FHA Enforcement: The Real Cost of Non-Compliance
Last week HUD’s Mortgagee Review Board (MRB) published in the Federal Register, the results from cases heard in 2013 and early 2014. The cases were divided into two groups, Group 1 could be considered enforcement actions based on lender and servicer compliance reviews. Group 2 is the lenders who failed to successfully complete FHA’s annual recertification requirement. While it is interesting to note that those failing to complete the annual recertification process received a civil money penalty of either $3,500 or $7,500 and another 22 had their FHA approval withdrawn for a year period, it is the details of the findings of first group that provides the most compelling information, both in relation the enforcement actions taken and their causes.
Group 1 is comprised of twenty-one lenders/servicers of varying sizes and locations. What they all had in common is that someone from HUD reviewed either loan origination or servicing files and came to the conclusion that the files did not meet FHA requirements. Referrals to the MRB most frequently come from the Quality Assurance Division (QAD) but file reviews may also have started with a HomeOwnership Center (HOC) Post-Endorsement Technical Review (PETR) or from an Office of the Inspector General (OIG) for Audit review.
The MRB has a range of sanctions it may impose and in the case of the July 16 Federal Register notice, all of its enforcement tools were utilized. Specifically, the MRB took the following actions:
- Civil Money Penalties assessed: $1,506,100
- Administrative fees, refunds, principal buydowns: $1,229,670
- Indemnification agreements involving 163 loans
- Withdrawal of FHA approval: four lenders
- Suspension of FHA approval: one lender
- Probation of FHA approval: one lender.
The Collingwood Group strongly believes that every lender and servicer should know what the findings are behind these enforcement actions and should use this knowledge as a tool to improve your FHA loan origination and servicing operations as well as ensure that your Quality Control (QC) departments are testing for these findings themselves.
The MRB findings can generally be placed in three groups of violations: 1) lender approval; 2) loan origination; and 3) loan servicing. Here are the highlights of major findings in each group:
Lender approval issues
Failure by the FHA lender/servicer to:
- Establish and implement a compliant QC Plan and/or QC program
- Review all early payment defaulted loans as a part of the QC review process
- Check the eligibility of loan participants against the FHA LDP, suspension, debarment list
- Enter the NMLS ID # for the loan officer in FHA Connection
- Disclose affiliated business arrangements
- Accurately certify all areas on their FHA annual recertification (most commonly the suspension/action by a state, federal or local government)
- Employ individuals who worked exclusively for the lender
- Ensure correct lender identification numbers were used when originating loans (FHA Connection data entry regarding sponsored originators).
Loan Origination Issues
Failure by the originating/underwriting lender to:
- Verify source of funds including gift funds; document earnest money
- Ensure borrower made minimum required investment
- Ensure loan documents are not faxed from an interested 3rd party
- Validate there were no unallowable and/or unearned fees charged (including a commitment fee without an acceptable lock-in agreement at least 15 days prior to closing)
- Resolve conflicting information in loan documents
- Fund closed loans; disburse construction-permanent loan proceeds
- Remit MIP timely
- Comply with Lender Insured loans
- Document income and/or stability of income
- Calculate maximum allowable mortgage (i.e. approval of over-insured loan)
- Properly analyze liabilities
- Comply with settlement requirements needed to close
- Provide required construction-permanent disclosures and required certifications
- Ensure that manufactured home properties were FHA eligible.
Loan Servicing Issues
Failure by the servicer to:
- Service the loan in accordance with FHA requirements
- Evaluate or document evaluation of loss mitigation techniques; borrower financial condition; eligibility for HAMP
- Follow FHA property preservation and inspection requirements
- Accurately report loans in FHA’s SFDMS system
- Remit timely monthly MIP or notify FHA within 15 days of termination of mortgage insurance.
The vast majority of the origination and lender approval violations listed above have been appearing in MRB actions for years. Servicing violations have been more prevalent in the past few years likely due to the significant increase in the number of compliance reviews performed by FHA’s Quality Assurance Division. A much more recent addition is the failure to enter a loan officer’s NMLS ID number on loan documents or in FHA Connection. This requirement became effective in April, 2011 and was announced in Mortgagee Letter 2011-04.
The Collingwood Group has former QAD staff and managers as well as a former MRB Secretary and Chairman among its ranks. In our experience a very, very small percentage of QAD or PETR reviews end up at the MRB. But if one does, it is important to know that your voice will be heard throughout the process. What is probably more important is to ensure you have a compliant FHA operation and avoid being a part of the entire process just described. Our team of experts is ready to help your company review its operations and keep you out of the eye of the MRB.