October 18, 2011
Practice Group:
Mortgage Banking &
Consumer Financial
Products
One Step Closer to Leveling the Playing
Field for FHA Lenders: HUD Eliminates
Geographic Restrictions on Lending
By Krista Cooley, Holly Spencer Bunting and Kathryn M. Baugher
Need some good news related to Federal Housing Administration (“FHA”) loans? The U.S.
Department of Housing and Urban Development (“HUD” or “Department”) has made immediate
changes to its guidelines to allow FHA-approved mortgagees to originate loans on a nationwide basis
without regard to the location of their branch offices. These changes come on the heels of the
sweeping changes that HUD made to its lender approval regulations in April 2010.1 As with most
regulatory change, the 2010 amendments had several unintended consequences, many of which
created competitive disadvantages between FHA-approved mortgagees and former loan
correspondents, now referred to as third-party originators, or “TPOs.” Most significantly, the new
regulations created broader geographic origination authority for TPOs than for sponsoring
mortgagees, resulted in more stringent requirements for employees of sponsoring mortgagees still
subject to HUD’s requirements regarding employee exclusivity and W-2 status, and restricted TPOs
from closing FHA-insured loans in the TPO’s name. HUD has acknowledged the challenges to both
mortgagees and TPOs presented by the new requirements and indicated a commitment to consider
amending its Handbook guidelines where possible to level the playing field for FHA-approved
sponsoring mortgagees and TPOs.
With Mortgagee Letter 2011-34, HUD has begun to make good on that commitment with regard to the
geographic lending authority of FHA-approved mortgagees. Mortgagee Letter 2011-34 amends the
relevant Handbook provisions to expand the lending authority for FHA-approved mortgagees from
specific geographic areas to the entire country. Unfortunately, HUD does not make changes to the
Handbook provisions requiring that all employees of approved mortgagees must be exclusively
employed by the mortgagee and compensated on a W-2 basis.2 Moreover, addressing the issue of a
TPO’s ability to close an FHA-approved loan in its own name will necessitate a Congressional
amendment to the National Housing Act, which HUD continues to pursue. Mortgagee Letter 2011-34,
however, does include the first changes to HUD’s FHA Mortgagee Approval Handbook3 to begin the
process of aligning the Handbook requirements with the regulatory changes made to lender approval
requirements in 2010. HUD also has updated its online Frequently Asked Questions (“FAQs”) to
reflect the changes in Mortgagee Letter 2011-34.4 This Client Alert summarizes the changes and
clarifications announced in Mortgagee Letter 2011-34, which is effective immediately.
I. Elimination of Geographic Restrictions for Loan Origination
The most significant and most welcome change announced in Mortgagee Letter 2011-34 is the
amendment to HUD’s single-family loan origination areas to create nationwide origination authority
for FHA-approved mortgagees. Prior to the regulatory amendments to HUD’s lender approval
requirements, FHA-approved loan correspondents and mortgagees were limited to certain geographic
One Step Closer to Leveling the Playing Field for FHA Lenders: HUD
Eliminates Geographic Restrictions on Lending
lending areas, or Areas Approved for Business (“AAFB”), designated by the Department and
determined based upon the entity’s office locations. As a result of last year’s regulatory amendments,
in which HUD ceased approving and overseeing loan correspondents, or TPOs, HUD relinquished its
jurisdiction over TPOs and, thus, its ability to restrict a TPO’s geographic origination authority for
FHA-insured loans. This provided un-approved TPOs with greater geographic origination authority
than FHA-approved mortgagees, which remained subject to HUD’s AAFB restrictions.
To level the playing field for FHA-approved mortgagees, Mortgagee Letter 2011-34 amends
paragraphs 2-19(A) and (B), as well as paragraph 5-8(C), of Handbook 4060.1 to expand the singlefamily origination lending area of each home office and registered branch office of an FHA-approved
mortgagee to include all HUD field office jurisdictions. As a result of the amendments to paragraph
2-19(A), the Department will now permit FHA-approved mortgagees to originate FHA-insured loans
in any jurisdiction in which the mortgagee is licensed or otherwise authorized to originate singlefamily residential mortgage loans.5
Although the Mortgagee Letter states that it amends paragraph 2-19(B) to expand the loan origination
lending area of direct lending branches to include all HUD field office jurisdictions, a lender’s direct
lending branch was already authorized to lend in all HUD field offices, as long as the lender met the
requisite state requirements to conduct business in those areas. Thus, if all branch offices may now
lend on a nationwide basis, as long as the lender is authorized to do so by state or other law, we
question whether a separately approved and designated direct lending branch is still necessary. Yet, as
the Mortgagee Letter only amends paragraph 5-8(C) of HUD Handbook 4060.1, which required
lenders to submit a list of states where it planned to originate FHA loans from its direct lending
branch, and otherwise maintains all other components of a request for direct lending branch approval,
HUD still requires separate authorization and registration of direct lending branches, including a paper
application and a dedicated, on-site branch manager. HUD confirms as much in its online FAQs,
which were updated to reflect the requirements in Mortgagee Letter 2011-34. Again, however, if a
lender’s traditional branch office in New York is now permitted under FHA guidelines to originate
loans in California, presumably such loans will be originated via the internet or telephone. This
appears to make the need for a direct lending branch unnecessary in most instances. That said,
regardless of whether FHA-approved mortgagees originate loans through a direct lending branch, the
nationwide origination authority now available to all branches is a welcome change.
II. Additional Changes to the FHA Lender Approval Handbook
The Mortgagee Letter makes other changes to the FHA Lender Approval Handbook and clarifies
existing requirements. While many of these modifications appear to be aimed at updating certain
provisions of HUD Handbook 4060.1 to ensure consistency with recent regulatory changes, other
provisions create new burdens for approved mortgagees.
A. Branch Office Facilities
HUD is no longer regulating branch office facilities. Mortgagee Letter 2011-34 removes paragraphs
2-11(B), 2-11(C), 2-11(D) and 3-2(A)(9) from HUD Handbook 4060.1, which means that a lender’s
traditional branch offices, non-traditional branch offices, and direct lending branch offices are no
longer required to comply with specific requirements for their office facilities under FHA guidelines.
In other words, HUD is no longer regulating whether a lender’s branch offices have adequate office
space, provide privacy for conducting interviews, or display fair housing posters, to name a few. New
2
One Step Closer to Leveling the Playing Field for FHA Lenders: HUD
Eliminates Geographic Restrictions on Lending
applicants for FHA approval also are no longer required to submit evidence of acceptable home office
facilities at the time of application.
However, a lender must continue to ensure that its branches comply with state laws, where applicable,
and the Mortgagee Letter does not change the office facility requirements applicable to a lender’s
main/home office. Thus, FHA continues to require that a lender’s home office have adequate office
space and equipment, be located in separate commercial space that is conducive to mortgage lending,
be clearly identified to the public, and display a fair housing poster. Lenders also should not construe
the Mortgagee Letter to mean that HUD is no longer regulating or requiring separate branch offices.
FHA regulations still require an approved lender to register branch offices with HUD in order to
originate loans or submit applications for mortgage insurance.6 And, HUD Handbook 4060.1
continues to regulate a lender’s branch office staffing and require the lender to pay all expenses of all
branch offices.7 That means that the current prohibition on “net branching” arrangements remains in
place. The Department’s online FAQs also highlight the fact that loan officers may not be outstationed from their registered home or branch office location where they are employees. Thus, when
a loan officer identifies a physical address on a loan application as the location where an FHA loan
will be originated, an FHA-approved lender must ensure that location is a registered branch with
HUD, is adequately staffed with at least one full-time employee, is supervised by a branch manager,
and otherwise complies with FHA guidelines and state licensing requirements.
B. Owners and Officers
1. New Lender Approval Applications
New applicants and existing mortgagees also should be aware of new requirements related to
company owners and officers. First, new applicants for FHA approval must identify, in the
Lender Approval Application form, the appropriate owners for their business form. That means
publicly-traded companies are required to list all owners with 10% or more ownership, while
non-publicly-traded companies must identify only those owners with 25% or more ownership in
the entity. The Mortgagee Letter reiterates HUD’s requirement that a limited liability company
(“LLC”) and a partnership identify all members and general partners, respectively, in the
application form.
Second, a new applicant for FHA approval must ensure its application lists all “corporate
officers” that will be directly involved in managing, overseeing, or conducting the applicant’s
FHA business and include resumes and credit reports for these individuals as required by
paragraphs 3-2(A)(4) and (5) of HUD Handbook 4060.1. Thus, if an Owner, President, Vice
President, Chief Operating Officer, Chief Financial Officer, Director, Corporate Secretary,
Chief Executive Officer, Chairman of the Board, Member of a LLC, or Manager of an LLC will
be involved in an applicant’s FHA business, the applicant must identify these officers by name
and supply the necessary documentation to HUD with its application.8
We note that the definition of “corporate officer” is only slightly different from the definition
HUD published in Mortgagee Letter 2010-38, but Mortgage Letter 2011-34 makes clear that its
definition of “corporate officer” replaces any prior definitions.9 In addition, we understand that
HUD’s Office of Lender Approval and Recertification takes the position that “Vice President”
includes only those individuals directly involved in processing, underwriting, and corporate
leadership for an entity’s FHA operations, and not individuals responsible for advertising and
sales. We, however, note that this position is not reflected in the text of Mortgagee Letter 201134 and was not addressed in the online FAQs updated by HUD in connection with Mortgagee
3
One Step Closer to Leveling the Playing Field for FHA Lenders: HUD
Eliminates Geographic Restrictions on Lending
Letter 2011-34. And, lastly, if FHA-approved mortgagees had any hope that HUD would
match its definition of “corporate officer” to that of a “control person” under the Nationwide
Mortgage Licensing System (“NMLS”), no such luck with this Mortgagee Letter.
2. Ongoing Reporting Obligation
Existing FHA-approved mortgagees (and new applicants once approved) also must report to
HUD any changes in their owners or “corporate officers” as defined above. Specifically, the
Mortgagee Letter amends paragraphs 6-11 and 6-13 of HUD Handbook 4060.1, which governs
a lender’s ongoing responsibility to update HUD on changes to the lender’s business. Thus,
with this change, rather than reporting only when an owner with less than 25% of voting stock
acquired 25% or more ownership in the entity, an approved lender must now report all
ownership changes, including new owners and changes in ownership interest, within 10 days of
the changes. That means any change in a LLC’s members must be reported to HUD, any
change in the general partners of a partnership must be reported to HUD, and any person’s or
entity’s acquisition of 10% or more of a publicly-traded company or 25% or more of a nonpublicly traded company must be reported to HUD. Similarly, any change in an approved
lender’s “corporate officers” with direct involvement in the lender’s FHA business will trigger a
reporting obligation to HUD within 10 days of the change in corporate officer.10
For mid-size to large mortgagees, this change will create a tremendous administrative burden.
If companies’ ownership percentages fluctuate regularly, or companies make regular shifts in
corporate officers, these lenders could find themselves making constant ownership reports (with
credit reports and resumes) and/or officer reports (with credit reports) to HUD. This obligation
will be virtually impossible for public companies to satisfy with daily changes in stock
ownership. We would hope that HUD will clarify these requirements to make them more
realistic and less burdensome. Moreover, for those lenders looking to streamline both federal
and state reporting procedures, different FHA and NMLS reporting requirements are likely to
continue causing frustration.
C. Other Changes and Clarifications
HUD made other clarifications and updates to HUD Handbook 4060.1, one of which was necessary to
match recent amendments to FHA regulations. Notably, while paragraph 6-26 has always required
approved lenders to report other business changes to HUD within 10 days of their occurrence, recent
amendments to FHA regulations expanded upon the criteria that render a lender ineligible for FHA
approval and required that lenders immediately notify HUD when any such criteria occur. With
Mortgagee Letter 2011-34, HUD amends paragraph 6-26 to make clear that lenders must report to
HUD, within 10 business days,11 when the lender or any of its officers, partners, directors, principals,
managers, supervisors, loan processors, loan underwriters, or loan originators are subject to any of
these business changes identified in FHA regulations or sanctions, exclusions, fines or penalties.12
We emphasize that this is an ongoing reporting obligation; approved lenders must not wait until their
annual recertification to notify HUD about sanctions or other actions taken against them or their
owners, officers, and employees. We also remind lenders that reports made through NMLS regarding
regulatory actions or litigation do not satisfy the reporting obligation to HUD. From an enforcement
perspective, HUD is taking a tough stance on lenders that do not report sanctions, revocations or
penalties to HUD, even if such reports were made to the states, and has gone so far as to propose
4
One Step Closer to Leveling the Playing Field for FHA Lenders: HUD
Eliminates Geographic Restrictions on Lending
debarment of company executives and officers when companies fail to make these reports. The
failure to report changes in ownership and officers also has the potential to become an enforcement
focus, which could subject lenders to hefty monetary settlements with the Department. HUD means
business, and FHA-approved lenders must take the ongoing reporting obligations, and related annual
recertification requirements, seriously.
The Mortgagee Letter also amended paragraph 6-9 of HUD Handbook 4060.1 to require lenders to
register all “doing business as” (“DBA”) names with HUD. While approved lenders were already
required to register DBA names through FHA Connection, FHA Connection will now permit lenders
to register up to six DBA names for each home or branch office, as long as the lender has state
approval for the DBA names. If a lender has more than 6 DBA names, it must register these names by
submitting the names, along with documentation authorizing their use, to HUD’s Office of Lender
Activities and Program Compliance.
Finally, the Mortgagee Letter rescinds paragraph 6-16 of HUD Handbook 4060.1, which permitted
existing mortgagees to convert their approval types. On a going-forward basis, any lenders that desire
to convert their FHA lender approval type must submit a new approval application package, along
with a $1,000 application fee, to HUD.
____________________________________________________________________________
The changes announced in Mortgagee Letter 2011-34 are a good start to addressing the unintended
consequences of last year’s regulatory amendments to the FHA lender approval requirements and to
aligning HUD’s Handbook guidelines to the amended regulatory provisions. HUD has more work to
do to implement these changes fully, and we expect to hear more from HUD as they continue to
implement their FHA approval requirements. Hopefully, future announcements will provide the
industry with additional guidance to address the inequities between TPOs and FHA-approved
mortgagees related to the employment restrictions currently applicable only to FHA-approved
mortgagees.
If you have any questions about this Mortgagee Letter or would like assistance with FHA compliance
issues, please contact Phillip L. Schulman (202.778.9027 / phil.schulman@klgates.com), Krista
Cooley (202.778.9257 / krista.cooley@klgates.com), or Holly Spencer Bunting (202.778.9853 /
holly.bunting@klgates.com).
Authors:
Krista Cooley
krista.cooley@klgates.com
+1.202.778.9257
Holly Spencer Bunting
holly.bunting@klgates.com
+1.202.778.9853
Kathryn M. Baugher
kathryn.baugher@klgates.com
+1.202.778.9435
5
One Step Closer to Leveling the Playing Field for FHA Lenders: HUD
Eliminates Geographic Restrictions on Lending
1
See “New FHA Approval Regulations: HUD Weighs in on Risk Management,” Mortgage Banking and Consumer
Financial Products Alert, by Phillip L. Schulman and Krista Cooley, April 27, 2010.
2
See HUD Handbook 4060.1 REV-2, ¶ 2-9.
3
HUD Handbook 4060.1 REV-2.
4
See “FHA Frequently Asked Questions,” available at https://www.hud.gov/answers.
5
The Mortgagee Letter notes that HUD will maintain AAFBs at the field office jurisdiction level in FHA’s system for
implementation with any Credit Watch terminations. As HUD will continue to utilize field office jurisdictions in connection
with its Credit Watch termination initiative, FHA-approved mortgagees should continue to monitor closely their
default/claim rates in connection with each of the geographic HUD field office jurisdictions in which each mortgagee
engages in the origination of FHA-approved loans.
6
See 24 C.F.R. § 202.5(k).
7
The Mortgagee Letter also reminds lenders that FHA-approved mortgagees must pay all expenses incurred in the
operation of their home and branch (including direct lending) offices directly, and may not engage in “net branching”
arrangements in which a party other than the approved mortgagee pays some or all of the branch office expenses. This
restriction was already found in paragraphs 2-8 and 2-14(B) of HUD Handbook 4060.1. The Mortgagee Letter removes
paragraph 2-14(B) for editorial purposes.
8
It is our understanding that HUD’s systems require certain “corporate officer” positions (i.e., Chief Executive Officer,
President, Chief Operating Officer, or Chief Financial Officer) to be identified as part of an application for approval,
regardless of whether that person has direct involvement in the applicant’s FHA business. Moreover, HUD issued a FAQ
in August 2011 that stated: “The term ‘Corporate Officer’ does not include a Member of the Board of Directors if the
individual does not also hold another office that is a ‘Corporate Officer’ within the definition provided in this Mortgagee
Letter.” See FHA Frequently Asked Questions, available at
http://portal.hud.gov/FHAFAQ/controllerServlet?method=showPopup&faqId=1-6KT-161. Presumably this FAQ refers to
the definition of “corporate officer” in Mortgagee Letter 2010-38, but as the definition of “corporate officer” in Mortgagee
Letter 2011-34 continues to encompass directors and the Chairman of the Board, it is unclear whether HUD continues to
take the position reflected in this FAQ.
9
The definition of “corporate officer” in Mortgagee Letter 2011-34 adds Manager of a LLC to the prior list of titles and
positions deemed to be “corporate officers” for FHA’s purposes.
10
As Mortgagee Letter 2010-38 had already amended the definition of corporate officer, the only real change with this
section of Mortgagee Letter 2011-34 is that approved LLCs must now report changes in managers to HUD.
11
With this amendment to HUD Handbook 4060.1, it is HUD’s position that notification within 10 business days satisfies
the requirement to immediately notify HUD of certain business changes.
12
These business changes include: (1) Being suspended, debarred, under a limited denial of participation (LDP), or
otherwise restricted under 2 CFR part 2424 or 24 CFR part 25, or under similar procedures of any other federal agency;
(2) Being indicted for, or convicted of, an offense that reflects adversely upon the integrity, competency, or fitness to meet
the responsibilities of the lender or mortgagee to participate in the Title I or Title II programs; (3) Being subject to
unresolved findings, as that term is defined in Mortgagee Letter 2010-38, as a result of HUD or other governmental audit,
investigation, or review; (4) Engaging in business practices that do not conform to generally accepted practices of prudent
mortgagees or that demonstrate irresponsibility; (5) Being convicted of, or pleading guilty or nolo contendere to, a felony
related to participation in the real estate or mortgage loan industry: (i) During the 7-year period preceding the date of the
application for licensing and registration; or (ii) At any time preceding such date of application, if such felony involved an
act of fraud, dishonesty, or a breach of trust or money laundering; or (6) Being in violation of provisions of the Secure and
Fair Enforcement (SAFE) Mortgage Licensing Act of 2008 (12 U.S.C. § 5101 et seq.) or any applicable provision of state
law. 24 C.F.R. § 202.5(j).
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One Step Closer to Leveling the Playing Field for FHA Lenders: HUD
Eliminates Geographic Restrictions on Lending
K&L Gates’ Mortgage Banking & Consumer Financial Products practice provides a comprehensive
range of transactional, regulatory compliance, enforcement and litigation services to the lending and
settlement service industry. Our focus includes first- and subordinate-lien, open- and closed-end
residential mortgage loans, as well as multi-family and commercial mortgage loans. We also advise
clients on direct and indirect automobile, and manufactured housing finance relationships. In addition,
we handle unsecured consumer and commercial lending. In all areas, our practice includes traditional
and e-commerce applications of current law governing the fields of mortgage banking and consumer
finance.
For more information, please contact one of the professionals listed below.
LAWYERS
Boston
R. Bruce Allensworth
Irene C. Freidel
Stanley V. Ragalevsky
Brian M. Forbes
Andrew Glass
Phoebe Winder
Charlotte
John H. Culver III
Amy Pritchard Williams
Chicago
Michael J. Hayes Sr.
Dallas
David Monteiro
Miami
Paul F. Hancock
New York
Philip M. Cedar
Elwood F. Collins
Steve H. Epstein
Drew A. Malakoff
San Francisco
Jonathan Jaffe
Elena Grigera Babinecz
Seattle
Holly K. Towle
Washington, D.C.
Costas A. Avrakotos
David L. Beam
Melanie Hibbs Brody
Krista Cooley
Daniel F. C. Crowley
Eric J. Edwardson
Steven M. Kaplan
Phillip John Kardis II
Rebecca H. Laird
Laurence E. Platt
bruce.allensworth@klgates.com
irene.freidel@klgates.com
stan.ragalevsky@klgates.com
brian.forbes@klgates.com
andrew.glass@klgates.com
phoebe.winder@klgates.com
+1.617.261.3119
+1.617.951.9154
+1.617.951.9203
+1.617.261.3152
+1.617.261.3107
+1.617.261.3196
john.culver@klgates.com
amy.williams@klgates.com
+1.704.331.7453
+1.704.331.7429
michael.hayes@klgates.com
+1.312.807.4201
david.monteiro@klgates.com
+1.214.939.5462
paul.hancock@klgates.com
+1.305.539.3378
phil.cedar@klgates.com
elwood.collins@klgates.com
steve.epstein@klgates.com
drew.malakoff@klgates.com
+1.212.536.4820
+1.212.536.4005
+1.212.536.4830
+1.216.536.4034
jonathan.jaffe@klgates.com
elena.babinecz@klgates.com
+1.415.249.1023
+1.415.882.8079
holly.towle@klgates.com
+1.206.370.8334
costas.avrakotos@klgates.com
david.beam@klgates.com
melanie.brody@klgates.com
krista.cooley@klgates.com
dan.crowley@klgates.com
eric.edwardson@klgates.com
steven.kaplan@klgates.com
phillip.kardis@klgates.com
rebecca.laird@klgates.com
larry.platt@klgates.com
+1.202.778.9075
+1.202.778.9026
+1.202.778.9203
+1.202.778.9257
+1.202.778.9447
+1.202.778.9387
+1.202.778.9204
+1.202.778.9401
+1.202.778.9038
+1.202.778.9034
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One Step Closer to Leveling the Playing Field for FHA Lenders: HUD
Eliminates Geographic Restrictions on Lending
Phillip L. Schulman
Nanci L. Weissgold
Kris D. Kully
Morey E. Barnes
Kathryn M. Baugher
Emily J. Booth
Holly Spencer Bunting
Andrew L. Caplan
Rebecca Lobenherz
Melissa S. Malpass
David G. McDonough, Jr.
Eric Mitzenmacher
Stephanie C. Robinson
Tori K. Shinohara
Kerri M. Smith
David Tallman
phil.schulman@klgates.com
nanci.weissgold@klgates.com
kris.kully@klgates.com
morey.barnes@klgates.com
kathryn.baugher@klgates.com
emily.booth@klgates.com
holly.bunting@klgates.com
andrew.caplan@klgates.com
becky.lobenherz@klgates.com
melissa.malpass@klgates.com
david.mcdonough@klgates.com
eric.mitzenmacher@klgates.com
stephanie.robinson@klgates.com
tori.shinohara@klgates.com
kerri.smith@klgates.com
david.tallman@klgates.com
+1.202.778.9027
+1.202.778.9314
+1.202.778.9301
+1.202.778.9215
+1.202.778.9435
+1.202.778.9112
+1.202.778.9853
+1.202.778.9094
+1.202.778.9177
+1.202.778.9081
+1.202.778.9207
+1.202.778.9127
+1.202.778.9856
+1.202.778.9423
+1.202.778.9445
+1.202.778.9046
PROFESSIONALS
Government Affairs Advisor / Director of Licensing
Washington, D.C.
Stacey L. Riggin
stacey.riggin@klgates.com
+1.202.778.9202
Regulatory Compliance Analysts
Washington, D.C.
Dameian L. Buncum
Teresa Diaz
Robin L. Gieseke
Brenda R. Kittrell
Dana L. Lopez
Patricia E. Mesa
Daniel B. Pearson
Jeffrey Prost
+1.202.778.9093
+1.202.778.9852
+1.202.778.9481
+1.202.778.9049
+1.202.778.9383
+1.202.778.9199
+1.202.778.9881
+1.202.778.9364
dameian.buncum@klgates.com
teresa.diaz@klgates.com
robin.gieseke@klgates.com
brenda.kittrell@klgates.com
dana.lopez@klgates.com
patty.mesa@klgates.com
daniel.pearson@klgates.com
jeffrey.prost@klgates.com
8