In June 2013, the Consumer Financial Protection Bureau (CFPB) issued Bulletin 2013-06 to encourage lenders to self-report serious violations in order to advance the CFPB’s enforcement mission. To complement the CFPB’s bulletin, the Federal Housing Administration (FHA) issued Mortgagee Letter 2013-41 on November 13, 2013 to establish mandatory self-reporting requirements for all single family FHA approved lenders. Mortgagee Letter 2013-41 specifies what lenders must report, deadlines for when lenders must report findings internally to senior management and externally to FHA, and how those finding must be reported to FHA. The letter also identifies FHA’s review process and repercussions of failing to report.
What must be reported?
After the lender’s quality control team investigates suspected instances of fraud and material misrepresentation and determines that there is a material finding, lenders must report all material findings to FHA, including material findings concerning the origination, underwriting, or servicing of the loan that the lender is unable to mitigate or otherwise resolve in accordance with Mortgagee Letter 2013-41. Lenders must also report any findings that occurred after the lender submitted its request for insurance or endorsed the loan through the Lender Insurance process.
Also, for all findings that must be reported, the lender must identify what actions, if any, have been taken to attempt to mitigate or resolve each finding along with any planned or pending follow up activities by the lender.
What findings do not need to be reported?
Findings that do not involve fraud or material misrepresentation and findings that are already mitigated or resolved by the lender do not have to be reported to FHA. However, lenders must make all quality control review results available for inspection by FHA for two years.
What is a material finding?
FHA defines a finding as a final determination of defect by the Lender. A finding is deemed material if disclosure of the finding would have altered the lender’s decision to approve the loan or to seek endorsement from FHA for insurance of the mortgage loan. Some examples of material findings include:
- Failing to ensure the borrower meets applicable eligibility requirements in accordance with FHA requirements;
- Failing to verify the creditworthiness, income, and/or employment of a borrower in accordance with FHA requirements;
- Failing to verify the assets used by the borrower for down payment and/or closing costs, or to meet applicable reserve requirements, in accordance with FHA requirements;
- Failing to ensure that the amount of the loan insured is consistent with the loan type, property value and other applicable FHA requirements;
- Failure to ensure that the loan was current and met any applicable payment history requirements at the time of insurance endorsement in accordance with FHA requirements;
- Failing to address property deficiencies identified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property in accordance with FHA requirements; and
- Failing to ensure that the appraisal of the property satisfies FHA appraisal requirements.
What is a mitigated finding?
If the lender has adequately addressed the deficiencies underlying the finding and if such deficiencies have been remedied through updated and accurate documentation, calculations, or other actions taken by the lender, then the finding is considered to be mitigated or resolved. Lenders need not report mitigated findings.
When must lenders report?
The quality control team must investigate and determine whether or not fraud or material misrepresentation actually occurred. Following such determination and completion of the initial findings report, lenders must report initial review findings to the lender’s senior management within 30 days of completing the report. Lender management must review and respond appropriately to each instance of fraud, material misrepresentation, or other material finding.
Findings of fraud or material misrepresentation must be reported to FHA immediately. All other findings must be reported no later than 30 days after the lender completes its internal evaluation of the findings or within 60 days of initial disclosure of the findings, whichever occurs first.
How do lenders report?
Lenders may report findings through the Neighborhood Watch Early Warning System using the Lender Reporting feature.
What will FHA review?
FHA will review each instance of self-reporting to decide if additional documentation is needed. FHA may require the production of the Endorsement Case Binder or the Quality Control Report. After performing its own review, FHA may allow the lender an additional opportunity to mitigate or resolve its findings. But, if FHA determines that the lender has not satisfactorily mitigated or resolved the findings, FHA may demand indemnification.
Repercussions for not reporting
FHA may take administrative action against approved lenders who fail to comply with FHA requirements.