Possibly in response to the CFPB's recent emphasis on self-reporting, FHA issued Mortgagee Letter 2013-41 last week, which clarifies the self-reporting requirements for Single Family FHA-approved lenders. Ballard Spahr has reported extensively on the CFPB's self-reporting initiative (linked here, here, and here) and recently held a webinar on the topic. As discussed on our recent webinar, this is a predictable step for FHA as a result of the CFPB's initiative, and the industry should expect similar guidance from other federal and state regulators in the near future.

Effective as of the date issued (November 13, 2013), the Mortgagee Letter addresses the following areas:

• What must be reported to FHA – The Mortgagee Letter outlines the requirement that lenders report to FHA: (i) all findings of fraud and material misrepresentations, and (ii) any material findings concerning the origination, underwriting, or servicing of the loan, that the lender is unable to mitigate or otherwise resolve in accordance with the Mortgagee Letter. The Mortgagee Letter goes on to define what constitutes a "finding," when a finding is "material," and whether a finding has been "mitigated."

The Mortgagee Letter also states that for all findings that must be reported, the lender must identify what actions, if any, have been taken to attempt to mitigate or resolve each finding, and report any planned or pending follow-up activities. In order to facilitate compliance with this requirement, the Lender Reporting Feature in the Neighborhood Watch Early Warning System has been updated with new functionality to document such information.

• Timeframe for lenders' internal reporting to senior management – The Mortgagee Letter clarifies that initial findings from a quality control review must be reported to senior management within 30 days of completion of the initial findings report. The letter further describes requirements should the initial findings report raise suspicion of the reportable occurrences noted above.
• Timeframe for lenders' external reporting to FHA – The Mortgage Letter makes clear that findings of fraud or material misrepresentation must be reported to FHA immediately. All other material findings must be reported to FHA no later than 30 days after the lender has completed its internal investigation, or within 60 days of initial disclosure of the findings, whichever occurs first.
• How findings should be reported to FHA – Self-reports must be submitted to FHA through the Neighborhood Watch Early Warning System. FHA will not accept paper reports. The Mortgagee Letter clarifies that this directive supersedes Section 7-3(J) of HUD Mortgagee Approval Handbook 4060.1, which states that findings of fraud or other serious violations must be reported directly to the HUD Homeownership Center having jurisdiction over the lender.
• FHA's review process – The Mortgagee Letter provides a basic description of its review process for any self-reported events. It does emphasize that a contact person for the lender must be listed in the self-report, with access to the Endorsement Case Binder, the Quality Control Report, and any additional documentation needed for FHA to complete a full evaluation. Notably, the letter states that if FHA finds that the lender has not satisfactorily mitigated or resolved the findings, FHA may demand indemnification for loans endorsed through the Lender Insurance process or request indemnification for any non-endorsed loans, among other potential remedies.
• Repercussions of failing to report to FHA – The Mortgagee Letter simply states that failure to comply with FHA requirements may result in FHA taking administrative action against the lender.

The Mortgagee Letter also references the existing Quality Control Plan requirements for FHA lenders, which must include procedures for reporting findings to senior management, taking corrective action, and notifying FHA. As a reminder, the FHA Quality Control Plan requirements can be found in Chapter 7 of the HUD Mortgagee Approval Handbook 4060.1.

Thankfully, for FHA lenders, the Mortgagee Letter does provide more concrete guidance as to what must be reported, the consequences of such reporting, and procedures for reporting and review by FHA. This is a welcome approach as compared to the CFPB's self-reporting guidance, which involves a vague incentive structure and poorly defined expectations.