Magazine article American Banker

FHA's New Loan Defect Taxonomy Is No Panacea for Enforcement Woes

Magazine article American Banker

FHA's New Loan Defect Taxonomy Is No Panacea for Enforcement Woes

Article excerpt

Byline: Brian Collins

The Federal Housing Administration's new loan defect "taxonomy" may give lenders better clarity on the quality assurance reviews of FHA loans, but it's not a shield from possible enforcement action by the Department of Justice and other regulators.

The taxonomy is designed to help lenders identify underwriting issues and reduce errors that could lead to enforcement actions, according to Department of Housing and Urban Development principal deputy secretary Edward Golding.

"This new guidance gives lenders greater insight into how FHA will capture defects and their relative severities," Golding said in a press release."By enhancing our approach, lenders will have more confidence in how they interact with FHA, and we anticipate will be more willing to lend to future homeowners who are ready to own."

The FHA currently uses 99 different codes to describe underwriting faults. Going forward, it will employ just nine defect categories, such as borrower income, loan-to-value/maximum mortgage amount and borrower assets.

However, the new compliance guidance comes with a disclaimer regarding possible enforcement actions by the FHA or Department of Justice.

"This taxonomy is not a universal statement on all compliance monitoring or enforcement efforts by FHA or the federal government and does not establish standards for administrative or civil enforcement action, which are set forth in a separate law," according to an FHA paper issued June 18 that outlines the loan defect taxonomy.

Lenders were hoping the new guidance would provide some relief from DOJ enforcement actions. However, the disclaimer indicates lenders will continue to be "second-guessed" by regulators, according to mortgage consultant Brian Chappelle.

"For lenders who have been through the Department of Justice process, that has to be a serious concern," he said in an interview. …

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