servicing—must have an additional 1% of total FHA loan volume in excess of $25 million, up to a maximum required net worth of $2.5 million. 
      • If not performing mortgage servicing—must have an additional 0.5% of total FHA loan volume in excess of $25 million, up to a maximum required net worth of $2.5 million.
    • If a mortgagee participates in both Single-Family and Multi-Family, it must meet the Single-Family net worth requirement

Elimination of Loan Correspondent Approval

Currently, FHA approves (i) mortgagees, which are permitted to perform lender origination and/or servicing functions and own FHA loans, and (ii) loan correspondents, which are permitted to perform any origination function except underwriting and may not service or own FHA-insured loans. Under the final rule, loan correspondents—which FHA will refer to as third-party originators (TPOs) going forward—will continue to be able to originate FHA-insured loans through association with an FHA-approved mortgagee (as is currently the arrangement). However, TPOs will no longer receive independent FHA eligibility approval. The final rule will relieve mortgagees of the responsibility to obtain prior FHA approval of the brokers (TPOs) that they would like to sponsor; however, mortgagees will assume responsibility for their sponsored TPOs satisfying FHA requirements regarding loan origination and processing. Failure of a TPO to comply with FHA requirements may result in FHA seeking sanctions against the sponsoring FHA-approved mortgagee.

Thirty days following publication of the final rule in the Federal Register, FHA will no longer approve new applicants for approval as loan correspondents. Loan correspondents that already are FHA-approved will be authorized to continue to originate FHA-insured loans through the end of the calendar year as normal. However, effective January 1, 2011, their origination authority will end. The final rule does not alter the approval process of investing mortgagees and governmental institutions. 

HUD explained that it will not establish FHA requirements related to sponsor approval of TPOs, as “[t]he additional responsibility that HUD will require of sponsoring FHA-approved mortgagees through this final rule is minimal. Since mortgagees are already responsible for ensuring that FHA requirements are met for mortgage loans originated by loan correspondents, HUD believes it is appropriate for mortgagees to continue doing so for TPOs.” The manner in which a mortgagee assesses a TPO’s qualifications “should not differ significantly from the manner in which FHA-approved mortgagees hire loan officers and appoint officials in their organizations.” In addition, “sponsoring mortgagees have the authority to establish oversight requirements to monitor the ongoing performance and financial capacity of their TPOs, as the mortgagees may determine appropriate, including the submission of audited financial statements from sponsoring TPOs.” The proposed rule sets forth 10 recommended (although not mandatory) measures that a mortgagee may implement to evaluate the qualifications of TPOs.

HUD also clarified that, as a result of HUD’s elimination of the FHA approval process for loan correspondents, the requirements regarding principal-authorized agent relationships will also change. Mortgage loans originated through principal-authorized agent relationships will be permitted to close in either party’s name. However, to participate in such relationships, both the principal and authorized agent will need to be approved as Direct Endorsement (DE) mortgagees, and the principal must originate and the authorized agent must underwrite the loans. Under existing FHA rules, mortgage loans originated through principal-authorized agent relationships must (i) close in the name of the principal, (ii) both parties must be approved mortgagees, but are not required to have DE authority, and (iii) either party (principal or agent) may originate or underwrite the loan as long as the party has the appropriate approval.

Note that, among other things, the preamble to the proposed rule also provides guidance on TPOs’ access to FHA Connection, monitoring TPO performance through Neighborhood Watch, and geographic limitations on originations.

Issues Under Consideration

HUD is reviewing two issues for further consideration, and taking public comment on one of these issues.

First, the final rule prohibits a TPO from closing a loan in its name. HUD is not considering withdrawing this prohibition in the final rule, but it will further examine the issue. Until and unless HUD announces a change to this prohibition, the prohibition for currently FHA-approved loan correspondents (that subsequently will become TPOs) closing any FHA loan in their names will be applicable as of January 1, 2011. Note that TPOs also will not be permitted to submit loans to FHA for insurance endorsement.

Second, HUD is considering requiring FHA-approved mortgagees that originate multi-family loans of $25 million or more to retain as additional net worth 50 basis points (0.5%) of the fee income resulting from such loans, in addition to their required net worth as set forth in the final rule, up to a maximum of $5 million. HUD will be taking public comment on this issue for a 30-day period.