FHA Clarifies Rules to Help Banks Issue More Loans

The number of traditional banks that participate in the Federal Housing Administration’s single-family mortgage insurance program has declined since the housing crisis. Banks have contributed to just 13% of the FHA’s origination volume, down from 44% in 2010, according to a recent report in Housing Wire. Banks have feared strict penalties and that even a minor error could expose them to fines.

To drive more bank originations, the agency says it’s clarifying lender certification requirements to open up more competition and financing choices for borrowers, particularly first-time and minority home buyers.

On Thursday, the FHA released proposed rules seeking to clarify its loan-level and annual lender-level certifications on compliance documents from lenders, which it hoped would ease some banks’ compliance concerns. Among the proposed changes, the FHA clarified what constitutes a defective loan and how problems can be remedied.

“It has become clear that our lending partners are seeking clarity and greater certainty when documenting compliance with FHA requirements,” says Brian Montgomery, acting deputy secretary of the U.S. Department of Housing & Urban Development and FHA commissioner. “We are proposing a new, more transparent set of requirements that will preserve our enforcement authority. We anticipate that this will encourage more lender participation in FHA business, thus increasing competition in the market and resulting in greater choices for borrowers.”

“Successfully addressing these issues will give lenders more confidence in participating in the FHA program and enable participating lenders to better serve homebuyers seeking an FHA loan,” Ed DeMarco, president of the Housing Policy Council, told HousingWire.

Before the rules are finalized, the FHA is accepting public comment on the proposed changes over the next 30 days.