Federal Housing Administration: Continuation of FHA Reform; Strengthening Risk Management Through Responsible FHA-Approved Lenders, 20718-20735 [2010-8837]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 75, Number 75 (Tuesday, April 20, 2010)]
[Rules and Regulations]
[Pages 20718-20735]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-8837]



[[Page 20717]]

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Part III





Department of Housing and Urban Development





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24 CFR Part 202



Federal Housing Administration: Continuation of FHA Reform; 
Strengthening Risk Management Through Responsible FHA-Approved Lenders; 
Final Rule

Federal Register / Vol. 75, No. 75 / Tuesday, April 20, 2010 / Rules 
and Regulations

[[Page 20718]]


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Department of Housing AND Urban Development

24 CFR Part 202

[Docket No. FR 5356-F-02]
RIN 2502-AI81


Federal Housing Administration: Continuation of FHA Reform; 
Strengthening Risk Management Through Responsible FHA-Approved Lenders

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Final rule with request for comments.

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SUMMARY: This final rule adopts changes pertaining to the approval of 
mortgage lenders by the Federal Housing Administration (FHA) that are 
designed to strengthen FHA by improving its management of risk. This 
final rule increases the net worth requirement for FHA-approved 
mortgagees. The increase, the first since 1993, is adopted to ensure 
that FHA-approved mortgagees are sufficiently capitalized for the 
financial transactions occurring, and concomitant risks present, in 
today's economy. This final rule also provides for elimination of the 
FHA approval process for loan correspondents. Loan correspondents will 
no longer be approved participants in FHA programs. Loan 
correspondents, however, will continue to have the opportunity to 
participate in FHA programs as third-party originators (TPOs) through 
sponsorship by FHA-approved mortgagees, as is currently the case, or 
through application to be approved as an FHA-approved mortgagee. In 
eliminating FHA's approval of loan correspondents, FHA-approved 
mortgagees assume full responsibility to ensure that a sponsored loan 
correspondent adheres to FHA's loan origination and processing 
requirements. Finally, this final rule updates FHA's regulations to 
incorporate criteria specified in the Helping Families Save Their Homes 
Act of 2009 (HFSH Act) designed to ensure that only entities of 
integrity are involved in the origination of FHA-insured loans.
    HUD also takes the opportunity afforded by this final rule to 
solicit comment on whether to adopt additional net worth requirements 
for FHA-approved mortgagees that originate multifamily mortgages of $25 
million or more.

DATES: Effective Date: May 20, 2010.
    Comment Due Date: As provided in section V. of the preamble, HUD is 
soliciting comment on whether to adopt additional net worth 
requirements for FHA-approved mortgagees that originate multifamily 
mortgages of $25 million or more. Comments on this issue are due on or 
before May 20, 2010. This is the only issue for which HUD solicits 
comment.

ADDRESSES: Interested persons are invited to submit comments in 
response to issue identified in section V of the preamble to the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 
20410-0500. Communications must refer to the above docket number and 
title. There are two methods for submitting public comments. All 
submissions must refer to the above docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note:  To receive consideration as public comments, comments 
must be submitted through one of the two methods specified above. 
Again, all submissions must refer to the docket number and title of 
the rule.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an appointment to review the public comments must be 
scheduled in advance by calling the Regulations Division at 202-708-
3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number via TTY by calling the 
Federal Information Relay Service at 800-877-8339. Copies of all 
comments submitted are available for inspection and downloading at 
www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Office of Lender Activities and 
Program Compliance, Department of Housing and Urban Development, 451 
7th Street, SW., Washington, DC 20410-8000; telephone number 202-708-
1515 (this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background--The Proposed Rule

    In September 2009, FHA announced plans to implement a set of policy 
changes designed to enhance FHA's risk management functions. The 
announcement preceded completion of an independent actuarial study to 
be submitted to Congress and which was expected to show FHA's capital 
reserve ratio dropping below the congressionally mandated threshold of 
2 percent.\1\ The changes announced in September 2009 were prompted by 
recognition of the need to put in place measures that would immediately 
commence strengthening FHA's reserves and, for the long term, better 
manage risk. The changes that FHA announced in September 2009 included 
the policy changes submitted for public comment in HUD's proposed rule 
published in the Federal Register on November 30, 2009 (74 FR 62521).
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    \1\ HUD released its independent actuarial study on November 13, 
2009. The study reported that FHA sustained significant losses from 
loans insured prior to 2009, and that FHA's capital reserve ratio 
had fallen below the congressionally mandated level of 2 percent. 
The capital reserve ratio generally reflects the reserves available 
(after paying expected claims and expenses) as a percentage of the 
current portfolio, to address unexpected losses. The report can be 
found at: https://www.hud.gov/offices/hsg/fhafy09annualmanagementreport.pdf.
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    HUD proposed the following policy changes in its November 30, 2009, 
proposed rule:
    1. Increasing the Net Worth Requirements for FHA-Approved 
Mortgagees. HUD proposed to increase the net worth requirements for 
current FHA-approved mortgagees, including investing mortgagees, and 
applicants seeking FHA approval as mortgagees from $250,000 to $2.5 
million over a period of 3 years. The proposed rule provided that 
within one year of the

[[Page 20719]]

effective date of the final rule, which would follow the November 30, 
2009, proposed rule, supervised and nonsupervised mortgagees and 
investing mortgagees would be required to have a minimum net worth of 
$1 million, of which at least 20 percent must be liquid assets 
consisting of cash or its equivalent acceptable to the Secretary.\2\ 
Mortgagees would be required to comply with the minimum net worth 
requirement of $2.5 million within 3 years of the effective date of the 
final rule, with at least 20 percent of such net worth consisting of 
liquid assets.
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    \2\ Supervised mortgagees are financial institutions that are 
members of the Federal Reserve System, and financial institutions 
whose accounts are insured by the Federal Deposit Insurance 
Corporation (FDIC) or the National Credit Union Administration 
(NCUA). Examples of supervised mortgagees are banks, savings 
associations, and credit unions. Nonsupervised mortgagees are non-
depository financial entities that have as their principal activity 
the lending or investment of funds in real estate mortgages. 
Investing mortgagees are organizations, including charitable or not-
for-profit institutions or pension funds, which are not approved as 
another type of institution and that invest funds under their own 
control. (See definitions of these terms at 24 CFR 202.6(a), 
202.7(a), and 202.9(a), respectively.)
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    In proposing to increase the net worth requirements of approved 
mortgagees, the November 30, 2009, proposed rule noted that the net 
worth requirements of FHA-approved mortgagees had not been increased 
since 1993. HUD advised that the increases were not only necessary 
adjustments for inflation, but would help ensure that FHA-approved 
mortgage lenders, including investing mortgagees, are sufficiently 
capitalized to meet the potential needs associated with the financial 
services they provide.
    2. 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 FHA-insured 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.
    3. Ineligibility to Participate in Origination of FHA-Insured 
Loans. The November 30, 2009, rule proposed to codify criteria 
specified in section 203 of the HFSH Act that precludes any lending 
entity not approved or authorized by the Secretary from participating 
in FHA programs, and also prohibits participation by an entity if the 
entity is currently: Suspended, debarred, or under limited denial of 
participation; under indictment for, or has been convicted of, an 
offense that reflects adversely upon the applicant's integrity, 
competence, or fitness to meet the responsibilities of an approved 
mortgagee; subject to unresolved findings of a HUD investigation, or 
engaged in business practices that do not conform to generally accepted 
practices of prudent mortgagees or that demonstrate irresponsibility; 
convicted of, or has pled guilty or nolo contendere to, a felony 
related to participation in the real estate or mortgage loan industry; 
in violation of the Secure and Fair Enforcement (SAFE) Mortgage 
Licensing Act (Title V of Division A of Public Law 110-289, approved 
July 30, 2008) (SAFE Act); or in violation of any other requirement 
established by the Secretary.
    Implementation of the criteria in section 203 of the HFSH Act did 
not require rulemaking, and the November 30, 2009, proposed rule noted 
that the statutory restrictions were in effect upon enactment of the 
HFSH Act.\3\
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    \3\ These criteria were announced by the Mortgagee Letter 
entitled ``Strengthening Counterparty Risk Management,'' issued 
September 18, 2009, and can be found as document number 09-31 at 
https://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm.
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    4. Use of HUD Registered Business Name and Business Changes. The 
November 30, 2009, rule also proposed to codify the statutory 
requirement presented in section 203 of the HFSH Act that directs FHA-
approved mortgagees to use their HUD-registered business names in all 
advertisements and promotional materials related to FHA programs. HUD-
registered business names include any alias or ``doing business as'' 
(DBA) on file with FHA. In addition to codifying this statutory 
requirement, the November 30, 2009, rule also proposed to codify the 
requirements specified in FHA's Strengthening Counterparty Risk 
Management Mortgagee Letter, issued September 18, 2009, and found at 
https://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm. 
This Mortgagee Letter directed FHA-approved mortgagees to maintain 
copies

[[Page 20720]]

of all advertisements and promotional materials for a period of 2 years 
from the date that the materials are circulated or used for 
advertisement purposes.
    The November 30, 2009, rule also proposed to codify the requirement 
in section 203 of the HFSH Act that requires mortgagees to notify FHA 
if individual employees of the lender are subject to any sanction or 
other administrative action. In incorporating this requirement, the 
November 30, 2009, rule noted that HUD was also proposing to codify its 
existing requirements pertaining to notification to FHA of business 
changes, such as changes in legal structure, which are currently found 
in HUD Handbook 4060.1, REV-2, Chapters 2 and 6.
    The amendments proposed by the November 30, 2009, proposed rule are 
discussed in more detail in the November 30, 2009, Federal Register at 
74 FR 62522 through 62528.

II. This Final Rule--Policies Adopted

    In consideration of issues raised by the commenters and HUD's own 
further consideration of issues related to this final rule, HUD is 
making the following changes at the final rule stage:

Net Worth Requirements for Applicants for Approval To Participate in 
FHA Single Family or Multifamily Programs and for FHA-Approved 
Mortgagees: 2010 to 2011

    The following net worth requirements are effective on May 20, 2010, 
for new applicants for FHA approval to participate in FHA single-family 
or multifamily programs, and effective on May 20, 2011, for all 
approved supervised and nonsupervised lenders and mortgagees, and all 
approved investing lenders and mortgagees with FHA approval as of May 
20, 2010:
     Applicants for FHA Approval and Existing Non-Small 
Business Approved Lenders and Mortgagees. An applicant for FHA approval 
or an approved lender or mortgagee that exceeds the size standards for 
its industry classification as established by the Small Business 
Administration (SBA) at 13 CFR 121.201, Sector 52 (Finance and 
Insurance), Subsector 522 (Credit Intermediation and Related 
Activities) shall have a net worth of not less than $1,000,000, of 
which no less than 20 percent must be liquid assets consisting of cash 
or its equivalent acceptable to the Secretary.
     Existing Small Business Approved Lenders and Mortgagees. 
An approved lender or mortgagee that meets the SBA size standards for 
its industry classification shall have a net worth of not less than 
$500,000, of which no less than 20 percent must be liquid assets 
consisting of cash or its equivalent acceptable to the Secretary. The 
net worth requirements for small business lenders and mortgagees remain 
applicable as long as the mortgagee continues to meet the SBA size 
standard for a small business. If, based on the audited financial 
statement prepared at the end of its fiscal year and provided to HUD at 
the commencement of the new fiscal year, a small business lender or 
mortgagee no longer meets the SBA size standard of a small business, 
the mortgagee shall meet the net worth requirements for a non-small 
business mortgagee by the last day of the fiscal year in which the 
audited financial statements were submitted.

Net Worth Requirements for Applicants for Approval To Participate in 
FHA Single Family or Multifamily Programs and FHA-Approved Mortgagees: 
2013 and After

    The following net worth requirements are effective on May 20, 2013, 
for new applicants for FHA approval to participate in FHA single-family 
or multifamily programs, for all approved supervised and nonsupervised 
lenders and mortgagees, and for all FHA-approved investing lenders and 
mortgagees:
     Single Family Mortgagees. Irrespective of size, all FHA-
approved mortgagees and applicants for approval to participate in FHA 
single family programs shall have a net worth of $1 million, plus an 
additional net worth of one percent of the total volume in excess of 
$25 million of FHA single family insured mortgages originated, 
underwritten, purchased, or serviced during the prior fiscal year, up 
to a maximum required net worth of $2.5 million. No less than 20 
percent of the mortgagee's required net worth must be liquid assets 
consisting of cash or its equivalent acceptable to the Secretary.
     Multifamily Mortgagees. Irrespective of size, all existing 
FHA-approved mortgagees and applicants for approval to participate in 
FHA multifamily programs shall have a minimum net worth of $1 million. 
For those multifamily mortgagees that also engage in multifamily 
mortgage servicing, an additional net worth of one percent of the total 
volume in excess of $25 million of FHA multifamily mortgages 
originated, purchased, or serviced during the prior fiscal year, up to 
a maximum required net worth of $2.5 million, is required. For 
multifamily mortgagees that do not perform multifamily mortgage 
servicing, an additional net worth of one half of one percent of the 
total volume in excess of $25 million of FHA multifamily mortgages 
originated during the prior fiscal year, up to a maximum required net 
worth of $2.5 million, is required. No less than 20 percent of the 
mortgagee's required net worth must be liquid assets consisting of cash 
or its equivalent acceptable to the Secretary.
     Single Family and Multifamily Mortgagees. Irrespective of 
size, all existing FHA-approved mortgagees and applicants for approval 
to participate in both FHA single family and multifamily programs must 
meet the net worth requirements for a single family mortgagee. 
Therefore, if a mortgagee is a participant in both the multifamily and 
single family programs, it is required to meet the greater net worth 
requirements for single family mortgagees.

Elimination of FHA Approval of Loan Correspondents

    The final rule limits the FHA approval process to mortgagees, but 
provides that all loan correspondents approved as of the date of the 
effective date of this final rule will maintain their approval through 
December 31, 2010. Commencing 30 days following publication of this 
rule, FHA will no longer approve new applicants for approval as loan 
correspondents.

Processing and Closing a Loan

    The final rule clarifies that, as a result of HUD's elimination of 
the FHA approval process for loan correspondents, the requirements 
regarding Principal-Authorized Agent relationships will also change. 
Mortgage loans originated through Principal-Authorized Agent 
relationships will be permitted to close in either party's name. 
However, to participate in such relationships, both the Principal and 
Authorized Agent must be approved as Direct Endorsement lenders under 
24 CFR 203.3. Further, for mortgage loans originated under the 
relationship, the Principal must originate and the Authorized Agent 
must underwrite, and their actions must be recorded as such in FHA 
Connection (FHA's Computer Home Underwriting Mortgage System).

Nonsubstantive Technical Changes

    In addition, HUD has taken the opportunity afforded by this final 
rule to make several nonsubstantive changes to the proposed rule for 
purposes of clarity. For example, HUD has removed paragraph (c) of the 
definition of ``Lender or title I lender'' at Sec.  202.2 to remove a 
reference to loan correspondents.

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III. Two Issues Under Consideration

    As discussed in more detail later in this preamble, HUD is 
reviewing two issues for further consideration, and taking public 
comment on one of the issues.
    First, HUD will further consider the prohibition on a TPO closing a 
loan in its own name. This final rule provides, as did the proposed 
rule, that a TPO may not close a loan in its name, and HUD is not 
considering withdrawing this prohibition in this final rule. However, 
HUD will further examine this issue. Until and unless HUD announces a 
change to this prohibition, the prohibition for currently FHA-approved 
loan correspondents (that subsequently will become TPOs) closing any 
FHA-insured mortgages in their own names will be applicable commencing 
January 1, 2011. Currently FHA-approved loan correspondents may 
continue to close FHA-insured mortgages in their own name through 
December 31, 2010.
    Second, HUD is considering requiring FHA-approved mortgagees that 
originate multifamily mortgages of $25 million or more to retain as 
additional net worth 50 basis points (0.5%) of the fee income resulting 
from such loans, in addition to their required net worth as set forth 
in this rule, up to a maximum of $5 million. This provision is intended 
to ensure sufficient mortgagee capitalization to compensate for the 
increased risk posed by such high cost projects. HUD is specifically 
taking public comment on this issue for a period of 30 days, and asks 
commenters to follow the public comment instructions in the ADDRESSES 
section of this preamble, above. This is the only issue for which HUD 
solicits comment.

IV. Discussion of Public Comments

    By the close of the public comment period on the November 30, 2009, 
proposed rule, on December 30, 2009, HUD had received 207 public 
comments. Comments were received from a variety of industry 
participants, including large direct endorsement FHA lenders, FHA loan 
correspondents, trade associations representing participants in the 
mortgage industry, and other interested parties such as law firms, 
certified public accountants, and individuals. In addition, the Office 
of Advocacy, of SBA, commented on the discussion of its impact on small 
businesses. All public comments can be found in the preamble to the 
rule, at https://www.regulations.gov.

A. The Comments, Generally

    The majority of the comments supported the goals of the November 
30, 2009, rule, but differed with or opposed HUD's proposed methods of 
implementation of the rule. For instance, many commenters supported the 
elimination of loan correspondent approval but expressed concerns about 
the proposed means of implementing this provision and its possible 
impact on loan origination activities, including concerns that 
borrowers would be affected by the absence of FHA approval and 
oversight of loan correspondents. Similarly, commenters generally 
supported FHA's intention to increase net worth requirements for 
mortgagees, but were not in agreement with the level to which HUD 
proposed to increase these requirements, or the timing of the increase. 
Other commenters sought postponement of any changes to lender/loan 
correspondent requirements until the housing market recovered. They 
stated this was not the time for HUD to make such ``sweeping'' changes 
to its relationships with the industry. Other commenters requested 
changes to policies that were not proposed in the November 30, 2009, 
proposed rule, such as changes to down payment requirements, yield 
spread premiums, and the Home Valuation Code of Conduct. These changes 
were not addressed in the November 30, 2009, proposed rule and are 
therefore outside the scope of this rulemaking.

B. Specific Issues Raised by Commenters

    The following presents the key issues raised by the public comments 
and HUD's response to these issues.
Timing of FHA's Policy Changes
    Comment: Commenters stated that this rule, combined with the new 
Real Estate Settlement Procedures Act (RESPA) disclosures, will result 
in the demise of the mortgage lending industry, other than big banks, 
and, by favoring large financial institutions, will limit the recovery 
of the housing market through the growth engine of small business. 
Commenters stated that changes to the current FHA system will further 
burden the weak housing market by adding more people to the ranks of 
the unemployed and risking foreclosure of their homes. Commenters 
stated that the current market is becoming stable and such sweeping 
action is unnecessary.
    HUD Response: HUD recognizes that the housing market remains in 
stress and that the FHA programs are a key element in sustaining 
economic recovery. However, the downturn in the housing market has not 
been without consequences to FHA. Consistent with its proactive role in 
previous economic crises, FHA once again positioned itself in this 
current crisis to quickly respond to the needs of homeowners in 
distress and qualified homebuyers without access to credit. As a 
result, the volume of FHA insurance increased as private sources of 
mortgage finance retreated from the market. The pace of growth in FHA's 
portfolio over such a short period of time, combined with continued 
housing price declines, defaults by homeowners, and home foreclosures 
has had an adverse impact on FHA, as evidenced by the reduction in 
FHA's capital reserve ratio reported in the independent actuarial study 
recently submitted to Congress.\4\ FHA cannot continue to be a 
stabilizing force in the mortgage market if FHA's own condition is not 
stable and strong. Although the timing of implementation of these 
measures may not be ideal, they cannot and should not be delayed. 
Replenishing FHA's capital reserves as quickly as possible is essential 
to ensuring that FHA remains available to respond to needs in the 
housing market. Additionally, as discussed below in HUD's response to 
specific comments raised about net worth requirements and the 
elimination of loan correspondents, the changes adopted by this final 
rule are not as sweeping as some commenters declare.
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    \4\ See footnote 1.
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FHA's Role in the Housing Market
    Comment: Commenters stated that the changes proposed to be 
implemented represent a major redefinition of the way FHA monitors and 
sources its business. Commenters stated that the policy changes would 
reduce the competency and selectivity of FHA originators precisely at 
such a time when it is necessary to improve the quality of loan 
originators. Commenters stated that FHA's proposals are at odds with 
other of the Administration's proposals pertaining to the financial/
housing markets, which would increase, not decrease, regulatory 
oversight. Commenters stated that a reduction of regulatory oversight 
will make FHA-insured loans vulnerable to involvement by entities that 
do not have the experience and competency that is traditionally found 
in FHA-insured mortgage loan participants, experience and competency 
required by FHA regulations, which will create more problems for FHA 
and borrowers of FHA-insured loans. Commenters stated that by favoring 
the larger mortgage lenders, FHA's changes in policies will result in 
less competition, less choice, and harm to consumers.

[[Page 20722]]

    HUD Response: Through the policy changes adopted in this final 
rule, FHA is not abandoning its traditional role in the housing market. 
The changes adopted are designed to ensure that FHA remains financially 
stable and strong, and that, as a result of the availability of FHA 
insurance, mortgage lenders are able to offer more affordable mortgage 
loan terms as they always have through FHA mortgage insurance programs.
    FHA is not retreating from regulatory oversight. As further 
discussed below, the focus of FHA-approval on mortgage lenders that 
underwrite and own mortgage loans reflects recognition that these are 
the entities that control the decision to extend a mortgage loan to a 
borrower, including the assessment of the mortgage borrower's ability 
to repay the mortgage loan, and therefore, should be the entities 
subject to FHA's regulatory oversight and requirements for sufficient 
capitalization. It is HUD's position that the policy changes 
implemented by this rule promote better regulatory oversight by 
focusing FHA's resources on oversight of the entities with the greatest 
degree of control over an FHA-insured mortgage loan. Furthermore, the 
SAFE Act and other recent initiatives have provided a uniform and 
reliable method of tracking loan originator licensing and compliance. 
As noted earlier in this preamble and further discussed below, FHA-
approved mortgagees now have, and have always had, responsibility and 
liability for the performance of sponsored loan correspondents. The 
final rule merely shifts to a sponsoring mortgagee the threshold 
assessment of a loan correspondent's qualifications to participate in 
FHA-insured loan transactions as a component part of the eligibility of 
the mortgage loan for FHA insurance.
Increase in Net Worth Requirements
    Comment: The majority of those commenting on the proposed net worth 
increase expressed the view that $1 million was an acceptable level of 
required net worth for lenders, although some commenters requested a 
delay in the effective date of the increase beyond the one-year period 
proposed by HUD and until such time as it could be said that the 
economy had sufficiently recovered. Among those commenters supporting 
the increase to $1 million, the majority of them, however, stated that 
the total increase in required net worth, to a level of $2.5 million, 
was excessive. Commenters stated that a net worth of $2.5 million would 
favor only the largest financial institutions, and eliminate the 
possibility of smaller mortgage lenders being able to obtain approval 
as FHA-approved mortgagees. Commenters stated that the increase in net 
worth would only be passed on to the borrowers by mortgage lenders 
charging higher fees.
    Some commenters suggested that net worth requirements be increased 
by different amounts, ranging from $500,000 to tiered requirements 
based on origination or lending volume, or by a Consumer Price Index 
(CPI) indicator. Other commenters suggested that the proposed timeframe 
of 3 years in which to comply with this new requirement was 
unrealistic. Other commenters stated that there should be no need to 
align FHA with Fannie Mae and Freddie Mac, particularly given the 
serious financial problems of those government-sponsored enterprises. A 
few commenters noted that the net worth requirements imposed by Ginnie 
Mae have not been raised for some time, and that Ginnie Mae was 
allegedly in better financial condition than either Fannie Mae or 
Freddie Mac.
    Some commenters submitted that an increase in the net worth was not 
the appropriate solution to enhance mortgage lender responsibility and 
performance. Commenters stated that no correlation had been shown 
between higher net worth and mortgage lender performance. Other 
commenters advised that net worth for FHA-approved mortgagees is 
actually higher than the $250,000 cited by HUD, because HUD also 
requires lenders to maintain net worth of one percent of funded loans. 
Other commenters suggested alternatives to increasing net worth such as 
establishing borrower FICO[supreg] requirements (a credit scoring 
system developed by the Fair Isaac Corporation), instituting required 
mortgagee internal controls, assessing a lender's track record before 
raising net worth, increasing FHA educational requirements, stepping up 
enforcement, and increased prosecution of fraud cases. Commenters also 
expressed the view that mortgagees engaged solely in multifamily and 
Home Equity Conversion Mortgage (``HECM'' or reverse mortgage) lending 
should not be held to the same requirements as single family mortgagees 
due to the differences in business models and products. One commenter 
recommended grandfathering existing mortgagee's/servicer's multifamily 
portfolios and making the net worth increase prospective for new 
insurance commitments applied for after the effective date of the rule.
    A few commenters stated that credit unions face unique problems in 
meeting increased capital requirements, because credit unions do not 
have access to capital markets and can increase their net worth only by 
cutting expenses or increasing their net income.
    HUD Response: In proposing an increase in net worth requirements of 
FHA-approved mortgagees, HUD strives to balance two components of FHA's 
mission: (1) To operate with a high degree of public and fiscal 
accountability, and (2) to stabilize housing credit markets in times of 
economic disruption. HUD recognizes that raising net worth requirements 
in the midst of current economic conditions may present some challenges 
for businesses in this sector. While the Nation's economy, and the 
mortgage and real estate industries in particular, currently face 
difficulties, it is just these difficulties, and the potential risks 
that accompany them, that necessitate FHA taking prudent action to 
protect its insurance funds. An increase in net worth is essential to 
ensure the stability of FHA mortgagees, especially given how low the 
current net worth requirements are; net worth requirements that were 
established in 1993 and not raised since that date.
    Additionally, the increase in net worth requirements does not 
ignore the fact that small mortgage lenders with lower capital reserves 
can and do originate quality loans. The fact remains, however, that the 
net worth level required by FHA prior to this final rule was 
established almost 20 years ago, and that passage of time is 
significant. Ensuring appropriate capitalization of firms engaged in 
lending activities is a fundamental principle of sound business 
regulation. Although many of FHA's program participants engage in 
responsible and diligent lending practices, effective underwriting and 
quality control procedures alone do not guarantee the continued 
financial viability of a lending entity. Therefore, requiring 
appropriate capitalization of FHA program participants is an essential 
baseline by which FHA can measure the soundness of its program 
participants.
    With respect to commenters' statements about Ginnie Mae not having 
raised net worth requirements, Ginnie Mae raised its net worth 
requirements for new applicant single family issuers in 2008. 
Additionally, the higher net worth requirements imposed by Fannie Mae 
and Freddie Mac were not the business practices that were reported to 
contribute to their financial difficulties.
    While HUD's position remains that an increase in net worth 
requirements is essential, it has revised the proposed rule to mitigate 
the potential economic burden on current participants in the

[[Page 20723]]

FHA single family and multifamily mortgage insurance programs and avoid 
disrupting their continued ability to provide FHA mortgage insurance. 
Although new applicants for FHA approval that do not currently 
participate in the single family or multifamily programs would be 
required to comply with the new net worth requirements commencing on 
the effective date of this final rule, currently approved program 
participants would have one year from the effective date of the rule to 
comply with the net worth increase.
    As already noted in Section II of this preamble, in response to 
commenters' concerns and as a result of further consideration of the 
net worth proposal by HUD, this final rule provides FHA-approved 
mortgagees that meet SBA's standards for classification as a small 
business an even more gradual transition period to meet the new net 
worth requirements. While HUD believes that a net worth of $1 million 
is prudent and appropriate for mortgagees, the Department very much 
values its existing relationships with FHA-approved small business 
mortgagees and realizes that the one year time frame for compliance 
with the increase in required net worth may have proven prohibitive for 
some of these firms. In recognition of this reality, FHA has determined 
that a more gradual increase in the required net worth for small 
business mortgagees is appropriate. Unlike new applicants for FHA 
approval, these mortgagees already possess unique knowledge and 
competency with regard to FHA products and have demonstrated their 
responsibility and reliability in the exercise of FHA activities. 
Therefore, due to the mutually beneficial relationships that exist 
between FHA and these small business mortgagees, HUD believes it is 
appropriate to take measures to permit their continued participation in 
FHA programs, while simultaneously taking steps to appropriately manage 
FHA's counterparty risks.
    Additionally, as described in Section II of this preamble, this 
final rule recognizes the key distinctions between the single family 
and multifamily business models, and this final rule provides net worth 
requirements that HUD determined are appropriate for single family and 
multifamily mortgagees. As noted in Section III of this preamble, HUD 
is considering requiring FHA-approved mortgagees that process 
multifamily mortgages of $25 million or more to retain a portion of 
their fee income from such transactions as additional net worth, and to 
increase the maximum required net worth for these mortgage lenders. 
These mortgages present higher risk to the multifamily mortgagees, and 
consequently to FHA, and the higher net worth better protects both the 
mortgagees and FHA against such increased potential liability. HUD will 
take comments on this single issue for the next 30 days, as provided in 
Section V of this preamble.
    With respect to credit unions, HUD believes that the changes made 
at this final rule stage alleviate the concerns expressed by credit 
union commenters. Following the initial increase in required net worth 
within one year following the effective date of this final rule, 
mortgagees will be granted an additional 2 years (after the first-year 
increase) in which to accumulate the required incremental net worth 
based on volume in excess of $25 million of FHA single family insured 
mortgages originated, underwritten, purchased, and/or serviced during 
the prior fiscal year.
Elimination of FHA Approval of Loan Correspondents
    Comment: Some commenters opposed FHA elimination of loan 
correspondent approval. Commenters suggested that FHA continue to 
approve, set requirements for, and monitor loan correspondents. 
Commenters suggested that in addition to continuing loan correspondent 
approval, FHA should increase its approval requirements for loan 
correspondents as an alternate means of strengthening its risk 
management. Commenters raised concerns about administrative 
difficulties that would arise through elimination of loan correspondent 
approval and that such difficulties would hinder effective program 
operations. Commenters stated that mortgagees will incur significant 
costs in employing and training new staff to process and close 
additional loans from correspondents, because mortgagees would not be 
able to handle correspondent functions on their own.
    Other commenters stated that elimination of loan correspondent 
approval would cause undue stress for mortgage lenders as they struggle 
to maintain compliance by their sponsored TPOs. Further, commenters 
expressed concern that mortgage lenders will inconsistently enforce 
standards, and this will ultimately be more costly than compliance with 
existing FHA requirements. In addition, a commenter noted that 
eliminating loan correspondent approval and certification increases 
risk to the insurance fund by opening the door to many new 
correspondents and the inherent conflict of interest sponsors will have 
between monitoring compliance and closing loans.
    HUD Response: HUD appreciates and carefully considered the issues 
raised by commenters, but HUD maintains its position that the 
elimination of FHA approval of loan correspondents is prudent for FHA 
and efficient for both FHA and mortgage lenders. Limiting approval to 
mortgagees reflects the recognition that the mortgagee, by 
underwriting, servicing, or owning a loan, is the most critical lending 
party to a mortgage transaction. It is the mortgagee that determines 
whether a borrower qualifies for the mortgage for which the borrower 
applied, and, therefore, determines the risk of lending money to the 
borrower. This is the most critical determination of the mortgage 
process. Accordingly, it is appropriate that FHA's approval process and 
oversight be focused on mortgagees, the parties to the loan transaction 
that pose the greatest risk to HUD.
    As noted earlier in this preamble, FHA-approved mortgagees 
currently have, and have always had, significant responsibility and 
liability for actions of sponsored loan correspondents. HUD's 
regulations have long provided that each sponsoring mortgagee shall be 
responsible 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 (see 24 CFR 202.8(b)(7)).
    HUD further defined the quality control requirements of a 
sponsoring mortgagee in its Mortgagee Approval Handbook (HB 4060.1 REV2 
Ch. 7), by requiring sponsoring mortgagees to provide for a review of 
mortgage loans originated and sold to it by each of its loan 
correspondents. As part of this review, sponsors determine the 
appropriate percentage of mortgage loans to review based on volume, 
past experience, and other factors. Sponsors are required to document 
their methodologies and the results of these reviews. In addition, all 
mortgagees/sponsors must identify patterns of early defaults by 
location, program, loan characteristic, loan correspondent, etc. 
Mortgagees/sponsors may use HUD's Neighborhood Watch Early Warning 
System to identify patterns. Mortgagees/sponsors must identify 
commonalities among participants in the mortgage origination process to 
learn the extent of their involvement in problem cases. Mortgages and 
loans involving appraisers, loan officers, processors, underwriters, 
etc., who have been

[[Page 20724]]

associated with problems must be included in the review sample. 
Accordingly, HUD's existing regulations reflect the responsibilities to 
be fulfilled by FHA-approved mortgagees, which are responsibilities 
that should be assumed by any lender, given the discretion and control 
that lenders have over the loans they underwrite.
    The additional responsibility that HUD will require of sponsoring 
FHA-approved mortgagees through this final rule is minimal. Since 
mortgagees are already responsible for ensuring that FHA requirements 
are met for mortgage loans originated by loan correspondents, HUD 
believes it is appropriate for mortgagees to continue doing so for 
TPOs. A mortgagee will be subject to sanctions (e.g., civil money 
penalties) should it fail in its responsibility to ensure that mortgage 
loans presented to FHA for endorsement, or those that the mortgagee 
endorses for insurance under the FHA Lender Insurance process, comply 
with processing and origination requirements. HUD's position is that, 
given the existing sponsor relationships between mortgagees and loan 
correspondents, mortgagees will continue to be able to undertake a 
threshold determination of a TPO's qualifications. Moreover, making 
sponsors responsible for this oversight actually relieves loan 
correspondents from the administrative burden of FHA's lender approval 
and recertification processes.
    Commenters raised concerns that elimination of approval of loan 
correspondents will result in mortgagees incurring significant costs in 
employing and training new staff to process and close mortgage loans. 
It is HUD's view, after careful consideration, that approved mortgagees 
will continue to rely upon loan correspondents with whom they have 
worked for years and who have demonstrated to sponsoring mortgagees 
their competency, compliance with applicable requirements, and 
integrity in their participation in the origination of FHA-insured 
mortgage loans. HUD believes that it would be contrary to current and 
financially sound business practices for approved mortgagees to sever 
ties with experienced loan correspondents with whom they have had a 
positive relationship for years, and have to hire and train new staff 
to perform correspondent functions.
    With respect to concerns that were raised about the integrity of 
TPOs without FHA approval, and the possibility of borrowers being 
exposed to unscrupulous loan originators, HUD believes that recent 
changes to mortgage lending licensing and regulatory requirements 
provide additional safeguards that did not exist when FHA established 
its lender-approval requirements. Specifically, the SAFE Act and the 
Nationwide Mortgage Licensing System have created standards that govern 
mortgage lending activities for loan officers and loan origination 
entities, and systems for tracking compliance with applicable mortgage 
lending laws. Further, recent changes in regulations for RESPA and the 
Good Faith Estimate have strengthened requirements to combat fraud and 
have improved disclosure of information to borrowers. These new or 
improved mechanisms to protect the public from inappropriate lender 
practices are in addition to state and local regulations and 
requirements governing mortgage lending practices. It should also be 
noted that the HFSH Act expanded HUD's authority to impose civil money 
penalties upon entities and individuals to include non-FHA-approved 
entities and their employees or representatives. HUD will judiciously 
use this new authority in conjunction with the changes enacted under 
this final rule.
    While this final rule proceeds to adopt the proposal to eliminate 
approval of loan correspondents, as provided in Section II of this 
preamble, HUD emphasizes that currently approved loan correspondents as 
of the effective date of this final rule may continue to act as FHA-
approved loan correspondents through December 31, 2010, and loan 
correspondents are eligible to apply for approval as an FHA-approved 
mortgagee.
FHA Approval of HECM Loan Correspondents Is Required by Law
    Comment: Commenters stated that HUD's November 30, 2009, proposed 
rule overlooked changes in statutory language made to section 255 of 
the National Housing Act (NHA), by the Housing and Economic Recovery 
Act of 2008 (HERA) (Pub. L. 110-289, approved July 30, 2008), which 
provide that only FHA-approved entities may participate in the home 
equity conversion mortgage (HECM) program. The commenters state that 
section 2122 of the HERA provides that ``All parties that participate 
in the origination of a mortgage to be insured under this section shall 
be approved by the Secretary.'' The commenters state that section 203 
of the HFSH Act provides: ``Any person or entity that is not approved 
by the Secretary to serve as a mortgagee, as such term is defined in 
subsection (c)(7) of the NHA shall not participate in the origination 
of an FHA-insured loan except as authorized by the Secretary.'' The 
commenters state that the language amending section 255 of the National 
Housing Act does not contain the phrase ``except as authorized by the 
Secretary'' that is included in section 203 of the HFSH Act. The 
commenters state that to comply with the HERA language, HUD must 
continue to approve and monitor loan correspondents engaged in HECM 
originations.
    HUD Response: The commenters identify a perceived contradiction 
between section 203(b) of the HFSH Act and section 2122(a)(9) of HERA, 
both pertaining to approval by the Secretary of HUD of parties engaged 
in the origination of FHA-insured mortgages. HUD appreciates the 
question posed by the commenters but, for the following reasons, 
disagrees with their analysis of the two statutory provisions in 
question.
    As noted by the commenters, the HERA amendments to section 255 of 
the National Housing Act require that mortgage lenders participating in 
the origination of HECM mortgages must be ``approved by the 
Secretary.'' Subsequent to enactment of HERA in July 2008, the HFSH Act 
was enacted on May 20, 2009. While the HERA changes to section 255 were 
limited to the origination of HECM mortgages, the HSFH amendments to 
section 202 of the National Housing Act more broadly encompass the 
origination of all single family mortgages insured by FHA, including 
those insured under the HECM program. Section 203(b) of HFSH also 
requires HUD approval of mortgage lenders participating in the 
origination of FHA-insured mortgages, ``except as authorized by the 
Secretary.'' This statutory exception to the approval requirement 
signifies that Congress intended to provide FHA with the authority to 
permit some limited participation by TPOs, which otherwise will not be 
FHA-approved mortgagees in the FHA mortgage insurance programs 
(including the HECM program), as provided for under this final rule.
    Rather than putting forth contradictory instructions from Congress, 
as the commenters assert, HUD views the statutory mortgagee approval 
requirements of sections 203 and 255 of the National Housing Act as 
being reconcilable. The statutory change to section 255 recognizes that 
the beneficiaries of the HECM program--elderly homeowners--are 
vulnerable to unscrupulous players in the lending market that target 
the elderly with overpriced or unneeded financial products. By 
specifying that mortgage lenders must be ``approved by the Secretary,'' 
Congress did not restrict the Secretary's ability to ``authorize'' TPO

[[Page 20725]]

participation in the origination of HECM mortgages under section 202 of 
the NHA. Instead, HUD has determined that Congress emphasized the need 
of FHA to take steps to protect elderly borrowers, who may lack the 
sophistication of the mortgage marketplace. FHA has addressed this need 
by allowing only mortgage lenders with professional and financial 
competency and integrity to participate in the origination of HECM 
mortgages. The provisions of this final rule regarding the relationship 
of sponsoring mortgagees and TPOs are consistent with the congressional 
intent of safeguarding HECM borrowers underlying the HERA statutory 
language. As discussed previously in this preamble, FHA-approved 
mortgagees have had, prior to this rulemaking, significant 
responsibility for actions of sponsored TPOs. As a result of this 
ongoing relationship between the sponsoring mortgagee and TPO, the 
sponsoring mortgagee is in a better position than FHA to immediately 
detect deficiencies with TPO performance and to remedy those 
deficiencies. Accordingly, HUD will look to FHA-approved sponsoring 
mortgagees to ensure that HECM mortgage loans are properly originated, 
and each sponsor shall be responsible to FHA for the actions of its 
loan correspondent lenders or mortgagees in originating HECM loans or 
mortgages.
Additional Guidance Requested Concerning Mortgagee Oversight of TPOs
    Comment: Commenters requested additional guidance regarding 
requirements of FHA-approved mortgagees for the approval, monitoring, 
and liability for actions of the TPOs they sponsor. Some commenters 
requested that FHA establish minimum approval guidelines for TPO 
approval by a sponsoring mortgagee. Others asked for clarification 
about the extent of monitoring required by mortgagees for the TPOs they 
sponsor, and of the specific TPO actions or violations for which 
mortgagees will be liable. Other commenters noted that lenders would be 
unable to perform the regulatory function that HUD performs in 
monitoring TPOs. Commenters stated that FHA should continue to monitor 
``mini-eagles'' and others directly. Other commenters expressed concern 
about the elimination of audits of loan correspondents, which serve an 
important function.
    HUD Response: HUD will not establish FHA requirements related to 
sponsor approval of TPOs. To do so defeats the aforementioned 
efficiency and improved risk management that HUD is striving to 
achieve. By focusing approval solely on lenders that underwrite loans, 
HUD's approval process should yield improved results in ensuring that 
only responsible lenders of integrity and competence are FHA-approved 
lenders. Such lenders will ensure that their employees and the TPOs 
that they sponsor are individuals and entities of integrity and 
competence. While, as noted in the response to a preceding comment, 
FHA-approved mortgagees will now make the initial determination of TPO 
qualifications, and not FHA, this assessment should not differ 
significantly from the manner in which FHA-approved mortgagees hire 
loan officers and appoint officials in their organizations. Moreover, 
sponsoring mortgagees have the authority to establish oversight 
requirements to monitor the ongoing performance and financial capacity 
of their TPOs, as the mortgagees may determine appropriate, including 
the submission of audited financial statements from sponsored TPOs.
    To the extent that mortgagees seek guidance from HUD on how best to 
determine if TPOs adhere to FHA's processing and origination 
requirements and are eligible to participate in the origination of FHA-
insured mortgage loans, HUD recommends that mortgagees develop and 
implement measures such as the following: (1) Procedures to verify TPO 
compliance with all federal, state, and local requirements that govern 
their activities; (2) procedures to verify TPO compliance with the 
requirements of the SAFE Act; (3) procedures to ensure that TPOs are 
not suspended, debarred, or under a limited denial of participation 
(LDP), in HUD's Credit Alert Interactive Voice Response System, or on 
the Federal Government's Excluded Parties list; (4) institutional 
guidelines and systems for establishing and maintaining relationships 
with TPOs; (5) procedures that govern the performance of due diligence; 
(6) systems for monitoring loan quality and performance for each 
sponsored TPO; (7) procedures for addressing potential problems with 
TPO operations, business practices, or customer service, and clearly 
articulated remedial processes for instances when such problems occur; 
(8) enhanced quality control plans and procedures that ensure 
appropriate evaluation of TPO originations; (9) ongoing renewal 
processes to ensure that TPOs continue to meet the mortgagee's approval 
standards; and (10) procedures for evaluating the financial capacity of 
TPOs. These are only recommendations on HUD's part, and no doubt many 
mortgagees already have such procedures, protocols, and systems in 
place.
    Although not a change from existing requirements, it is 
nevertheless important to reiterate that mortgagees may not knowingly 
or willingly conduct business with TPOs that are not in compliance with 
all laws and regulations that govern their practices. If a mortgagee 
becomes aware of TPO noncompliance with any provision of law or 
regulation, FHA requires that the mortgagee cease sponsoring FHA loans 
on behalf of the TPO in question and proceed accordingly with regard to 
notifying HUD of such occurrences. Mortgagees that continue to engage 
with such entities will be held responsible for such activities by HUD. 
Moreover, HUD will hold mortgagees accountable for FHA loan origination 
and processing violations committed by TPOs.
Processing a Loan in Name of FHA-Approved Mortgagee
    Comment: Some commenters requested that HUD permit non-FHA-approved 
TPOs to process a loan and close it in the entity's own name, and not 
that of the FHA-approved mortgagee. The commenters stated that the 
removal of this authority would yield a number of adverse impacts for 
TPOs, including impacts on state licensing and regulatory matters and 
TPO funding arrangements. Some commenters expressed concern that the 
elimination of processing authority would limit TPO revenues, and would 
present a significant administrative burden for mortgagees.
    HUD Response: HUD has not revised the rule in response to these 
comments, but as noted earlier in this preamble and discussed at the 
end of this response, HUD is further considering this issue. Section 
203(b)(1) of the National Housing Act (12 U.S.C. 1709(b)(1)) requires 
that a mortgage ``[h]ave been made to, and be held by, a mortgagee 
approved by the Secretary'' in order to be eligible for FHA mortgage 
insurance. Accordingly, only FHA-approved mortgagees may close mortgage 
loans in their names (that is, using the statutory terminology, have 
the mortgage ``made to'' the FHA-approved mortgagee). Since FHA will no 
longer be approving loan correspondents, TPOs will be statutorily 
prohibited from closing FHA-insured mortgage loans in their own names; 
however, TPOs may continue to close such mortgages in the name of their 
sponsoring FHA-approved mortgagees. Further, only the sponsoring FHA-

[[Page 20726]]

approved mortgagee may submit the loan to FHA for insurance 
endorsement.
    HUD emphasizes that currently approved TPOs (loan correspondents) 
as of the effective date of this final rule may continue to act as FHA-
approved TPOs and close FHA-insured mortgages in their name through 
December 31, 2010. Loan correspondents are also eligible to apply for 
approval as an FHA-approved mortgagee.
    As noted earlier in this preamble, HUD will further consider this 
issue, but unless such change is made, currently FHA-approved loan 
correspondents (that subsequently will become TPOs), commencing on 
January 1, 2011, may no longer close FHA-insured mortgages in their own 
names, although they may continue to do so through December 31, 2010.
Third-Party Originators Should Be Permitted To Access and Utilize FHA 
Connection
    Comment: Commenters expressed concern about the inability of TPOs 
to access and utilize the FHA Connection system for loans they 
originate. These commenters advised that the data input and other tasks 
performed by TPOs in FHA Connection were an important part of the 
services they provide to mortgagees.
    HUD Response: HUD information technology security requirements do 
not permit non-FHA-approved entities to access or utilize FHA 
Connection. Therefore, only FHA-approved mortgagees will be authorized 
to utilize this system to carry out necessary processes associated with 
a loan transaction. However, as explained in Mortgagee Letter 2004-31, 
which remains applicable, FHA Connection's Business-to-Government (FHAC 
B2G) Specification ``allows lenders to transmit data directly from 
their own internal loan processing systems to FHA without re-keying 
data into the FHA Connection or functional equivalent.'' This 
functionality allows TPOs to input data into a sponsoring mortgagee's 
loan origination system, as may be permitted by the sponsoring 
mortgagee, which will then carry out FHA Connection tasks via an 
automated process. Such practices will enable TPOs to continue to 
provide important loan processing services to mortgagees. Additional 
information regarding FHAC B2G can be found in the ``FHA Connection 
Business to Government User's Guide'' at https://www.hud.gov/offices/hsg/sfh/f17c/b2g.pdf.
Tracking TPO Performance Through Single Family Neighborhood Watch
    Comment: Commenters suggested that HUD continue to track TPO 
performance through the Single Family Neighborhood Watch (Neighborhood 
Watch) system. The commenters were concerned that with the removal of 
loan correspondent approval, the ability to analyze performance data 
for sponsored TPOs would be eliminated. These commenters requested that 
TPO tracking in Neighborhood Watch continue.
    HUD Response: FHA will make available to sponsoring mortgagees 
aggregate comparison TPO performance data at a national level. HUD 
anticipates that mortgagees will use this data in carrying out their 
responsibilities under this final rule to monitor the performance of 
their TPOs on an ongoing basis. The information will be available to 
FHA-approved mortgagees by accessing Neighborhood Watch through their 
FHA Connection account.
Geographic Limitations on Originations
    Comment: Commenters requested clarification regarding the impact of 
this rule on FHA's ``Areas Approved for Business.'' The commenters 
expressed concern that the rule would result in geographic limitations 
on originations.
    HUD Response: When conducting retail and direct lending 
originations, FHA-approved mortgagees must continue to comply with the 
existing Single Family Origination Lending Areas (Areas Approved for 
Business or AAFB), as outlined in HUD Handbook 4155.2, Section12.E.2. 
FHA-approved mortgagees must also continue to be licensed to perform 
loan origination in each state in which they desire to originate FHA 
loans. For purposes of wholesale origination, FHA-approved mortgagees 
may underwrite loans originated in any s