So you want to originate FHA loans? An update on HUD eligibility requirementsMike DaughertyFHA loans, HUD approval, regulatory compliance
As most mortgage brokers and lenders are now aware, only
mortgagees that have been approved by the U.S. Department of
Housing and Urban Development can originate FHA loans. HUD has
recently imposed heavy sanctions on mortgagees involved in certain
unauthorized forms of net branching and brokering that resulted in
increased risks to both the FHA insurance fund and to FHA
borrowers. Brokers and lenders interested in originating FHA loans
must go through an approval process. There are three classes of HUD
approval: supervised lender, non-supervised lender and loan
correspondent.
A supervised lender is a commercial bank, savings and loan
association or credit union under the direct regulation of the
FDIC, Federal Reserve or the National Credit Union Administration.
The HUD approval requirements for supervised institutions are
minimal due to the close scrutiny by other governmental agencies. A
supervised lender can participate in the same kinds of lending
activities as a non-supervised lender, or they can operate as a
loan correspondent.
A non-supervised lender is a mortgage banker, the so-called
"full eagle." The banker's principal activity must be the lending
or investing of funds in real estate mortgages. With this category,
mortgage bankers may originate, service, purchase, hold and sell
FHA-insured mortgages. After surviving 15 pre-closing test cases,
non-supervised lenders may obtain "direct endorsement" (DE)
approval and subsequently submit loans for mortgage insurance
without prior underwriting review by HUD. Applicants for
non-supervised approval should be aware that the DE approval
process is far more harrowing than the initial approval itself, and
that DE approval is mandatory for this category of lender to
originate an FHA loan. You must make sure you have a savvy and
experienced DE underwriter on board before beginning the procedure.
Keep in mind, however, that it is not necessary for non-supervised
lenders to achieve DE status if the main purpose of the HUD
approval is for state or investor approval purposes, rather than
the origination or underwriting of FHA loans.
A loan correspondent is HUD parlance for a mortgage broker, or
mini-eagle. With this category of approval, brokers may only
originate FHA loans; they may not hold or sell such loans. In
addition, the loan correspondent must have one or more registered
sponsors to underwrite and fund the FHA loans that it originates.
Sponsors must be supervised or non-supervised lenders with DE
approval from HUD.
When approved, each broker or lender is issued an exclusive HUD
mortgagee identification number that is to be used only by the
approved entity to order FHA case numbers and deal with HUD on a
variety of issues via the FHA connection on the Internet. This
identification number will allow the approved mortgagee to order an
FHA case number anywhere within the lending area of the mortgagees
home office. Lending areas are generally tied to the location of
HUD field offices within states, but can often overlap into HUD
field office jurisdictions in adjoining states. To originate an FHA
loan outside of the home office lending area, the approved
mortgagee must apply to HUD for branch office approval. Supervised
and non-supervised lenders may add branches over the FHA connection
on the Internet for a $300 fee, but loan correspondents must submit
a hard copy application to HUD, along with an audited financial
statement and the $300 fee. In addition to the initial net worth
requirement detailed later in this article, a loan correspondent
must maintain an additional net worth of $25,000 for each approved
branch office, up to a maximum requirement of $250,000.
Current qualifications for HUD approval
The following is a concise but complete summary of HUD's
requirements. If a mortgagee satisfies these, then with the proper
paperwork, application can be confidently made to HUD for
approval.
"The applicant must be a corporation, a limited
liability company (LLC) or a partnership.
A sole proprietorship is not acceptable. Both C and S corporations
qualify. An LLC must meet more specific requirements; it must have
at least two members, its operating agreement must show a term of
existence of at least 10 years, and it must also have a provision
for continuance after the withdrawal of a member. Both the LLC
operating agreement and articles of organization must be submitted
for review. Partnership requirements are too complicated to cover
here, and are not recommended unless there are compelling tax or
legal issues involved. The eligibility requirements that follow
will indicate "corporation" for brevity, but also apply to LLCs and
partnerships.
"The applicant corporation must have an adjusted net
worth of at least $63,000 for a loan correspondent or $250,000 for
a non-supervised lender.
At least 20 percent of the net worth must be in the form of liquid
assets, which are defined as cash and cash equivalents, such as
readily marketable securities. The remainder of the net worth may
consist of furnishings, equipment and other business items owned by
the corporation. The entire corporate net worth must be verified to
HUD by an audited financial statement, prepared by a certified
public accountant in accordance with generally accepted accounting
principles. The audited statement must also contain HUD's
computation of adjusted net worth, a formula that excludes the
value of certain unacceptable assets.
"The corporation must be currently licensed by the state
regulatory agency where its home office is located.
There can be no sanctions or restrictions on the state license.
"At least one senior designated corporate officer
(president or vice president) must have a minimum three years of
mortgage origination experience, either conventional or
FHA.
A resume must be submitted showing the places and dates where the
employment occurred. In the case of an LLC applicant, the
designated operating manager-member must have three years of
experience.
"In companies with joint officers, there must be a duly
appointed senior officer (president or vice president), with the
required minimum three years of acceptable experience, designated
to conduct exclusively the affairs of the approved
mortgagee.
This is an area of common confusion. For example, you cannot own
and operate a HUD-approved mortgage company and have day-to-day
management responsibilities at any other mortgage company.
Likewise, you cannot own and manage a real estate brokerage and
have day-to-day operating responsibilities at a HUD-approved
mortgage company. You can have an ownership interest in either of
these other entities, as long as you, the designated officer of the
HUD-approved mortgage company, have no day-to-day management
responsibilities with any other business entity. You will also, of
course, need to heed all of the RESPA requirements with respect to
conflicts of interest between different entities.
"The corporation, its major stockholders and senior
officers must have acceptable credit.
Recent credit reports, both personal and commercial, must be
submitted to HUD. There can be no outstanding tax liens or past-due
government loans. Bankruptcies must be discharged and seasoned, and
good credit re-established. A default on an FHA-insured loan is
cause for application rejection. HUD uses the Mortgage Asset
Resource Institute (MARI), as well as its own record base, to check
the background of applicants for license restrictions, suspensions,
debarments and other negative items that may make individuals or
companies ineligible for approval. Applicants may preview the MARI
database by visiting www.mari-inc.com to determine if there are
adverse records. There is a nominal fee for this service.
"The corporation must have acceptable main office
facilities.
The office must be located in a commercial building, not a
residence, with the types of furnishings and equipment required to
run a mortgage operation in a responsible and professional manner.
There must be permanently affixed business signs to identify the
mortgage company to borrowers. The corporation's main office must
be separate and apart from any other business entity, but may share
a common reception area or lobby.
"The corporation must have at least two
employees.
The employees may include the principals of the corporation, but a
shared receptionist cannot be used to meet this requirement.
"A loan correspondent applicant is required to have a
HUD-approved sponsor (a supervised or non-supervised lender with DE
approval) that will underwrite and fund its FHA
originations.
Once the correspondent has received its initial HUD approval,
additional sponsors may be added via the FHA connection on the
Internet.
"Non-supervised lenders must maintain a warehouse line
of credit for at least $1 million.
"Non-supervised lenders, but not loan correspondents,
must provide evidence of a fidelity bond, and errors and omissions
insurance for at least $300,000 each.
These are the requirements to originate FHA loans. The actual
application package to HUD involves substantial paperwork, but the
qualifications themselves are by no means difficult or
unreasonable. There is, however, a non-refundable $1,000
application fee to HUD for reviewing and processing the
application, so it is important to submit it correctly. Once
approved, each mortgagee must be re-certified by HUD on an annual
basis. This re-certification requires the submission of an audited
financial report and a $500 fee to HUD within 90 days after the end
of the company's fiscal year. Failure to meet the strict
re-certification deadlines has resulted in approval termination for
many mortgagees in recent years. So, mark your calendars!
Mike Daugherty was a lender approval official with HUD for
many years and is a principal of Mortgagee Approval Services, a
provider of consultation and application preparation services to
brokers and lenders seeking initial HUD approval. He may be reached
at (925) 254-5999 or visit www.mortgageeapproval.com.
