New FHA Total Scorecard Guide Summary

What do I need to know about the new FHA Total Scorecard Guide? Download Copy Of The FHA Total Scorecard Guide 2011 As you may know FHA released a new FHA Total Scorecard Guide (TSG) with some pretty significant changes. Our team sat down and scrubbed the new TSG to identify and relay the changes to you on our blog. The details will most certainly be incorporated into our FHA Practical Guide and the rest of our FHA training programs with additional angles of analysis. We found more than a dozen important issues and reminders (not including the many minor text changes). Here are the important changes and updates we spotted: New FHA Total Scorecard Guide Summary Of Changes 1) System Overrides: The System Overrides requirements have been expanded to include a critical new “Review Rule”. These rules require the loan application to be downgraded to a ‘refer’. New on the list is ‘excessive qualifying ratios’. Many lenders have established a maximum DTI regardless of the AUS decision but others still work with the old adage that if the system issued an approve/eligible it must be OK. This is risky business and now the TSG clearly gives FHA the upper hand in determining what is considered a high DTI based on the other factors in the file and what should have been downgraded to a manual underwrite. (page 13) 2) The guide layout is completely changed in that it only states the documentation requirements for approve/accept loans. This layout change is good because now it is very clear that a refer loan will always follow the documentation requirements of the 4155.1. 3) There are two underwriting issues that occur as a result of publishing the TSG with only ‘approve/accept’ documentation requirements:

a) Alimony and child support: Previously the TSG allowed alimony and child support income to be verified using only a 3 month history when a loan received a ‘refer’. The elimination of this documentation exception from the TSG clearly indicates that refer loans require a full 12 months of verification before using alimony or child support income. Until now, most underwriters were requiring the 12 month history for ‘refer’ loans anyway but the guideline allowing 3 months gave them some latitude to make exceptions. The change means underwriters should not be making any exceptions for shorter or spotty payment histories from the ex spouse.

b) Judgments: The TSG remains the same and states “Obtain evidence of payoff for any outstanding judgments shown on the credit report” for approve/accept loans. There is still no reference in the TSG to the exception noted in the 4155.1 that allows the underwriter to accept an agreement with the creditor for regular payments and verify the borrower has made the payments on time. In my opinion, the underwriter still has the ability to choose to manually underwrite the loan and use this exception.

However with the new TSG format it appears clear that you are either using an automated decision and following all of its rules or using manual underwriting guidelines. If the borrower has an agreement and is not paying off the judgment then the loan is considered manual underwriting. This is a credit factor AUS can’t assess and accepting a payment arrangement is not what the ‘approve/accept’ is dictating will happen.

If the loan has to fall into a full manual underwriting mode the representations and warranties disappear and DTI and other issues change. I have not confirmed this with anyone directly at FHA yet but my experience in audits sees that underwriters should be very cautious and not layer other risks when considering accepting a court ordered judgment with a payment arrangement on ‘approve/accept’ loans.

4) Energy Efficient Mortgages: The new TSG adds specific certifications the DE underwriter must make on the HUD 29900 LT.   The underwriter should note on the LT something along this line: I have reviewed and certify the following items: •   The calculations associated with energy efficient improvements are correct •   The acceptability of the improvements have been declared energy efficient •   This transaction meets all FHA EEM program requirements The previous TSG referenced this in part but did not specifically list all three bullet points that must be covered by the DE underwriter on the LT. (pg.8-9) 5)  Misc. Documents:  The new TSG adds a few documentation requirements that are probably already in place at most companies but worth   pointing out: •   Commission earnings require IRS verification in all cases •   IRS transcripts are to be reconciled with the tax returns prior to APPROVAL •   If the borrower does not hold the deposit account solely, all non-borrower parties on the account must provide a written statement that the  borrower has full access and use of the funds 6)   Disputed Accounts/Collection and Public Record:   The old TSG states:   “If the credit report reveals that the borrower is disputing any credit accounts or public records, the application must be referred to a DE underwriter for review.”   The new TSG incorporates an April 28th 2011 HOC reference guide email from Jerry Mayer that added guidance regarding disputing credit accounts.  It is very clear that a disputed account is cause for a manual downgrade unless ANY of the following circumstances apply (meaning the lender has to confirm at least one of these requirements can be met): •   The disputed account has a zero balance •   The disputed account is marked as “paid in full” or “resolved” •   The disputed account is BOTH less than $500 AND more than 24 months old Keep in mind that FHA does not state a DE underwriter has to be the one to clear this requirement. (pg.15) 7)  Borrowers Employed by Family Members:  This topic has its own section now to remind lenders to check the 4155.1 for requirements and that AUS will not factor in the risks associated with this type of employment. (pg.17) 8)  Tolerance Requirements:   The tolerance requirements permitted per ML 05-15 have been added. (pg.10) 9)  Reminders:   There are several items in the TSG we want to remind you of: • An occupant borrower that has no credit score and is supported by a non occupant borrower with a credit score must be manually underwritten. • Cash out refinances for self employed borrowers require business tax returns even with an approve/eligible • A gift can be used as reserves • Consumer credit counseling is acceptable for approve/accept loans and requires no additional documentation The items listed here are being incorporated into our FHA Practical Guide and are an example of the added organization and detail you get with the guide when compared to the 4155.1 or other reference publications. Our FHA and VA Practical Guides are available in book format from the MU website and on line through Allregs. If you have found something unclear in this write up or in the TSG please send me an email! We are always researching and comparing FHA policies to help you determine what is the right risk and the right process for your organization.