The


Federal
Housing
Administration
(FHA)
this
week
announced
a
proposed
Mortgagee
Letter
(ML)
that
would
add
fraud
and
misrepresentation
to
its
defect
taxonomy
list
for
Title
II
FHA-sponsored
mortgage
financing.

The
defect
taxonomy
includes
a
list
of
attributes
that
FHA
can
use
to
identify
potential
defects
at
the
loan
level
based
on
policy
requirements
from
the


U.S.
Department
of
Housing
and
Urban
Development
(HUD).
The
newly
proposed
ML
adds

fraud
or
misrepresentation
involving
a
third-party

originator
as
a
“tier
1
severity
defect,”
since
lenders
are
responsible
for
the
actions
of
their
sponsored
third-party
originator
(TPO)
partners,
FHA
explained.

Tier
1
means
that
the
lender
“knew
or
should
have
known”
about
the
defect.
Currently,
fraud
or
misrepresentation
for
TPOs
under
Title
II
loans
can
fall
under
either
Tier
1
or
Tier
4,
the
latter
of
which
meaning
that
the
lender
“did
not
know
and
could
not
have
known”
about
the
defect.

“FHA
is
proposing
these
changes
to
better
align
the
Defect
Taxonomy
with
these
existing
requirements
and
mitigate
risk
to
the
Mutual
Mortgage
Insurance
Fund
(MMI
Fund),”
FHA
specified.
“The
provisions
of
this
Draft
ML
apply
to
all
FHA
Title
II
Single
Family
mortgage
programs,”
which
primarily
serve
lower-
and
middle-income
borrowers.

“Based
on
this
update,
FHA
will
seek
life-of-loan
indemnification
from
Mortgagees
when
there
is
evidence
of
fraud
or
material
misrepresentation
involving
a
sponsored
TPO,
regardless
of
whether
FHA
identifies
specific
red
flags
that
should
have
been
questioned
at

underwriting,”
the
draft
ML
reads.

The
draft
ML
is

available
to
view
through
the
FHA’s
Single
Family
Drafting
Table,
an
online
portal
that
allows
stakeholders
to
view
proposed
policies
prior
to
implementation.
Feedback
can
be
provided
to
FHA
through
June
24
using
a
dedicated
response
worksheet
that
is
also

available
online.

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