Don’t Let Lender Overlays Catch You Off-guard
The latest HUD Inspector General Report aims at HUD’s inability or unwillingness to follow federal laws. HUD’s reported failures may have ramifications to the FHA, VA, USDA-RD, and GSEs mortgage programs. The report titled “Top Management Challenges Facing the U.S. Dept. of HUD in 2021” lists “Protecting the FHA Mortgage Insurance Fund” as a top priority for HUD’s Management. The report details the significant threat to the program presented by lenders making unprecedented numbers of FHA-insured mortgages to borrowers with delinquent federal tax debt. In a scathing rebuke to HUD, the Inspector General’s Office stated that they had identified more than 56,000 FHA loans tallying 13 billion dollars to borrowers ineligible for FHA financing due to delinquent federal income taxes. The IG’s critical report on loans to delinquent taxpayers was not HUD’s first charge of violating restrictions on government guarantees. In 2012 The Government Accountability Office (GAO) offered similar criticisms. The particular threat risks these loans pose are outside the scope of this writing. However, the risks as quantified by HUD are not insignificant, amounting to losses in the billions. In the report, the Inspector General demanded that HUD act on the problem with all haste. The same federal laws that prohibit the FHA from guaranteeing mortgages to delinquent federal debtors also apply to the VA and USDA guarantees.
Most originators know something about tax liens, tax debt, and repayment arrangements. Priority concerns aside, the FHA Handbooks 4000.1 and 4235.1 prohibit borrowers with delinquent Federal tax debt from being approved for a mortgage unless the delinquent account is paid or a satisfactory repayment plan exists. For forward mortgages, borrowers with unpaid tax debt are eligible only if they have made timely payments for at least three months. The HECM handbook states 4235.1 Rev 1, 4-3 “If the borrower is presently delinquent on any Federal debt (e.g., VA-guaranteed mortgage, HUD Section 312 Rehabilitation loan or Title I loan, Federal student loan, Small Business Administration loan, delinquent Federal taxes, etc.) or has a lien, including taxes, placed against their property for a debt owed to the United States, the borrower is not eligible until the delinquent account is brought current, paid or otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing.”
The GSEs have similar requirements but stipulate that applicants must have made at least one payment towards an acceptable IRS payment plan before closing.
If the IRS has a lien against the applicant, generally, that is apparent to the lender. But absent a lien, what is the lender’s obligation to determine delinquent federal tax status? According to the GAO and HUD reports, lenders may be unclear or, at best, inconsistent in handling applicants with delinquent federal taxes, apparently taking a see no evil hear no evil approach.
Where does that leave the mortgage originators? No one wants to abet mortgage fraud or practices harmful to the health of the industry. So how do you keep from being embarrassed by underwriting conditions or prefunding audits? How should MLO’s comprehend and address their responsibility in discovering delinquent tax status during the loan application or pre-qualification? Read more in next week’s newsletter.
Should you be concerned about HMDA reporting requirements?
Who will be the next compliance piñata
You may stop reading if you know the difference between an application and prequalification described under Regs B and C. If you do not, read on.
The HMDA requires that non-depository financial institutions, including mortgage brokers, report specific data regarding mortgage applications. Consumer and investor transactions are covered. An Application is: (a) an oral or written request (b) for a Covered Loan (c) that is made in accordance with procedures the Financial Institution uses for the type of credit requested (12 CFR 1003.2(b)(1)). This definition of application is similar to the Regulation B definition.
The Regulation C reporting transaction threshold includes preapprovals not accepted or denied, applications withdrawn, applications closed for incompleteness, applications resulting in a counteroffer. If the lender reports – you don’t. If there is no lender for these originations, they are yours to report if you meet the threshold test (100 closed-end originations).
Under Regulation C, prequalifications resulting in adverse action are not originations and are excluded from reporting and do not count towards the reporting threshold. Preapprovals resulting in adverse action are reportable. Are your prequalifications preapprovals under Regulation C?
Next week, Regulation C prequalification or preapproval?
Tip of the Week
Building rapport in under 60 seconds
Listening to the stakeholder is the first step in building rapport and trust. The ability to listen takes practice. Step one – withhold judgment about the veracity of what they say. Step two – use active listening techniques to ensure you understand what is said, and they know you get what they are saying. Step three – let them know you understand and respect the way they want to work together. BUT, what if they are unreasonable, demanding, or will just make life more challenging than you’d like? See next week’s tip, negotiation.