Legislative Article 001

Legislative - NEW FHA RULES STRENGTHEN RISK MANAGEMENT

NEW FHA RULES STRENGTHEN RISK MANAGEMENT

http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-070

HUD No. 10-070
Lemar Wooley
(202) 708-0685

FOR RELEASE
Monday
April 5, 2010

NEW FHA RULES STRENGTHEN RISK MANAGEMENT
New regulations boost lender oversight, tighten controls and streamline lender approval

WASHINGTON - The Federal Housing Administration (FHA) today announced new regulations to further reduce and better manage counterparty risks to its insurance funds as it continues to play a critical role in today's housing market. FHA will issue regulations to increase the net worth requirements of FHA-approved lenders, strengthen lender approval criteria, and make lenders liable for the oversight of mortgage brokers.

"These changes support quality mortgage lenders while excluding organizations that are ill-equipped to handle the risk associated with market variations," said FHA Commissioner David H. Stevens. "That is particularly important now when a robust, competitive mortgage finance market is a crucial element in rebuilding the American economy. Lenders bear the overall risk of FHA-endorsed loans, therefore it makes sense for them to approve their counterparties and have sufficient capital to operate."

The final rule permits FHA to more effectively focus its resources on lenders that pose the greatest potential threat to its insurance funds and to ensure that lenders possess the resources appropriate for the financial services they deliver. FHA solicited public comments on this new regulation and considered those comments in the development of the final rule.

On September 18th 2009 Stevens announced a set of credit policy changes that enhanced FHA's risk management function, including the hiring of a Chief Risk Officer for the first time in the agency's 75-year history. In addition, Stevens announced his intent to propose new regulations to further strengthen FHA's risk management. The final rule, to be published in the next few days, makes good on that promise and will:

* Strengthen the Capacity of FHA-Approved Lenders â€“ Since 1993, FHA has required approved lenders to have a net worth of at least $250,000. To ensure that FHA lenders are sufficiently capitalized to meet potential need, effective immediately, all new lender applicants for FHA programs must now possess a minimum net worth of $1 million. * Provide Sufficient Time for Current FHA Lenders to Increase Net Worth â€“ Effective one year following the enactment of this rule:

o Current FHA approved lenders â€“ with the exception of small businesses â€“ must possess a minimum net worth of $1 million;
o Current FHA approved small business lenders must possess a minimum net worth of $500,000.
Effective three years following the enactment of this provision:
* Approved lenders and applicants to FHA single-family programs must have a net worth of $1 million plus 1% of total loan volume in excess of $25 million.
* Approved lenders and applicants to FHA multifamily programs must have a minimum net worth of $1 million.
o Multifamily lenders that also engage in mortgage servicing must have an additional 1% of total volume in excess of $25 million.
o Multifamily lenders that do not perform mortgage servicing must have an additional 0.5% of total loan volume in excess of $25 million.

Â· Streamline Lender Approval â€“ FHA-approved lenders currently assume liability for all the loans they originate and/or underwrite. While mortgage brokers will continue to be able to originate FHA-insured loans through their relationships with approved lenders, they will no longer receive independent FHA eligibility approval. These changes align FHA with Fannie Mae and Freddie Mac and have potential to increase the number of mortgage brokers eligible to originate FHA-insured loans while providing for more effective oversight of brokers by FHA-approved lenders. Mortgage brokers or other third-party originators, already approved by FHA, will be authorized to continue to originate FHA-insured loans through the end of the calendar year without sponsorship of an FHA-approved lender. Commencing January 1, 2011, however, the origination authority will end.

Together, these new regulations align with risk management practices within the conventional marketplace and permit FHA to mitigate losses and decrease risk to its insurance funds. These represent significant steps toward ensuring that FHA resources are entrusted to lenders strong and healthy enough to meet the needs of the market.

Legislative - Home Valuation Code of Conduct

Home Valuation Code of Conduct

To help enhance the integrity of the home appraisal process in the mortgage finance industry, in March 2008, Fannie Mae entered into an agreement with our regulator - the Federal Housing Finance Agency (FHFA) (then the Office of Federal Housing Enterprise Oversight) - and the New York Attorney General's office to adopt certain policies relating to appraisals for loans delivered to us. Following a public comment period, the Home Valuation Code of Conduct has been modified and will be effective for single-family mortgage loans (except government-insured loans) that are originated on or after May 1, 2009, and delivered to Fannie Mae. Home Valuation Code of Conduct

Legislative - S.A.F.E. Act

S.A.F.E. Act

The S.A.F.E. Act is to be implemented on January 1, 2010. Why is this important to you as a loan originator? All loan originators nationwide will fall under this act. As per outlined in the S.A.F.E Act all loan originators in Texas will have to be retested, refingerprinted, relicensed, new background checks, possibly take more education classes and meet new financial requirements.

Legislative -

Housing and Economic Recovery Act of 2008 - H.R. 3221

The "Housing and Economic Recovery Act of 2008" was signed into law on July 30, 2008, and covers many areas that impact mortgage lending. Two sections of this legislation that, we believe, are of particular interest to our membership are summarized below. They are: (1) the new federal mortgage loan originator licensing and registration requirements contained in the "Secure and Fair Enforcement for Mortgage Licensing Act of 2008" ("SAFE"); and, (2) the "FHA Modernization Act of 2008", which is supplemented by information from FHA's August 4th national teleconference with members of the mortgage industry.

Secure and Fair Enforcement for Mortgage Licensing Act of 2008 "S.A.F.E. "

1. The SAFE Act provides for a federally mandated licensing and registration system for all loan originators in the United States. In accordance with minimum standards set by SAFE, loan originators will be licensed by the individual States and registered nationally in a national registry system, called the "Nationwide Mortgage Licensing System and Registry," to be developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.

2. Under SAFE, a loan originator is an individual who takes a residential mortgage loan application and, for compensation, offers or negotiates a residential mortgage loan. There are two categories of loan originations under SAFE: (1) loan originator employees of depository institutions and their subsidiaries (called "registered loan originators"); and, (2) loan originators who are not employees of such depository institutions or subsidiaries but either (i) are licensed in the individual States, or (ii) HUD licensed loan originators in those States that do not have licensing and registration requirements (called "State-licensed loan originators").

3. Individuals who perform only administrative or clerical tasks in connection with a residential mortgage loan and licensed real estate brokers not compensated by the loan originator or other lender are excluded from the definition of "loan originator" under SAFE. However, SAFE does provide that an independent contractor performing loan processor or underwriter activities must be a State-licensed loan originator.

4. A residential mortgage loan is a consumer loan secured by a mortgage on residential real estate on which is constructed or to be constructed a mobile home, condo unit, or a 1-to-4 family structure.
5. Each loan originator will have a nationally recognized number, called a "unique identifier," assigned in accordance with the protocols established by the Nationwide Mortgage Licensing System and Registry, which will identify the loan originator and allow electronic tracking of the loan originator and public access to the loan originator's employment history and publicly adjudicated disciplinary and enforcement actions against the loan originator.

6. SAFE prohibits an individual from acting as a loan originator unless the person is a State-licensed loan originator or registered loan originator AND whose license and/or registration and unique identifier is currently active.

7. To be licensed as a State-licensed loan originator, SAFE requires pre-licensing fingerprints, criminal and civil background checks, credit reports, and information on the personal history and experience of the loan originator applicant. SAFE also establishes minimum standards for licensing and registration as a State-licensed loan originator, including but not limited to: (1) no conviction, guilty plea, or nolo contendere relating to a felony (foreign, domestic or military) (i) within 7 years preceding the application date; or (ii) at any time preceding the application date if the felony relates to fraud, dishonesty, breach of trust, or money laundering; (2) completion of SAFE's pre-licensing 20 hr. education requirement; (3) passing SAFE's pre-licensing written test; and (4) meeting SAFE's pre-licensing net worth or surety bond requirement (no amount specified) or payment into a state recovery fund.

8. To have a State-licensed loan originator license renewed, SAFE requires that the loan originator continue to meet SAFE's minimum standards for license issuance summarized above and SAFE's annual 8 hr. continuing education requirements.

9. For registered loan originators, SAFE requires the Federal banking agencies (i.e., the Federal Reserve Board, Comptroller of Currency, Office of Thrift Supervision, National Credit Union Administration and FDIC), through the Federal Financial Institutions Examination Council, to jointly develop and maintain a system for registering employees of depository institutions and their subsidiaries with the Nationwide Mortgage Licensing System and Registry as registered loan originators. SAFE does not require registered loan originators to comply with the educational and testing requirements it mandates for State-licensed loan originators; but SAFE does require a similar registration background check.

10. Because the Texas legislature meets only in odd numbered years, Texas has 2 years, starting from July 30, 2008, to comply with the requirements of SAFE to license and register loan originators operating in this State as State-licensed loan originators. After that time, HUD is authorized to establish the requirements of SAFE for loan originators operating in Texas. A recent email from the TDSML states that it is developing strategies to address the SAFE requirements, will keep the mortgage industry informed by posting on its website, www.sml.state.tx.us, updated information on its implementation efforts, and will send emails to licensees as new information becomes available.

FHA Modernization Act of 2008

1. Maximum Principal Loan Obligation.
Beginning January 1, 2009, the FHA maximum mortgage amount for a 1-family residence is increased to be the lesser of (i) 115% of the local area median 1-family house price; or (ii) 150% of the Freddie Mac loan limit. The current Freddie Mac loan limit is $417,000, so 150% of that = $625,500. There is also a maximum mortgage amount floor, set at 65% of the Freddie Mac loan limit (current Freddie Mac loan of $417,000 x 65% = $271,050). But in no event may the FHA maximum mortgage amount for a 1-family residence exceed 100% of the property's appraised value. According to the FHA representative conducting the August 4th teleconference, FHA will publish a Mortgage Letter in Nov. '08 setting out the new FHA loan limits.

2. Moratorium on Implementation of Risk-Based Premiums.
Beginning October 1, 2008, the risk-based premiums that were implemented by FHA on July 14, 2008 in Mortgage Letter 2008-16 are placed on hold for 12 months. Nor, during this 12-month moratorium, will FHA be allowed to implement any other risk-based premium program. According to the FHA representative conducting the August 4th teleconference, this moratorium will apply to case numbers assigned on and after October 1, 2008. So, for loans closed and for case numbers assigned before October 1, 2008, the risk based premium requirements of ML 2008-16 will continue to apply.

3. Cash Investment Requirement and Prohibition of Seller-Funded Down Payment Assistance.
The FHA cash down payment requirement will increase from 3% to 3.5%, and be based on 100% of the appraised value of the property (currently it is based on the cost of acquisition less MIP). It will include veterans (who are presently excluded from this cash down payment requirement). Also, for credit approvals on and after October 1, 2008, down payment assistance from third parties (other than family members) is prohibited. On July 31st a bill, H.R. 6694, was introduced into the House of Representatives to reinstate seller-financed down payment assistance. Congress is in recess until September, but we will be monitoring the progress of that bill.

According to the FHA representative conducting the August 4th teleconference these new requirements be implemented as follows:
*For the new 3.5% Cash Down Payment Requirement, FHA will issue guidance within 60 days that will also set a 30 or 60-day effective date after issuance of the guidance. In determining the amount of the cash down payment, the FHA will still use the lesser of sales price or appraised value. For example, assume a 100,000 sales price/appraised value; 3.5% x $100,000 = $3,500 cash down payment; leaving a sales price/appraised value balance of $96,500, to which can be added the up-front MIP as long as the $96,500 plus the amount of the up-front MIP added to the loan does not exceed 100,000.
*The prohibition on third-party Down Payment Assistance applies to loans for which "Credit Approval" is issued on or after October 1, 2008. For manual underwriting, Credit Approval is issued on the date the MCAW ("Mortgage Credit Approval Worksheet") or letter transmittal is signed. For automated underwriting, Credit Approval is issued on the last date of credit scoring.

4. Mortgage Insurance Premiums.
The statutorily allowed maximum upfront MIP is increased from 2.25% to 3%. For first time homebuyers, the statutorily allowed maximum upfront MIP is increased from 2.0% to 2.75%. Currently, the FHA upfront MIP is 1.5%; but, according to the FHA representative conducting the August 4th teleconference, starting October 1, 2008, FHA will increase the upfront MIP (but not the renewal) to an amount yet to be determined.

5. Pilot Program for Automated Process for Borrowers without Sufficient Credit History.
For the next 5 years FHA will conduct a limited pilot program to establish, and make available to lenders, an automated process for providing alternative credit rating information for borrowers on 1 to 4-family residences who have insufficient credit histories for determining their creditworthiness. This alternative credit rating information may include rent, utilities, and insurance payment histories, and such other information as FHA considers appropriate. For any fiscal year, the number of mortgages insured by FHA under this program cannot exceed 5% of the number of mortgages on 1 to 4-family residences insured by the FHA during the preceding fiscal year.

6. Fraud Prevention.
Fraud in connection with FHA loans is now subject to the penal sanctions of 18 U.S.C. 1014, which provides for a fine up to ONE MILLION DOLLARS and 30 YEARS in prison.

7. Revised Standards for FHA Appraisers.
Effective July 30, 2008, in addition to the existing standards for FHA appraisers, any appraiser chosen or approved to conduct appraisals for FHA mortgages also must: (A) be certified (i) by the State in which the property to be appraised is located or (ii) by a nationally recognized professional appraisal organization; and, (B) have demonstrated verifiable education in the appraisal requirements established by the Federal Housing Administration. According to the FHA representative conducting the August 4th teleconference, FHA will issue directives at a later date about these additional appraisal standards.