With much fanfare, HUD enacted its new LEAN program on March 1, 2009, thereby replacing HUD’s Multi-family Accelerated Process (“MAP”) approved lender program for Section 232 applications. The number of financings closed under the LEAN program in the past year, however, has been less than expected due to pitfalls that have delayed or halted LEAN closings. This Alert discusses a few of these pitfalls, which lenders should consider when engaging in the HUD LEAN approval process.

Requirement of DACA and DAISA

A new requirement instituted by the LEAN program, but not required under MAP, is the use of deposit account agreements. Specifically known as Deposit Account Control Agreements (“DACA”) and Deposit Account Instructions Service Agreements (“DAISA”), these agreements are used to perfect a lender's security interest in and control the use of an operator’s deposit accounts. This requirement has delayed some LEAN closings as these agreements must be agreed to in advance by the banking institution involved. Some community banks have been unable, or, in some cases, unwilling to enter into these agreements because they do not feel they have the capability to facilitate blocked account agreements. In practice, some borrowers have found themselves in the undesirable position of having to change banks in order to comply with this new requirement, which invariably delays closing. Further, in practice we are seeing a misunderstanding of the sample form DACA and DAISA provided by HUD as inflexible when, in fact, these forms may vary as long as the HUD-required elements are present.

Firm Application

HUD’s website states that: “HUD begins its legal review immediately when the Firm Application is submitted.” This review process is different from MAP. Previously, HUD began its review before the Firm Application was submitted, which cut out duplicative reviews by lenders’ counsel and HUD staff. Now, both reviews must occur separately, which increases the time spent on the loan.

Lack of Uniformity

Despite the goals of the program, LEAN currently lacks uniformity in its application. HUD states on its website that it has: “developed standardized checklists, statements of work for third party work, certifications, and templates for the lenders to use in their assembly of the application package. Moreover, [it has] developed standardized punchlists for HUD staff to use in their underwriting of submitted applications.” HUD continues to work towards that goal. LEAN continues to face the challenge of inconsistencies between HUD staff’s interpretation of document provisions and program requirements. Accordingly, the approval process lacks uniformity among the HUD offices. We have seen both lenders and borrowers lulled into a false expectation of a quick closing by the promise of a uniform, forms-driven process.

While this Alert discusses a few of the pitfalls that lenders face when engaging in the HUD LEAN approval process, there are others awaiting the unwary.