FHA divulges more about its view of servicing errors, cures

FHA divulges more about its view of servicing errors, cures

The Federal Housing Administration is providing more detailed and official guidance on how it will react to servicing defects in loans and what actions mortgage companies can take in response.

The latest update to the previously drafted servicing defect taxonomy sharpens distinctions between servicing and related underwriting loan reviews, and provides more detail about severity tiers, remedies and indemnification.

The Department of Housing and Urban Development has codified this guidance in a mortgagee letter, marking the first time the FHA has published detail on the method it uses to identify servicing defects outside of a draft-only process.

The new guidance addresses a “transparency gap” for FHA, the administration said in an information bulletin issued this week.

Notable changes in the latest update include one specifying the parties considered responsible for top-tier fraud or material representation issues on a “knew or should have known” basis include a third-party originator or a subservicer.

The taxonomy also puts underwriting reviews in nine categories covering the process starting at origination and continuing through to closing, including FHA insurance endorsement. Servicing reviews have six categories covering subsequent loan stages.

Those underwriting and servicing distinctions additionally have been extended to one-, five- and life-of-loan indemnification categories in the taxonomy. Mortgagees indemnify when all other options to correct an error are exhausted.

Examples of issues categorized as underwriting findings in defect categories include those implications for FHA insurance eligibility, whereas those in the servicing category are more related to financial remediation or missing data and documents.

Updates to potential responses in defect findings include new passages stressing the importance of demonstrable financial remediation when borrowers have charges or escrow issues.

Mortgage companies can attempt to rebut any severity determination in a loan review with supporting information based on information pre-funding information FHA had.

The latest version of the servicing taxonomy and its publication outside of draft form makes some progress toward giving the industry a better sense of how to manage its defect risk. But more could be done, according to the Mortgage Bankers Association.

The association said in a statement that it “appreciates FHA’s efforts – through two rounds of the drafting table – to craft a taxonomy that provides greater clarity and predictability to loan level reviews.

“While some of these updates may fall short of our August 2024 recommendations, including our request to create objective standards to identify material defects, we recognize that servicing is a complicated process with evolving risks,” the group added.

Those evolving risks, which can span up to 30 years for a typical mortgage, make it challenging for the FHA to provide definitive guidance, the MBA noted. The association suggested the FHA take a flexible approach to the guidance.

“We look forward to continuing the interactive process to improve the taxonomy,” the group said.

The servicing defect taxonomy only applies to loan-level reviews done by divisions of the single-family housing office handling quality assurance and processing or underwriting, not those by HUD’s national servicing center, budget office or Ginnie Mae.

It can be found in the searchable FHA single-family policy library as posted on ICE Mortgage Technology’s AllRegs platform, or in more static form on the administration’s website.

FHA also has a longstanding defect taxonomy for originators it updated last year.

Although there was some initial skepticism of the origination defect taxonomy’s limits when it was introduced in 2015, as it has evolved over time, the industry has generally found it helpful.

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