81 FR 90373 - Federal Housing Administration (FHA): Direct Endorsement Program Timeframe for Conducting Pre-Endorsement Review

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Federal Register Volume 81, Issue 240 (December 14, 2016)

Through this document FHA advises that it is shifting the timeframe for FHA's review of loans prior to endorsement from pre- closing to post-closing. A lender applying for unconditional Direct Endorsement authority will therefore submit required loan files, required in accordance with HUD regulations, only after closing. After determining that the mortgage is acceptable and meets all FHA requirements, FHA will notify the lender that the loan has been endorsed.

[Federal Register Volume 81, Number 240 (Wednesday, December 14, 2016)]
[Notices]
[Pages 90373-90375]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-29757]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5658-N-02]


Federal Housing Administration (FHA): Direct Endorsement Program 
Timeframe for Conducting Pre-Endorsement Review

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Notice.

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SUMMARY: Through this document FHA advises that it is shifting the 
timeframe for FHA's review of loans prior to endorsement from pre-
closing to post-closing. A lender applying for unconditional Direct 
Endorsement authority will therefore submit required loan files, 
required in accordance with HUD regulations, only after closing. After 
determining that the mortgage is acceptable and meets all FHA 
requirements, FHA will notify the lender that the loan has been 
endorsed.

DATES: Effective Date: January 13, 2017.

FOR FURTHER INFORMATION CONTACT:  Joy Hadley, Director, Office of 
Lender Activities and Program Compliance, Office of Housing, U.S. 
Department of Housing and Urban Development, 490 L'Enfant Plaza East 
SW., Room P3214, Washington, DC 20024-8000; telephone number 202-708-
1515 (this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the toll-free 
Federal Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    FHA grants lenders unconditional Direct Endorsement authority to 
close loans without prior FHA approval in accordance with the terms and 
conditions of HUD's regulations in 24 CFR 203.3. 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 as 
described in 24 CFR 203.3(b)(4). The regulations provide for the review 
of each loan file to be conducted by FHA, and the lender to be notified 
of the acceptability of the mortgage, prior to FHA endorsement of the 
mortgage for insurance. The Direct Endorsement program has been 
designed to give the lender sufficient certainty of FHA endorsement 
requirements to justify the assumption of the responsibilities involved 
in originating and closing mortgage loans without prior FHA review.
    Currently, FHA generally conducts this review of the loan files 
required under 24 CFR 203.3(b)(4) 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 
other requirements for Direct Endorsement approval under 24 CFR 203.3.

II. Solicitation of Comment on Timeframe Pre-Endorsement Review

A. March 2013 Notice Soliciting Comment

    On March 21, 2013, at 78 FR 17303, HUD published in the Federal 
Register a notice that solicited comment from FHA-approved lenders and 
other interested parties on FHA's announcement that it was considering 
shifting the timeframe for FHA's review of loans prior to endorsement 
from pre-closing to post-closing. The notice specifically sought 
feedback 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. The notice also sought feedback 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 could help to ensure that the borrower receives 
the best interest rate available at the lowest possible cost to the 
borrower.
    As provided in the March 21, 2013, notice, HUD submitted that 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. The notice advised that FHA guidance issued in 
accordance with 24 CFR 203.3(b)(2), already requires the lender to 
certify that their underwriter(s) have the qualifications, expertise, 
and experience to underwrite mortgage loans in accordance with FHA 
requirements. The notice provided that given the certification required 
of lenders, the shift in the timeframe for review may in fact result in 
enhanced lender accountability; that is, the lender will place more 
emphasis on ensuring that their underwriting staff is sufficiently 
trained prior to requesting Direct Endorsement authority. The notice 
further provided that properly trained underwriters will help to 
increase the number of loans that are found to be acceptable, resulting 
in an even higher percentage of loan files that meet FHA policies and 
guidelines.
    The March 21, 2013, notice also advised that HUD had analyzed data 
for mortgage loans that were submitted for review during the period 
beginning October 1, 2009 through June 30, 2012, and the data 
demonstrated that 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. The notice further advised that the 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

[[Page 90374]]

of lenders had only one loan rated unacceptable and 10.9 percent of 
lenders had two loans rated unacceptable, and that overall, 87.4 
percent of lenders had two or fewer loans rated unacceptable. The March 
21, 2013, notice provided that when material violations of FHA policies 
and procedures are uncovered during the loan file review, FHA notifies 
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, and as is 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.

B. Public Comment and HUD's Response to the Comment

    In response to HUD's solicitation of comment, HUD received only one 
comment, and the following provides the issues raised by the commenter 
and HUD's responses.
    Comment: The commenter stated that feedback received from FHA 
during the pre-endorsement review is helpful and enables lenders to 
adjust their processes prior to closing loans that may be ineligible 
for insurance. The commenter stated that if the proposal is adopted 
lenders applying for Direct Endorsement authority will be expected to 
close loan transactions with no guarantee that their loans will be 
insured by FHA when they are submitted for post-closing, pre-
endorsement review.
    HUD Response: FHA guidance issued in accordance with 24 CFR 
203.3(b)(2) requires lenders to certify that it has on its permanent 
staff an underwriter(s) that has the qualifications, expertise and 
experience to underwrite mortgage loans in accordance with FHA 
requirements. (See Handbook 4000.1 Section I.B.3). Further, lenders 
must submit loans for review and approval by FHA as described in 24 CFR 
203.3(b)(4), which are processed in accordance with Sec.  203.5 which, 
in turn, requires underwriter due diligence be exercised to the same 
level of care which the lender would exercise in obtaining and 
verifying information for a loan in which the lender would be entirely 
dependent on the property as security to protect its investment.
    On September 14, 2015, FHA's Single Family Housing Policy Handbook 
went into effect and FHA implemented a core component of its goal to 
expand access to mortgage credit. This implementation consolidated and 
superseded hundreds of Mortgagee Letters and Housing Notices, along 
with numerous policy handbooks. Mortgagees and other stakeholders now 
benefit from a single consolidated source and comprehensive set of 
policies that support homeownership for millions of qualified 
individuals and families each year. It also provides mortgagees' with a 
clear and consistent understanding of FHA's requirements during the 
origination, underwriting, closing and endorsement process.
    FHA provides live and online training events throughout the year 
covering multiple topics regarding FHA Single Family Housing policies, 
processes, and technology to assist lenders in complying with HUD/FHA's 
requirements. In addition, FHA has created a series of eight pre-
recorded training webinars covering the policies that mortgagees use 
for origination through FHA insurance endorsement for Title II forward 
mortgages. The modules provide an overview of the policies and 
requirements contained in the Origination through Post-Closing/
Endorsement for Title II Forward Mortgages section of the Single Family 
Housing Policy Handbook 4000.1.
    Comment: Under the proposed rule, lenders would bear considerable 
new financial responsibility. The commenter wrote that bringing lenders 
attention to uninsurable loans only after they closed at considerable 
expense to the lender would discourage some FHA lenders from seeking DE 
authority and/or force them to make loans only to the most credit 
worthy borrowers. The commenter cited the 13 percent of all loans 
reviewed from October 1, 2009 to June 30, 2012 which were not in 
compliance with FHA policies and guidelines and were not eligible for 
endorsement.
    HUD Response: As a part of the post-closing, pre-endorsement 
program, FHA will continue to 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. As is 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.
    FHA requires lenders to certify that it has on its permanent staff 
an underwriter(s) that has the qualifications, expertise and experience 
to underwrite mortgage loans in accordance with FHA requirements. As 
stated in March 21, 2013, notice, FHA continues to believe that given 
the certification required of lenders, the shift in the timeframe for 
review may in fact result in enhanced lender accountability; that is, 
the lender will place appropriate emphasis on ensuring that their 
underwriting staff is sufficiently trained prior to requesting Direct 
Endorsement authority. Properly trained underwriters will help to 
increase the number of loans that are found to be acceptable, resulting 
in an even higher percentage of loan files that meet FHA policies and 
guidelines.

C. Analysis of More Recent Data

    Since HUD issued the March 2013 notice, FHA analyzed a new set of 
data for the period October 1, 2014 through June 30, 2016 and found 
that overall the acceptability of mortgage loans submitted for pre-
closing review continued to improve during this period when compared to 
the October 1, 2009 through June 30, 2012 data analyzed in the March 
21, 2013, notice. Specifically, for mortgage loans that were submitted 
for review during the period beginning October 1, 2014 through June 30, 
2016, the data demonstrated that 94.3 percent of the total cases 
reviewed were found to meet HUD/FHA guidelines and were eligible for 
endorsement; 87.2 percent of the eligible cases were endorsed as of 
July 25, 2016. In addition, of the lenders entering the Direct 
Endorsement review process during the October 1, 2014 through June 30, 
2016 timeframe, 55.5 percent did not receive an unacceptable rating on 
any loan submitted for review, while 33.7 percent of lenders had only 
one loan rated unacceptable and 6.4 percent of lenders had two loans 
rated unacceptable. Overall, 95.6 percent of lenders had two or fewer 
loans rated unacceptable.

III. New Timeframe for FHA's Review of Loans Prior to Endorsement

    After consideration of public comment and further consideration of 
this issue, FHA has determined to move the timeframe for FHA's review 
of loans prior to endorsement from pre-closing to post-closing. FHA's 
Mortgagee Letter which more fully addresses this issue can be found at 
http://portal.hud.gov/hudportal/documents/huddoc?id=16-21ml.pdf.


[[Page 90375]]


    Dated: December 1, 2016.
Genger Charles,
General Deputy Assistant Secretary for Housing.
[FR Doc. 2016-29757 Filed 12-13-16; 8:45 am]
 BILLING CODE 4210-67-P