Transparency and clarity
In response to concerns about lack of transparency
and clear standards regarding underwriting violations, the FHA rolled out its defect “taxonomy.” The
taxonomy is an effort to provide a transparent and
more objective identification of types of underwriting defects and their sources, causes and severities.
Problems are separated by categories between
minor faults and more serious defects that have indemnification consequences.
Scott Olson is executive director of the
Community Home Lenders Association
(CHLA). CHLA is the only national
association exclusively representing
independent mortgage bankers and is
comprised of small and midsized community-oriented
mortgage lenders and servicers. Reach Olson at
Unfortunately, a major cause of lender apprehension regarding FHA has not been caused by
FHA, but by actions brought by the Department of
Justice under the False Claims Act, which has been
used to impose significant fines, generally on larger
FHA lenders. This issue is commonly cited by banks
as a major factor in their decision to reduce FHA
loan originations or impose credit overlays.
There are some signs of potential change on the
horizon, however. Ben Carson, secretary of the U.S.
Department of Housing and Urban Development,
appears supportive of changes to the False Claims
Act. In addition, Brian Montgomery, the nominee
for FHA commissioner, has said the FHA should treat
lenders more like “partners than adversaries.”
One concern still facing lenders and mortgage
companies has been a perceived lack of guidance
on what the CFPB expects from them with regard to
specific rules. The TRID consumer-disclosure rules,
for example, initially contained issues such as the
so-called “Black Hole” — a potential timing conflict
with disclosures that could leave lenders liable despite following the rules — and a lack of a formal
safe-harbor transitional period for compliance.
The change in administration has brought a
change in regulatory focus, however. Notably, Mick
Mulvaney, new CFPB acting director, took a different
approach last December when rolling out the new
data requirements for the Home Mortgage Disclosure Act, putting in place a full-year safe harbor and
seeking comments on the new requirements.
The risk of CFPB enforcement action is of particular concern for smaller independent mortgage
bankers, or IMBs, which do not have the same
financial resources to spread compliance costs over
larger loan volumes or absorb large fines. Moreover,
smaller IMBs often have not had as much interaction with the CFPB — in contrast to their state
regulators, which they more regularly interact with.
This often makes it more difficult for IMBs to understand the CFPB’s thinking on compliance issues.
This is especially true when it comes to what is
often referred to as the CFPB’s “enforcement first”
policy, where it imposes fines and enforcement
actions without first giving lenders or financial
institutions a chance to correct the issue. In contrast,
bank and credit union regulators generally work
with the entities they regulate, identifying concerns
and giving them a chance to correct the problem.
The goal should be working with lenders to get
them to comply with rules, not just punishing infractions with fines.
A broader question is whether or not smaller
IMBs should even be subject to CFPB exams or
enforcement in the first place. IMBs are subject to
CFPB supervision as well as exam and enforcement
regulation by the states in which they originate or
service loans. The Treasury Department pointed
out this dual-compliance burden last year. This past
March, Mulvaney also emphasized that the CFPB
should defer more to primary regulators (banking
regulators or state regulators). With the administration’s emphasis on deregulation, it is possible this
issue could be resolved in the near future.
n n n
Mortgage lenders should have a reasonable expectation that there is predictability and certainty when
they do the loan underwriting job well. Mortgage
professionals should keep in mind — and mortgage
programs should reflect — the importance of this
reliability and predictability. Fortunately, strides
have been made recently, but more can be done.
Ultimately, it is borrowers, as well as loan originators,
who benefit when this loan predictability becomes
a reality. n
Serious problems include fraud or misrepresentation, statutory violations, significant eligibility or
insurability issues and inability to determine or support loan approval — listed as Tier 1 issues — as well
as material errors that impact loan approval and any
failures to comply with FHA policy (the Tier 2 issues).
Tiers 3 and 4 include lower-level problems, such as
minor errors or issues, failure to comply with guidelines by a small degree and other minor errors that
would still result in the loan being approvable.
The taxonomy was part of a broader FHA
effort to provide lenders with more assurance that
if they comply with the important and material FHA
underwriting requirements, they will not be second-
guessed for minor technical violations. A critical
component of this is FHA’s implementation last year
of its “Loan Review System.”
Lenders have generally been pleased with the
system. The most positive part is that it provides a
formal appeal process to rebut allegations of lend-
er error, which can be taken all the way to Washing-
ton, if necessary. In the past, it could be difficult for
lenders to escalate findings to the FHA headquar-
ters for review.
Read more about new
underwriting initiatives at:
<< Elephant continued from Page 38
“One concern still facing
lenders and mortgage
companies has been
a perceived lack of
guidance on what
the CFPB expects.”
Day 1 Certainty: sctsm.in/DayOne
Defect Taxonomy: sctsm.in/Defect
FHA Loan Review System: