Limiting Approval to Mortgagees.

In the November 30, 2009, rule, HUD proposed to limit FHA’s approval only to mortgagees that underwrite loans and can perform any origination and/or servicing function and can also own FHA-insured loans.

Loan correspondents, in contrast to mortgagees, perform any origination function except underwriting, and cannot service or own FHA insured mortgage loans. HUD did not propose to alter the approval process of investing mortgagees and governmental institutions, as addressed in 24 CFR 202.9 and 202.10.

In proposing to limit FHA’s approval to the mortgagee charged with underwriting, servicing, or

owning a loan, HUD advised that it is the mortgage lender with the greatest control over the mortgage loan that should be subject to FHA’s rigorous lender approval and oversight processes, and bear the greatest degree of responsibility and liability for the mortgage loan obtained by the mortgage borrower and insured by FHA.

In the November 30, 2009, proposed rule, HUD advised that loan correspondents would continue to have the opportunity to participate in the origination of FHA mortgage loans as third-party originators (TPOs) through association with an FHA-approved mortgagee, as is currently the arrangement, but TPOs would no longer be subject to the FHA lender approval process.

HUD also advised that since HUD would no longer be approving loan correspondents, and in acknowledgement and anticipation that loan correspondents would continue to be involved in the origination of FHAinsured mortgage loans through sponsorship, FHA-approved mortgagees would assume full responsibility to ensure that their sponsored TPOs adhere to FHA origination and processing requirements.

Responsibility for actions of TPOs is not a new responsibility for FHA-approved mortgagees.

HUD’s current regulations in 24 CFR 202.8(b)(7) provide that: “Each sponsor shall be responsible to the Secretary for the actions of its loan correspondent lenders or mortgagees in originating loans or mortgages, unless applicable law or regulation requires specific knowledge on the part of the party to be held responsible.”

The present regulations in 24 CFR 202.8(b)(6) provide that: “Each sponsor must obtain approval of its loan correspondent lenders or mortgagees from the Secretary.” It is the obligation to obtain approval of loan correspondents/TPOs from FHA that, under this final rule, mortgagees will no longer have to meet. However, in being relieved of the responsibility to obtain prior approval from FHA of the TPOs that it would like to sponsor, the mortgagee assumes responsibility that sponsored TPOs meet FHA’s requirements regarding loan origination and processing as found in relevant statutes, regulations, HUD handbooks, and mortgagee letters.

Failure of the TPO to comply with these requirements may result in FHA seeking sanctions against the sponsoring FHA-approved mortgagee.

The proposed rule provided that, upon promulgation of the final rule, entities that are already approved by FHA as loan correspondents would not be permitted to renew their loan correspondent status or automatically convert their approval to mortgagee, and only FHA-approved mortgagees would be allowed to request FHA case numbers. However, a loan correspondent would be eligible to apply to FHA to obtain approval as a mortgagee.