Important aspects of the 2020 housing outlook – in addition to demand, supply, and rates – are the various changes to the regulatory environment that will affect lenders and borrowers.
Improvements to FHA’s defect taxonomy – the method used to identify defects at the loan level and the remedies for such shortcomings – are one of the more positive developments, particularly for first-time homebuyers and low- and moderate-income borrowers.
These changes are part of a larger effort by HUD to revise the loan review process and simplify the certifications that lenders make in connection with the FHA program in order to reduce the risk of False Claims Act enforcement for immaterial loan origination errors.
MBA has championed reforming the taxonomy for some time. Our posture has been that FHA does not need new rules and regulations to govern our industry, but rather more clarity and transparency in the ones that are already on the books.
Since the crisis, the legal and reputational risks associated with originating FHA-insured loans have substantially increased through hyper-technical enforcement of FHA’s lending requirements, driving many lenders – particularly banks – away from offering FHA loans to their customers.
To address these concerns, the just-released final defect taxonomy includes specific remedies for various tiers of defect severity. This will allow lenders to understand in advance the remedies for different types of loan defects.
Not only did HUD work to make changes to the loan review process, but last October, HUD Secretary Ben Carson announced a joint memorandum of understanding (MOU) between HUD and the Department of Justice (DOJ). This MOU stated that DOJ would defer primarily to HUD’s administrative proceedings to evaluate and remediate loan origination errors, rather than pursuing the draconian damages allowed in the Civil War-era False Claims Act. It also provided for closer coordination between HUD and DOJ throughout the investigative process.
In addition, HUD revised the certifications that lenders provide annually and on each loan. The changes to the loan-level and annual certifications more closely link them to relevant regulations, as opposed to every requirement found in the FHA Handbook. They also stress that the underwriting process should allow for judgment and discretion on the part of underwriters. Lastly, the loan-level certification ties in to the defect taxonomy as the remedy for any defects, and thus limits the risk that errors will be adjudicated through the False Claims Act.
Taken together, these changes represent a significant effort by HUD to resolve longstanding concerns about exposure to False Claims Act penalties, and to bring lenders back to the program. HUD took steps to make these changes durable to provide lenders with some certainty that a future administration could not easily return to the indiscriminate use of the False Claims Act to pursue lenders for immaterial defects on FHA loans. While individual lenders must consider when and how to return to FHA lending or increase their participation in the program, these reforms represent very positive progress in restoring clarity and certainty.
Housing market stability is strengthened when key programs like FHA are supported by a deep pool of participating lenders, depository institution and IMB alike. I commend HUD for these steps and encourage them to continue their efforts in other areas, particularly on FHA servicing reforms.