On January 11, 2017, the U.S. Department of Housing and Urban Development (HUD) published Mortgagee Letter (ML) 2017-03, “Federal Housing Administration (FHA) Loan Review System – Implementation and Process Changes.” The ML indicates that HUD is developing a new Loan Review System (LRS) that will provide an electronic platform for FHA loan-level file reviews and other functions for single family insured mortgages. The new requirements will apply to all FHA Title II Single Family programs, including reverse mortgages.

After HUD launches the new LRS, it will use the system to: (i) process reviews of test cases submitted by mortgagees applying for unconditional Direct Endorsement (DE) underwriting approval; (ii) post loans selected for pre-insurance review so that mortgagees without Lender Insurance (LI) authority can view them; and (iii) manage post-endorsement technical reviews of loans and lender monitoring reviews. HUD also will use the LRS to generate automated requests and reminders for lenders to respond to findings and submit documentation in connection with reviews. For example, after HUD provides notice to a mortgagee of an upcoming monitoring review, the mortgagee will be able to access detailed information about the upcoming review in the LRS. After HUD concludes its review, it will document any findings in the LRS, where it also will specify the remedies and responses required from the mortgagee. ML 2017-03 notes HUD’s intent to use the Single Family Housing Loan Quality Assessment Methodology (Defect Taxonomy) to identify and categorize loan-level findings. HUD published the Defect Taxonomy on June 18, 2015 to provide greater clarity and transparency to FHA lenders. The Defect Taxonomy provides for different tiers of loan-level defects and explains how HUD intends to categorize particular file deficiencies. It includes nine distinct defect categories, with more specific defects organized under each category, codes to identify sources and causes of the defects, and four tiers related to the severity of the defects. A mortgagee will have to respond to any material findings under the Defect Taxonomy through the new LRS. The LRS will replace the Underwriter Review and eFindings functions in FHA Connection, as well as some of HUD’s current emails and other manual processes for communication. Lenders will be able to download and review data and reports with summary statistics and loan level review results from the LRS.

Like HUD, mortgagees will use the new LRS for various purposes. For example, mortgagees who receive DE Program Test Case approval letters from HUD, dated on or after April 1, 2017, will have to review all test case results in the LRS and respond to requests from HUD in connection with DE program test cases, including making necessary corrections and providing required documentation. In addition, as noted above, mortgagees will have to respond through the LRS to material findings that HUD identifies during monitoring reviews. The LRS also will replace the lender reporting feature in Neighborhood Watch, and mortgagees will have to self-report fraud, misrepresentation, and other material findings through the LRS. Mortgagees will have to grant certain personnel authority to perform relevant functions within the new system to accomplish required tasks, including execution of indemnification agreements.

HUD’s stated goal in implementing the LRS is to align documentation of loan review results across HUD divisions and incorporate the Defect Taxonomy. ML 2017-03 states that HUD will confirm the effective date of the new system in a subsequent ML, which will come no earlier than March 1, 2017. After launching the LRS, HUD will make all necessary corresponding changes to the Single Family Housing Policy Handbook (4000.1). In the meantime, HUD is offering a webinar for mortgagees on Thursday, January 26, 2017 at 2:00 pm EST, to explain the system and related process changes.