Shifting Timeframe for DE Test Cases

The Department of Housing and Urban Development (HUD) is giving consideration to revising the pre-endorsement review of loans originated by Direct Endorsement lenders from a time that is prior to the lender closing each loan and before FHA's endorsement of the mortgage for insurance to a period after the loan has been closed.

Specifically, HUD is soliciting comments on (1) the proposed shift in the timeframe for conducting its pre-endorsement review of the loans originated by prospective Direct Endorsement lenders from prior to the lender closing each loan to before FHA's endorsement of the mortgage for insurance, and (2) on its other proposals that, HUD claims, would reduce the processing time and facilitate loan closing. 

HUD requests comments from the public by April 22, 2013.

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IN THIS ARTICLE
Status Quo
Proposal
HUD's View
Statistics
Resolving Material Violations

Satisfying Pre-endorsement
Library

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Status Quo

The Federal Housing Administration (FHA) currently grants lenders unconditional Direct Endorsement authority to close loans without prior FHA approval in accordance with HUD guidelines. Under the Direct Endorsement program, the lender underwrites and closes the mortgage loan without prior FHA review or approval.

Before being granted unconditional Direct Endorsement authority, the lender must submit a specified number of loan files for review and approval by FHA. The regulations provide for the review of each loan file to be conducted by FHA itself, and the lender to be notified of the acceptability of the mortgage, prior to FHA endorsement of the mortgage for insurance.

This procedure is followed, because FHA wants to ensure that the lender will submit loan files for FHA endorsement that are consistent with FHA's endorsement requirements. Therefore, this method of screening candidates for the unconditional Direct Endorsement program is accomplished to justify the lender's assumption of the responsibilities involved in originating and closing mortgage loans without prior FHA review.

At the present time, FHA generally conducts this review of the loan files prior to closing and, if acceptable, issues a commitment to the lender at that time. After closing, the mortgage is then submitted to FHA for endorsement for insurance. While this is the general procedure utilized by lenders seeking unconditional Direct Endorsement approval, FHA currently allows lenders to close the loans before submission for review. 

A lender is eligible for unconditional Direct Endorsement authority once FHA has reviewed and found acceptable the requisite number of loan files, at either pre-closing or pre-endorsement review, provided that the lender has met the all other requirements for unconditional Direct Endorsement approval.

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Proposal

FHA's proposal would shift the timeframe for FHA's review of loans prior to endorsement from pre-closing to post-closing. 

Operationally, the lender applying for unconditional Direct Endorsement authority would submit FHA loan files only after closing. After determining that the mortgage is acceptable and meets all FHA requirements, FHA would then notify the lender that the loan has been endorsed.

The feedback that HUD is seeking involves commenting on whether the proposed change in review time would benefit the lender by reducing the amount of time between loan origination and closing, and would result in operational savings of time and costs associated with approval timeframes, which FHA recognizes can be lengthy at times. Feedback is also sought on whether the proposed change in review time would benefit the borrower; that is, would the borrower be able to take advantage of shorter interest rate lock-in periods, which, according to HUD, could help to ensure that the borrower receives the best interest rate available at the lowest possible cost to the borrower.

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HUD's View

From the perspective of FHA, the proposed change in review time "should not alter the current quality of review of the loan file or the quality of the Direct Endorsement lender approval process."

FHA believes that its guidelines already require the lender to certify that its underwriter has the qualifications, expertise, and experience to underwrite mortgage loans in accordance with FHA requirements. In addition, FHA further maintains that, given the certification required of lenders, the shift in the timeframe for review may in fact result in enhanced lender accountability (i.e., the lender will place more emphasis on ensuring that its underwriter is sufficiently trained prior to requesting Direct Endorsement authority). 

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Statistics

FHA analyzed data for mortgage loans that were submitted for review during the period beginning October 1, 2009 through June 30, 2012. Based on the data collected, 86.7 percent of all loans reviewed during this time period, and 90.5 percent of all loans reviewed year to date in FY 2012, were found to meet FHA policies and guidelines and were subsequently endorsed. 

Furthermore, of those lenders entering the Direct Endorsement review process during the October 1, 2009 through June 30, 2012 timeframe, 48.6 percent did not receive an unacceptable rating on any loan submitted for review, while 28 percent of lenders had only one loan rated unacceptable and 10.9 percent of lenders had two loans rated unacceptable. 

Overall, 87.4 percent of lenders had two or fewer loans rated unacceptable. 

Currently, the percentage of lenders with two or fewer loans rated unacceptable has increased to 93.3 percent and is expected to continue to improve.

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Resolving Material Violations

When material violations of FHA policies and procedures are uncovered during the loan file review, the proposal would provide that FHA would notify the lender that a preliminary assessment, based on file documentation, indicates that the loan contains material findings, such that FHA is exposed to an unacceptable level of risk. FHA will provide the lender with an opportunity to present missing information or documentation to address the review findings and permit subsequent submission for endorsement. 

Similar to the current practice, if the lender is unable to adequately respond (or fails to respond) to the material findings, FHA will notify the lender that the loan is not eligible for endorsement.

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Satisfying Pre-endorsement

When FHA has reviewed and found acceptable the requisite number of loan files, the lender will have satisfied the pre-endorsement review requirements necessary to be approved for unconditional Direct Endorsement authority.

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Library

Department of Housing and Urban Development
Federal Housing Administration (FHA)

Direct Endorsement Program Solicitation of Comment
on Timeframe for Conducting Pre-Endorsement Review

Request for Comments

Federal Register: Volume 78, Number 55 (3/21/13)

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