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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2010

Uniform Standards May Ease FHA Shift

As broker-approval tasks transition to lenders, consistency concerns mount

The U.S. Department of Housing and Urban Development's (HUD's) decision to eliminate Federal Housing Administration (FHA) approval of mortgage brokers -- aka, loan correspondents -- draws a clear line in the sand. Beginning Jan. 1, mortgage brokers working with FHA loans must instead be approved by sponsoring, FHA-approved lenders.

But without uniform standards for approving brokers, these lenders can place brokers and themselves in a precarious, potentially costly position. One option to help alleviate these concerns would be the creation of automated, universal lender standards for broker reviews.

Based on comments HUD received, many industry professionals felt the elimination of broker approvals would place a burden on mortgage bankers, which would incur the labor costs associated with approving brokers. Additionally, many in the industry expressed concern that lenders wouldn't enforce consistent standards, thereby making broker compliance more costly.

As it stands, lenders' standards for approval can vary greatly from FHA's process. Researching and reviewing lenders' diverse requirements present an expense that could sink wholesale FHA production altogether.

An industrywide system for broker approval, however, could reduce due-diligence costs for brokers and lenders and make the wholesale FHA channel more attractive and affordable. As such, brokers would be wise to advocate for such a system while lenders begin developing their third-party management protocols.

In leading the charge for a consortium approach to broker approvals, brokers can explain the cost benefits to lenders and suggest that lenders cooperate to develop rigorous guidelines that ensure properly originated FHA loans.

Anything brokers can do to restore consumer confidence and lender trust should pay dividends. The resurgence of the wholesale channel represents one of the keys to the recovery of the mortgage and real estate markets. Further, becoming active in the discussion about lender approvals for third-party FHA-loan origination provides brokers an opportunity to have significant input on how final requirements look -- even if universal standards never become reality.

Some criteria are obvious. For example, brokers must have all current and necessary state licenses and approvals, and they must have a strong history of loan performance. 

Other criteria are open for debate. Although some might consider brokers' personal credit to be of utmost importance, others might think a strong business-credit history better represents professional capabilities. Because many brokers suffered financially during the market downturn -- and may have less-than-perfect personal credit histories-- examining business credit likely will favor more brokers.

Although a broker's financial troubles would raise many bankers' figurative eyebrow, a slightly blemished personal credit report or inadequate financials shouldn't torpedo a relationship. Business-credit reports reflect a business enterprise's financial history and offer a more comprehensive portrait of brokers' financial viability.

Other mandates worth considering are the purchase of fidelity bonds, which address protection against fraud, and errors-and-omissions insurance.


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