www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 August 2, 1995 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 95-36 TO: ALL APPROVED MORTGAGEES SUBJECT: Mortgagee Approval -- Single Family Loan Production -- Revised Mortgagee/Program Requirements Earlier this year an FHA Single Family Business Practices Working Group was established. This Group was comprised of representatives of mortgage lenders, State and local governments, trade associations, realtors, government-sponsored enterprises, and other interested parties. The purpose of the Working Group was to develop recommendations to streamline the FHA processes, reduce or eliminate unnecessary requirements, promote greater opportunities for first-time homebuyers and minorities, and maintain a responsible risk management program. The areas in FHA's business practices that the Working Group reviewed included: o mortgagee approval and recertification requirements o risk management and quality control o marketing and outreach o communications and technology The changes described in this Mortgagee Letter result from the efforts and recommendations made by the Working Group. They will make the FHA processes more flexible for mortgagees, and our partners such as State and local governments and nonprofit associations and expand homeownership opportunities. They will also assist in making the FHA a more effective organization to serve the needs of our customers and clients. These changes should also minimize the differences between FHA and conventional loan processing, and place greater reliance and accountability on mortgagees. -2- A number of the recommended changes are effective as of this date. However, some of them require revision of our present regulations, and/or the development or modification of existing data systems. Where such revisions are required, we are undertaking appropriate actions to achieve implementation at the earliest possible time. As these proposed changes occur, we will advise you of their implementation. The following changes in PHA requirements are effective immediately. 1. Modification of the face-to-face borrower interview requirement. We are modifying our face-to-face borrower interview requirement. This requirement now applies only to first-time homebuyers who make less than a ten percent downpayment resulting in a loan-to-value ratio of more than 90 percent. In addition, this requirement is further modified to provide that in lieu of the face-to-face interview for first-time homebuyers that make less than a ten percent downpayment, the face- to-face interview is not required where the homebuyer receives pre- purchase counseling on the responsibilities of homeownership from a HUD-approved housing counseling agency. The borrower must provide evidence from the counseling agency of having received such counseling. HUD Handbooks 4000.2 REV-2, and 4155.1 REV-4, will be revised to incorporate these changes. Videoconferencing that utilizes employees of the mortgagee and documents the interview process is acceptable to meet the requirements of a face-to-face interview. 2. Elimination of "brick and mortar" mortgagee branch office requirements. We are now eliminating the administrative requirements concerning office facilities for the approval of mortgagee branch offices as set forth in Chapter 2, paragraph 2-16a., of HUD Handbook 4060.1 REV-1 and modifying the staffing requirement in paragraph 2-12 to provide greater flexibility to mortgagees in conducting their FHA lending activities. -3- Mortgagees may now determine the location and type of branch office facility they choose to maintain including the number of employees. However, there must be at least one employee that works exclusively for the mortgagee. The branch office facility may be located in either commercial or non-commercial space. Where office space is shared, mortgagees must assure that they are in compliance with RESPA requirements. We expect mortgagees to maintain adequate facilities and conduct their lending activities in a professional business like environment. This should result in reduced overhead costs of establishing a "brick and mortar" branch facility in every locality in which a mortgagee wants to originate FHA insured mortgages, and provide greater access to FHA programs for low- and moderate-income homebuyers. However, mortgagees will still be required to obtain approval of their branch offices from which loans are submitted to FHA, and will be held fully accountable for the quality of loans originated by their branches. HUD Handbook 4060.1 REV-1, will be revised to reflect this change in our requirements. 3. Expansion of lending areas where mortgagees may originate FHA insured mortgages We are now expanding the geographic lending areas where a mortgagee may originate FHA insured mortgages as set forth in HUD Handbook 4060.1 REV-1, paragraph 2-18. Until now, each office of a mortgagee required our approval for the FHA field office(s) jurisdiction in which the mortgagee intends to submit mortgages for insurance endorsement (except for refinance cases). We have modified our requirements to expand our present Field Office jurisdictions into "lending areas" by combining closely located Field Offices. This permits mortgagees to do business with a number of Field Offices from any approved branch or their main office location within the "lending area". Mortgagees must maintain at least one approved branch office within a "lending area from which loans are submitted to the FHA Field Offices within the "lending area". This significantly reduces the number of branch office approvals and requests for extra-territory previously required from the 80 present FHA Field Office jurisdictions such that a nationwide lender will only need to be approved in 25 "lending areas" as indicated in Attachment I. HUD Handbook 4060.1 REV-1 will be modified to incorporate this change. -4- This change requires a modification of our present lender approval data system. Mortgagees approved after this date will receive automatic access to the new expanded "lending areas". Mortgagees approved prior to this letter will automatically receive access to the expanded "lending areas" within 30 days of the date of this Letter Also, in those limited instances where the expanded "lending areas" do not cover the locality where a mortgagee wants to originate loans, extra territory approval will have to be requested. The procedures for requesting branch office and extra territorial approval are set forth in Mortgagee Letter 94-47. 4. Contracting out of certain loan origination functions. The Department recognizes that there are certain loan origination functions that do not materially affect underwriting decisions which may be contracted out by mortgagees without increasing the risk to FHA. We are now modifying our requirements to permit mortgagees to contract out certain loan origination functions. However, the underwriting and customary loan officer functions may not be contracted out. We will hold mortgagees responsible for the quality of loans and compliance with our program requirements. This change does not in any way restrict the division of loan origination functions between an approved Sponsor and its approved Loan Correspondent(s). The types of functions that may be contracted out are: o clerical assistance o preparation of loan documents o mailing out and collecting verification forms o ordering credit reports o Preparing for endorsement and shipping loans to investors o Such other functions as may be approved by the Department -5- The contracting out of such loan origination functions must be with a commercial provider of the types of services being requested, and may not be contracted out to third party loan originators, real estate brokers and other similar entities. An approved mortgagee may, however, own or have an ownership interest in a separate business entity that offers such contract services. The costs of such services may also not be imposed on the borrower in addition to the origination fee. Mortgagees must also assure that they are in compliance with RESPA requirements. This modification will permit mortgagees to establish business practices that are the most cost effective for their operations. HUD Handbook 4060.1 REV-1 will be revised to incorporate this change. 5. Elimination of individual ratings ("report cards") for mortgagees' underwriters. Individual rating sheets, i.e., "report cards", will no longer be sent to the underwriters. We will continue to perform post- endorsement reviews and we will continue to send semi-annual reports to the CEOs/Presidents summarizing the underwriting using the post-endorsement technical review sheets. Since individual loan reports will not be issued, appeals of the ratings shown on the summary reports will not be possible. This change is intended to reflect the Department's policy of holding the lender accountable for the underwriting decision. In the future the report will be modified eliminating individual underwriters names and adding codes for specific deficiencies. 6. Streamlined initial Loan Correspondent application processing. We are streamlining the initial Loan Correspondent approval process. Sponsors that have a net worth of $1 million or more will be permitted to submit a completed FHA mortgagee approval application package for their Loan Correspondents together with a certification that the Loan Correspondent meets FHA approval requirements. In the absence of information to the contrary, we will rely upon the certification provided by the Sponsor for assurance that FHA standards have been met resulting in a faster and more streamlined approval process. Instructions regarding this process are set forth in Attachment 2 to this letter. -6- Changes to the lender approval process and single family program requirements that will be implemented at a future date The following proposed changes in FHA requirements will be implemented at the earliest feasible date. Each of these changes described below require that the Department revise existing regulations and/or develop or modify our present data systems (except for the Quality Control Plan revision). The Department will undertake its best efforts to make the regulatory and data systems changes as rapidly as feasible. You will be advised as these changes become effective. 1. Elimination of mortgagee branch office approval -- granting national approval through a branch registry system. We will implement a process to grant national approval to mortgagees for loan origination authority through a registry of branch offices. Under the new process, mortgagees will simply notify FHA through electronic data transfer when they establish a branch office. FHA will electronically assign the branch office an identification number and transmit the number to the mortgagee within one-to-two days. This will significantly reduce the amount of time for mortgagees to be able to originate FHA loans in new markets, and make it easier for lenders to establish branches. This process will not be available for Nonsupervised Loan Correspondents as they must meet higher net worth standards for each branch office they establish. 2. Establishing uniform requirements for Authorized Agent relationships. We will propose by rulemaking to eliminate the present requirement on the use of Authorized Agents by Nonsupervised and Supervised mortgagees which presently limits such relationships to underserved areas and affiliate relationships as set forth in Handbook 4060.1 REV-1, paragraph 2-27. -7- We will propose to establish uniform requirements that will permit any approved Nonsupervised and Supervised mortgagee to appoint an Authorized Agent(s) for the purpose of originating insured mortgages. This change will help to create a "level playing field" for mortgagees and serve to increase the availability of FHA insured mortgages for homebuyers. It will allow for greater underwriting flexibility between approved mortgagees under a principal and Authorized Agent relationship. 3. Elimination of the compliance report and report on internal controls for Loan correspondents' annual audited financial statements. We will propose by rulemaking to revise our present requirements to reduce the costs of preparing financial statements for Loan Correspondents. Under our present annual recertification process mortgagees are required to submit audited annual financial statements that include a report on certain prescribed compliance tests, and internal controls. These tests increase the costs of preparing financial statements for Loan Correspondents most of whom have limited financial capacity. We will eliminate the compliance and internal controls reports for audited financial statements submitted by Loan Correspondents, as these reports essentially reflect quality control reviews that Sponsors of Loan Correspondents presently perform. This change will also serve to encourage more lenders to participate in the FH programs and increase the availability of mortgage credit for homebuyers. 4. Streamlined Sponsor and Loan Correspondent application processing. We will streamline the present application process by which an approved Sponsor is able to acquire additional Loan Correspondents that have already been approved by FHA. -8- We will implement a process under which the Sponsor will notify FHA through electronic data transfer of each new Loan Correspondent that the Sponsor is adding. We will complete the process electronically reducing it to as little as one day. This will reduce the amount of paperwork involved under the present process, and be less staff intensive for mortgagees and FHA. We will also eliminate the fee for such transactions. 5. Elimination of the requirement that loans must be closed in the name of the Loan Correspondent. We will propose to eliminate the requirement that an insured mortgage be closed in the name of the Loan Correspondent. Under the proposed change, Sponsors and their Loan Correspondents will be permitted the option of closing a loan in either of their names. This will provide for more flexibility in the loan origination process between Sponsors and their Loan Correspondents, and eliminate the additional workload and paperwork required under the present requirement. 6. Elimination of FHA approval of mortgagees' Direct Endorsement underwriters. We will propose by rulemaking to eliminate the present FHA process of individually approving mortgagees' Direct Endorsement underwriters. We will implement a process under which lenders will certify that their underwriters meet FHA standards and permit them to register their underwriters with FHA through electronic data transfer. This change will eliminate the submission of individual underwriter applications and streamline the process for both lenders and FHA. Mortgagees will continue to be held accountable for the underwriting quality of their loans. -9- 7. Modification of Quality Control Plan requirements. We will modify our present Quality Control Plan requirements as set forth in Handbook 4060.1 REV-I, to place greater emphasis on the objectives of risk management rather than specified detailed compliance items. This change will result in streamlined standards that focus on critical quality control functions and provide mortgagees with greater flexibility in establishing specific quality control items in their Quality Control Plan. We believe that the changes discussed above will make substantive improvements in the FHA processes, better serve the needs of homebuyers, and attract new participants to the FHA programs. If you have questions concerning the lender approval issues in this Letter, please contact the Lender Approval and Recertification Division at (202) 708-3976. Questions concerning the DE underwriter issues discussed in this Letter should be directed to the Single Family Development Division at (202) 708-2700. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner Attachments ATTACHMENT I: Approved L ending Areas PRIMARY FIELD ADDITIONAL FIELD ADDITIONAL FIELD ADDITIONAL FIELD OFFICE OFFICE OFFICE OFFICE Albany, NY Buffalo,NY New York City, NY Burlington, VT Albuquerque, NM Lubbock, TX Anchorage, AK * Atlanta, GA Columbia, SC Birmingham, AL Baltimore, MD Washington, DC Wilmington, DE Richmond, VA Charleston, WV Bangor, ME Manchester, NH Burlington, VT Boston, MA Birmingham, AL Atlanta, GA Jackson, MS Nashville, TN Boise, ID Helena, MT Boston, MA Manchester, NH Providence, RI Albany, NY Buffalo, NY Albany, NY Cleveland, OH Burlington, VT Manchester, NH Albany, NY Camden, NJ Newark, NJ Philadelphia, PA Wilmington, DE Caribbean * Casper, WY Denver, CO Charleston, WV Pittsburgh, PA Richmond, VA Cincinnati, OH Baltimore, MD Chicago, IL Springfield, IL Milwaukee, WI Indianapolis,IN Cincinnati, OH Columbus, OH Indianapolis, IN Louisville, KY Cleveland, OH Columbus, OH Buffalo, NY Detroit, Ml Columbia, SC Greensboro, NC Atlanta, GA Columbus, OH Cincinnati, OH Cleveland, OH Pittsburgh, PA Coral Gables, FL Tampa, FL Orlando, FL Dallas, TX Ft. Worth, TX Oklahoma City, OK Shreveport, LA Houston, TX Denver, CO Casper, WY Des Moines, IA Omaha, NE Sioux Falls, SD Detroit, MI Flint, MI Grand Rapids, MI Cleveland, OH Fargo, ND Minneapolis/ Sioux Falls, SD St. Paul, MN Flint, MI Grand Rapids,MIDetroit, MI Fresno, CA Los Angeles, CA San Francisco, CA Sacramento, CA Santa Ana, CA Ft. Worth, TX Dallas, TX Oklahoma City, OK San Antonio, TX Lubbock, TX Grand Rapids,MI Detroit, MI Flint, MI Greensboro,NC Richmond, VA Columbia, SC Knoxville, TN Hartford, CT Providence, RI New York City, NY Newark, NJ Helena, MT Boise, ID Honolulu, HI * Houston, TX San Antonio, TX Dallas, TX Indianapolis, IN Cincinnati, OH Springfield, IL Louisville, KY Jackson, MS New Orleans, LA Shreveport, LA Little Rock, AR Jacksonville, FL Orlando, FL Kansas City, KS St. Louis, MO Omaha, NE Topeka, KS Knoxville, TN Nashville, TN Greensboro, NC Las Vegas, NV Los Angeles, CA Santa Ana, CA Phoenix, AZ Little Rock, AR Memphis, TN Jackson, MS Los Angeles, CA Santa Ana, CA San Diego, CA Fresno, CA Louisville, KY Cincinnati, OH Nashville, TN Lubbock, TX Ft. Worth, TX Albuquerque, NM Manchester, NH Burlington, VT Boston, HA Bangor, ME Memphis, TN Nashville, TN Little Rock, AR Jackson, MS Milwaukee, WI Chicago, IL Springfield, IL Minneapolis/ Fargo, ND Sioux, Falls, SD St. Paul, MN Nashville, TN Knoxville, TN Memphis, TN Louisville, KY New York City, NY Hartford, CT Newark, NJ Albany, NY New Orleans, LA Jackson, MS Shreveport, LA Newark, NJ Camden, NJ New York City, NY Philadelphia, PA Oklahoma City, OK Ft. Worth, TX Dallas, TX Tulsa, OK Omaha, NE Des Moines, IA Kansas City, KS Orlando, FL Jacksonville, FL Tampa, FL Philadelphia, PA Camden, NJ Pittsburgh, PA Wilmington, DE Newark, NJ Phoenix, AZ Tucson, AZ Las Vegas, NV Pittsburgh, PA Philadelphia, PA Columbus, OH Charleston, WV Portland, OR Seattle, WA Providence, RI Boston, HA Hartford, CT Reno, NV Sacramento, CA San Francisco, CA Richmond, VA Washington, DC Greensboro, NC Baltimore, MD Charleston, WV Sacramento, CA San Francisco, CA Reno, NV Fresno, CA Salt Lake City * San Diego, CA Santa Ana, CA Los Angeles, CA San Antonio, TX Houston, TX Dallas, TX San Francisco, CA Sacramento, CA Fresno, CA Santa Ana, CA San Diego, CA Los Angeles, CA Las Vegas, NV Fresno, CA Seattle, WA Portland, OR Spokane, WA Shreveport, LA New Orleans, LA Jackson, MS Sioux Falls, ND Fargo, ND Minn./St. Paul Des Moines, IA Spokane, WA Seattle, WA Springfield, IL Chicago, IL Indianapolis, IN St. Louis, MO Kansas City, KS Springfield, IL Tampa, FL Orlando, FL Coral Gables, FL Tucson, AZ Phoenix, AZ Tulsa, OK Oklahoma City, OK Washington, DC Baltimore, MD Richmond, VA Wilmington, DE Philadelphia, PA Baltimore, MD Camden, NJ *There is no extended lending area for this field office jurisdiction. Attachment 2 SAMPLE COVER LETTER TO BE UTILIZED BY THE SPONSORING MORTGAGEE U.S. Dept. of HUD Lender Approval and Recertification Division 451 Seventh St. SW Room 9146 Washington, DC 20410 To Director, Lender Approval and Recertification Division: Attached is an application for initial HUD/FHA approval for: [Applicant Loan Correspondent] This is to certify that [enter your company name and HUD/FHA Identification Number] currently has an adjusted net worth in accordance with HUD/FHA requirements of at least $1,000,000. I further certify that the attached application and supporting documentation meets all requirements of HUD Handbook 4060.1 REV-1 as updated by Mortgagee Letter 94-47. I certify that all required documentation has been submitted and it is accurate and complete. I certify that [applicant Loan Correspondent] meets all HUD/FHA requirements for a Loan Correspondent type mortgagee as set forth in 24 CFR Section 202.12, 202.15, HUD Handbook 4060.1 REV-1 and Mortgagee Letter 94-47. Signed, Senior Corporate Officer of Sponsoring Mortgagee