Posted on Friday, December 10, 2010
The Washington, D.C.-based Mortgage Bankers Association (MBA) sent a letter to the Federal Housing Administration (FHA) on Tuesday, expressing criticism of a proposal that would increase indemnification requirements on lender-issued loans.
The proposed regulation would allow FHA to require lenders to compensate the agency for losses incurred on certain loans. Traditionally the FHA can only request such recompense.
MBA feels the FHA would use the policy to find “small, inconsequential reasons” to require indemnification. Additionally the suggested rules will allow FHA to “continually” review lender performances, which MBA protests is vague.
“This proposed rule … penalizes responsible lenders by requiring them to indemnify FHA for loans regardless of cause or materiality, and without a well-defined, clear and transparent appeals process,” MBA said.
The letter continued, “Many of the proposed policy changes are extremely subjective and provide FHA with the authority to apply rules with the most rigid interpretation, at the Administration’s discretion. Making the rules overly strict and incontestable only serves to heighten all lenders’ reservations in originating FHA loans through the LI [lender insurance] process.”
The proposal also mandates that the mortgagee is required to indemnify HUD for an insurance claim paid within five years of the date of origination if the mortgagee knew or should have known of a serious and material violation, whether or not the violation led to default.
MBA believes five years is too long a time period for such a rule, and suggests a better time frame would be three years, claiming default caused after the three year mark is usually due to issues beyond the lender’s control, such as divorce, death, or loss of employment.
“MBA is concerned about the layering of additional risk management requirements that significantly increase compliance costs and lead to fewer responsible borrowers qualifying for FHA loans,” the letter said.