June 2015, Issue 06
HUD/FHA's Origination Through Post-Closing/Endorsement Handbook (4000.1)
Major Policy & Procedural Changes -
Effective on September 14, 2015
PART THREE - Quality Control, Oversight & Compliance and 203(k) Rehab Loan Program & Consultant Requirements
The past two LendingLogics' Newsletters have focused on the major credit and appraisal policy & procedural changes being proposed by HUD/FHA in their draft "Origination Through Post-Closing/Endorsement" Handbook (4000.1). A revised targeted implementation date of September 14, 2015 (for FHA Case Number Assignments on and after that date) has been established by HUD as the effective date for these policies. The focus of this Newsletter will be to outline the more substantive changes being proposed for lenders' Quality Control, Oversight & Compliance operations, as well as the new Section 203(k) Rehab Loan Program & Consultant Requirements being implemented.
Please note that this is not an all-encompassing list:
Quality Control, Oversight and Compliance
It is stated that Mortgagees must select loans for post-closing reviews on a monthly basis with the selection comprising loans closed in the prior month. Mortgages that are selected must be reviewed within 60 days from the end of the prior one-month period.
Previously, HUD's requirement for the processing of post-closing reviews was that the review of a specific loan transaction should be completed within 90 days of closing (with review findings being reported within one month of completion of the initial report) and that, depending on a mortgagee's production volume, reviews could be performed weekly, monthly or quarterly.
Loan transactions that are selected for pre-closing review must be reviewed after the Mortgage is approved by an FHA Direct Endorsement (DE) underwriter, and prior to closing.
Previously, HUD only recommended that lenders process pre-closing reviews and there were no requirements as to the timing in which these reviews had to be processed.
The Mortgagee's required FHA QC sample size must comply with the following balance of pre and post-closing reviews: Pre-Closing Reviews - 10% or less of the total sample and Post-Closing Reviews - 90% or more of the total sample. Mortgagees that close nine or fewer loans during the prior one-month period must select at least one loan for pre-closing review.
Previously, HUD only recommended that lenders conduct pre-closing reviews to evaluate the quality of their processing and underwriting.
As part of a pre and post-closing review, HUD has outlined a total of 22 areas that must be addressed as part of a post-closing review and 17 areas as part of a pre-closing review.
Previously, HUD had no minimum requirements for the processing of pre-closing reviews as these reviews were only recommended.
Mortgagees must re-verify, in writing or electronically if available, mortgage payments or rental payments made by the borrower(s) as part of a post-closing review.
Previously, the re-verification of a borrower's mortgage or rental payments was only a recommendation and not mandated.
Mortgagees must perform targeted field reviews on 10% of the Mortgages selected for the monthly post-closing QC sample, as well as on all Early Payment Defaults (EPDs).
Previously, lenders were expected to perform field reviews on 10% of the entire QC sample - which includes EPDs.
Mortgagees must verify that a "Fair Housing Poster" is prominently displayed in the Mortgagee's home office and any branch offices that deal with borrowers and the general public. However, there is no formal site review of a mortgagee's offices (including nontraditional branch and direct lending offices) required by HUD.
Previously, HUD required lenders to conduct annual site visits to branch offices with certain higher risk criteria and other branch offices at an appropriate frequency (as determined & documented by the lender).
Section 203(k) Rehab Loan Program & Consultant Requirements
There are two types of 203(k) rehabilitation mortgages: Standard 203(k) and Limited 203(k).
Previously, the Limited 203(k) program was referenced as the Streamlined 203(k) program.
For mixed-use properties, a total of 51% of the Gross Building Area (GBA) must be for residential use and any commercial use will not affect the health & safety of the occupants.
Previously, for 203(k) loan transactions two story properties could have up to 49% commercial space but three story buildings could only have 33.3% commercial space and one and four story dwellings could only have 25% commercial use.
The Mortgagee must obtain a Work Plan from the Borrower detailing all of the proposed repairs or improvements. The Borrower may develop the Work Plan themselves or engage an outside party - including a Sec. 203(k) Consultant. However, a Sec. 203(k) Consultant fee may not be charged under the Limited 203(k) program.
Previously, a Sec. 203(k) Consultant could not be involved with a Limited (or Streamlined) 203(k) loan transaction.
An As-Is Appraisal is required in cases involving Property Flipping and in refinance transactions in which the property was acquired by the Borrower within 12 months of the FHA case number assignment date. Also, in refinance transactions, in which the property was acquired by the Borrower more than 12 months from the FHA case number assignment date and the existing debt plus financeable repairs, fees & reserves does not exceed the After Improved Value, an As-Is Appraisal may be obtained by the lender.
Previously, an As-Is Appraisal was not typically required on a Sec. 203(k) purchase and/or refinance transaction as the lender could utilize the sales price (on a purchase transaction) or the existing indebtedness (on a refinance transaction) in calculating the maximum allowable mortgage amount.
Section 203(k) Maximum Mortgage Worksheets have been created for use by HUD based on the type of loan transaction being processed (limited 203(k) purchase, standard 203(k) purchase, standard refinance with property acquired less than 12 months, etc.)
Previously, HUD required lenders to utilize the HUD Form 9-2700 for calculating the maximum mortgage amount on all 203(k) transactions.
The maximum CLTV for secondary financing provided by private individuals and other organizations is 110% of the After Improved Value. Also, an updated MIP chart is provided along with instructions as to how to calculate the correct LTV.
Previously, secondary financing provided by private individuals and other organizations could not exceed the applicable LTV limit and there was much confusion as to how to calculate the correct LTV and corresponding required MIP.
There is a revised Rehabilitation (Self-Help) Loan Agreement Form that has been created for use by HUD when a lender approves a Borrower to act as a General Contractor or doing their own work.
Previously, the older version of the Rehabilitation (Self-Help) Loan Agreement was Attachment #3 of Mortgagee Letter 2000-25.
The procedures for the establishment and management of the Rehabilitation Escrow Account have been significantly enhanced with very detailed accounting system criteria established. Also, it is stated that the Mortgagee must release funds within five (5) business days after receipt of a properly executed draw request and title update when necessary.
Previously, specific accounting system criteria for the handling of Rehabilitation Escrow Account funds was not established. Also, lenders were required to release monies from the Rehab Escrow Account within 24 to 48 hours after receipt of a properly executed draw request (refer to HUD HB 4240.4 REV-2, para. 5.2.C.).
Under the Limited 203(k) program, it is stated that, when releasing funds from the Rehab Escrow Account, the Mortgagee may issue checks solely to the contractor, or issue checks to the Borrower and the contractor as co-payees.
Previously, under the Streamlined 203(k) program the lender could only issue checks directly to the contractor.
In the "Overview" portion of the 203(k) Consultant Requirements section of the 4000.1 Handbook, it is stated that an FHA-approved 203(k) Consultant is required for all Standard 203(k) mortgages and "may be used for Limited 203(k) mortgages". However, in the 4000.1 Handbook it is indicated that any Section 203(k) Consultant fee may not be financed under the Limited 203(k) program.
Previously, under the Streamlined 203(k) program the use of a 203(k) Consultant was prohibited.
The maximum 203(k) Consultant fees (for preparation of the Work Write-Up and review of architectural exhibits) reflected in the 4000.1 Handbook are identical to those cited in Mortgagee Letter 1995-40. Also, it is indicated that the 203(k) Consultant may charge $100 per draw request.
Previously, HUD established maximum 203(k) Consultant fees in 1995 and these fees remain unchanged 20 years later (a fact that is not well received by Consultants). However, in recent years Consultants were permitted by the HOCs to charge draw inspection fees that are deemed reasonable & customary since compliance inspection fees had been established by HUD field offices and, in 1996, all work from these field offices were transferred to the four HOCs. The $100 maximum draw request fee will conflict with current practices.
As noted above, the proposed changes highlighted in this Newsletter are not an all encompassing listing of all of the policy and procedural changes being implemented by HUD in September 2015. It is highly recommended that all of those entities that are currently involved with FHA financing access the www.hud.gov website & type in "4000.1 Handbook" in the Search box. HUD/FHA has now made this draft Handbook available on-line via a link on this webpage to the AllRegs online electronic policy platform free of charge.
Gerry Glavey, SVP - Chief Credit Officer, LoanLogics
Mr. Glavey was the former Director of the Processing &Underwriting Division in the Philadelphia HOC for an 11 year period (2000 thru 2011) and has a total of 37 years' experience with HUD/FHA.
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