Consumer Finance Insights
March 17, 2016

FHA Announces Final Revisions to Loan-Level Certification Form

On March 15, 2016, the Federal Housing Administration (FHA) announced final changes to its loan-level certification form, 92900-A HUD/VA Addendum to the Uniform Residential Loan Application.  The announcement represents important and highly-anticipated changes to the FHA’s required certification.

The FHA’s loan-level certification form, which the lender completes for every loan that it seeks to have insured by the FHA, certifies that the loan is of an acceptable risk level to the FHA.  If the loan ultimately defaults, the lender can file a claim on the loan with the FHA.  But if, in the course of reviewing the claim, it is determined that the loan file contains an error, the FHA may require the lender to reimburse or indemnify it for the cost of the claim.  There had been a growing concern in the mortgage industry over the last several years that the language in the existing loan-level certification was so broad that lenders would be held liable for any error at all, no matter how minor and regardless of whether the error was the lender’s fault.

Aiming to clarify the scope of liability that lenders would face in connection with errors in the origination of FHA-insured mortgage loans, the FHA had initially released proposed changes to the certification in July 2015.  But the proposed changes drew criticism from both the mortgage industry and consumer groups, who each felt the changes did not go far enough to protect their interests.  Consumer groups and democrats on the Senate Banking Committee, who took issue in particular with the removal of the certification that the lender had not been convicted of wrongdoing that would call into question their ability to carry out the responsibilities of the FHA program.

In response to this and other concerns, the FHA issued a revised proposal on September 1, 2015, reinstating that certification requirement (although it was moved from the loan-level certification to the FHA’s lender-level certification, proposed changes to which the FHA also announced on March 15, 2016).  The revised proposal also added new requirements to the loan-level certification that the lender certify that it had completed a pre-endorsement review of the loan and no deficiencies had been revealed, and that the individuals who had been involved with the loan application and the borrower had not engaged in any prohibited activity.  But the mortgage industry felt that these changes created more uncertainty about lenders’ obligations and urged the FHA to reconsider.

Finally, on March 15, 2016, the FHA announced its final revised loan-level form.  Perhaps the most significant change is that the new form tries to make clear that lenders will only be held responsible for mistakes that would have altered the decision to approve the loan.  The new form also asks lenders to certify that the information in the certification is accurate to the best of their knowledge, rather than certifying that the information is true, as had previously been the requirement.  Finally, the new form removes the proposed references to a pre-endorsement review, and instead contains language about the lender’s responsibility to practice due diligence in processing the mortgage and reviewing the loan files.

In his announcement, FHA head Ed Golding explained that these changes are intended to reinforce and clarify the FHA’s “longstanding position that lenders should not be penalized for minor mistakes,” and that lenders should not be held “responsible for mistakes or fraud committed by a third party that the lender did not or could not have had reason to know of.”  The FHA says that it hopes the revised form will clarify these positions and provide lenders greater certainty in their relations with the FHA.

Lenders may begin using the new form on August 1, 2016.  Until then, they should continue using the existing form.  The FHA’s proposed changes to its lender-level certification form are available for a 30-day information collection period and are expected to be finalized by August as well.