FHA’S New Lender Approval World

FHA ML 10-20 outlined the provisions for HUD’s reform of the lender approval process. Effective May 20th 2011 most lenders must possess a net worth of at least $1m (20% must be liquid assets). The only exception is for small lenders as defined by the Small Business Administration: o mortgage & non mortgage brokers with $7million or less in gross receipts; o Banks, Savings institutions and credit unions $175 million in assets per the FFIEC call 034 report Small businesses will need only a $500k net worth until May 20, 2013. Once this date hits, all lenders will be subject to a $1m net worth requirement plus an additional net worth of one percent of the total volume in excess of $25 million of FHA SF insured mortgages originated, underwritten, purchased OR serviced during the prior fiscal year, up to a maximum of $2.5m. There will still be a 20% minimum liquid asset requirement. Getting the most attention is FHA’s elimination of the loan correspondent approval process. We have worked with many of our wholesale and CUSO clients to determine the best way to transition into a new world of accountability. We are seeing various approaches and it all hinges on the client base and system controls. Some wholesalers are gearing up to accept FHA loans from the brokers that have never taken an FHA application (at least legitimately). This is going to require substantial support services and training before the broker is permitted to take any applications. In addition, both companies need to agree on the quality control measures. The wholesalers need to consider increasing their QC audit percentages for each of the new brokers. Contract provisions have been put in place at some shops that push the responsibility on the brokers but ultimately we all know FHA will hold the wholesaler responsible. The CUSO’s are seeing the opportunities. Even though the number of credit unions is declining each day, the number of credit union members is still over 9 million strong! (information courtesy of Alan Bahr, CMG Mortgage Insurance) That is a lot of potential FHA customers! The CUSO’s are working hard to provide the origination platforms and training that will open the doors for more credit unions to participate in the program. There is a delicate balance here between the work performed, compensation, DBA’s and system issues.