www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 February 22, 1996 MORTGAGEE LETTER 96-10 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production - Underwriter Approval Issues and the Revised Lead-Based Paint Disclosure Form In Mortgagee Letter 95-36 (M. L. 95-36), we discussed a number of topics raised by the Business Practices Working Group that was formed earlier in the year. Specifically, the Working Group recommended that FHA end the practice of approving individual underwriters, that it provide additional emphasis on communications with lenders and training opportunities, that it study its portfolio to determine default predictors, and that it revise its lead based paint disclosure and provide additional information regarding home inspections. Each major issue is covered below: I. UNDERWRITER APPROVAL PROCESS REPLACED WITH REGISTRATION. Effective February 26, 1996, FHA will no longer approve individual underwriters to participate in the Direct Endorsement (DE) program. The approval process previously employed has been replaced by a DE Underwriter Registry. All DE underwriters must be registered with FHA. Failure to do so may delay issuance of mortgage insurance certificates on loans underwritten by non-registered underwriters. Underwriters with valid CHUMS identification numbers and currently shown as working for an FHA- approved lender need not re-register. We will continue to check all underwriters against the Credit Alert Interactive Voice Response System (CAIVRS) file and we reserve the right to remove underwriters from the registry upon imposition of sanctions taken by local FHA offices or Headquarters. Lenders must update underwriter information whenever a DE underwriter is hired or when an underwriter has achieved the necessary qualifications to underwrite FHA-insured mortgages for the company. Lenders may add, update, or delete underwriter information in the registry through CLAS 2 (CHUMS Lender Access System). CLAS has been expanded to maintain the necessary information under the heading the heading "Underwriter Registry," which is a new option on the CLAS Add/Update Request menu (CLAS Version 8.0 is required). After the information has been processed by CHUMS, CLAS will return an Underwriter Update report to the lender verifying the information provided as well as the underwriter's CHUMS identification number. Lenders may also obtain a listing of all its underwriters on the registry through CLAS. A copy of the CHUMS entry screen is attached. After June 30, 1996, the underwriter registry will be available only through CLAS. Lenders are therefore encouraged to begin using CLAS as soon as possible. In the meanwhile, lenders that currently do not have CLAS may write to: U.S. Department of Housing and Urban Development Underwriter Registry-Single Family Development Division/HSID 451 7th Street S.W., Room 9272 Washington DC, 20410 For written requests, the lender must include the following information on the underwriter: <<>> Whether this is a new underwriter (i.e., no CHUMS ID # previously assigned) <<>> The underwriter's name <<>> Former name of the underwriter (if applicable) <<>> Social security number of the underwriter <<>> Home or office phone number of the underwriter <<>> Complete mailing address, either Home or Office <<>> Lender's five-digit CHUMS ID number <<>> Date the underwriter was hired Allow up to four weeks for processing if the information is submitted through a written request. If you have questions regarding the underwriter registry, contact Daniel Kahn at (202) 708-2121 Ext. 2212. Please note that the lender approval process for DE remains the same as described in HUD Handbook 4000.4 REV-1. The lending institution is still required to submit test cases before it can obtain unconditional DE approval, even if it hires an underwriter already on the DE underwriter registry. II. CLAS VERSION 8.0. In addition to the underwriter registry that may be accessed by the lender through CLAS Version 8.0, the following enhancements have been made: 3 CAIVRS Updates. CHUMS now has access to all CAIVRS information including that provided by agencies other than HUD. CAIVRS numbers will be returned to the lender following entry of social security numbers on the Receiving/Assignment screen or separately on the new CAIVRS authorization screen. The returned information includes authorization code and, when a match is found against a social security number resident in CAIVRS, the government agency that took the action, the case number, case type, and a telephone referral number. If a CAIVRS "hit" is detected, the case number assignment will still be issued. Refinance Authorization. Lenders may now extend Refinance Authorizations by entering the case number and the new closing date. When a premium refund is involved, a recalculated refinance amount will be returned to the lender. Please note that refinance authorizations are required on all FHA-to-FHA refinances, not just streamline refinance transactions. III. COMMUNICATIONS AND LENDER TRAINING. Since we will no longer review underwriter qualifications and will rely on lenders to assure that its underwriters are fully qualified, it becomes even more important to provide adequate training to underwriters as well as production personnel. As our policies and procedures evolve over time, it is imperative that we communicate with the lending community and keep it informed of those changes designed to expand homeownership opportunities. To achieve this, we are encouraging lenders to avail themselves to the training sessions conducted by our local offices. These sessions are designed to cover credit and appraisal issues, special programs such as Section 203(k) rehabilitation mortgage insurance, and in general, to provide an overview of acceptable underwriting practices, including the flexibility we offer in underwriting "good" borrowers whose credit patterns may not fall completely within prescribed standards. We recognize that our ultimate success depends on your skill in properly underwriting the loan application and making an accurate and realistic assessment of risk. We also hope that lenders will participate in the exchange of ideas and also help keep us abreast of the technological changes in the marketplace. We are committed to finding ways to reduce the lender's cost to originate FHA-insured mortgages while still maintaining adequate risk assessment. 4 To help lenders find FHA training seminars, we have asked that Field Offices post their single family training schedules onto HUD's Home Page on the World Wide Web (http://www.hud.gov/). Many local FHA offices have already established their own home page on the Web. Those lenders with Internet access will be able to determine which local FHA offices are offering training at a time and place convenient to them. We are considering other avenues to keep lenders informed of local office outreach seminars and will provide additional guidance in the near future. IV. DEFAULT PREDICTORS. Over the next few months, FHA will begin an extensive study to determine the feasibility of identifying meaningful predictors of default on loans we insure. We intend to look at income ratios, cash reserves, credit histories and scores, etc. Our purpose for doing this is threefold: 1) to help us better manage our mortgage insurance risk; 2) to develop additional strategies to make new homeowners out of those potential borrowers that may have fallen out of our current prescribed standards, and 3) where justified, permit a reduction in paperwork requirements on those loans that are of reduced risk. Upon completion, we will notify the lending community of any modifications to our credit policies resulting from this study. V. REVISED LEAD-BASED PAINT DISCLOSURE FORM. The revised form now includes information on the importance of obtaining a general home inspection and how a borrower may pay for it. Since FHA does not warrant the condition of the property which secures the mortgage, it is imperative that borrowers are made aware of this fact as early as possible in the homebuying process. Equally important, borrowers need to know how to obtain and pay for a home inspection in order to ascertain potential defects in the home they are considering purchasing. Mandatory use of this form begins 90 days from the date of this mortgagee letter. The attached disclosure form is to be signed and dated by the borrower(s) on or before the date that the sales contract is executed (or re-executed if necessary) for all transactions that will involve FHA mortgage insurance. For insured mortgages secured by properties built before 1978, the entire form must be in the casebinder with the borrower's signature and date on the second page. For those properties built during or after 1978, only the top portion of the form must be submitted with the borrower's signature and date on the first page. 5 For refinance transactions, including streamline refinances, the notice must be signed on or before the borrower executes the loan application. For mortgages insured under FHA's Home Equity Conversion Mortgage, a notice is not required if the borrower has certified that no child under the age of six will be residing in the property. If you have any questions concerning these issues, please contact your local FHA office. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner Attachments