The past year brought some good news for Federal Housing Administration mortgagees, as top Department of Housing and Urban Development officials continued to urge the Department of Justice to reduce reliance on the False Claims Act in enforcing FHA program requirements.
Notwithstanding this potential de-escalation, FHA lending still carries risk and HUD’s public statements suggest that it may ramp up its own enforcement of FHA requirements.
An obvious FHA compliance checkpoint is the annual recertification that mortgagees are required to complete within 90 days after their fiscal year ends, which for the vast majority of mortgagees is March 31st.
HUD has not yet indicated whether it will extend the March 31st deadline due to the partial government shutdown, but it has said it will resume review of recertification submissions during the last week of January. Absent further guidance, mortgagees should assume the deadline will not be extended.
In order to ensure timely and accurate submission, mortgagees should prepare early. This checklist offers suggestions for a less painful recertification process, and highlights issues that have vexed mortgagees in the past.
1. Understand the process and timing requirements.
Start now and aim to complete the process well ahead of the deadline. In recent years, many mortgagees that submitted recertification filings toward the end of the certification window experienced severe delays that, in some cases, resulted in referral to the Mortgagee Review Board for consideration of enforcement action.
Mortgagees’ FHA administrators should understand how to complete the recertification within HUD’s Lender Electronic Assessment Portal. The LEAP User Manual includes helpful screenshots explaining the mechanics of the process.
2. Ensure your LEAP profile is accurate.
A mortgagee should confirm that its LEAP account profile and contact information is accurate and up to date, otherwise important and time-sensitive information may not be received.
Senior management should also confirm that the information regarding Certifying Officials identified in LEAP is accurate and that these individuals will be available during the recertification period to complete the recertification statements.
The certification must be completed by a corporate officer of the mortgagee who has been granted the Certifying Official authorization in FHA Connection. Mortgagees can designate up to three individuals as Certifying Officials. Use all three. Each year, there are mortgagees that unexpectedly need to appoint a last-minute replacement.
3. Establish an appropriate pre-certification diligence process.
The annual Certification Statements require the Certifying Official to attest to nine multi-part statements that cover a variety of compliance and regulatory issues.
Mortgagees should establish a pre-certification diligence process so that Certifying Officials can certify under the “to the best of their knowledge and after conducting a reasonable investigation” standard. Appropriate policies and procedures can foster recertification in accordance with this standard.
For example, some mortgagees send annual surveys to personnel that requires respondents to disclose whether they have been the subject of criminal or regulatory actions during the certification period.
Management can review any affirmative responses to determine whether they fall within the certification statements. To the extent that there are no affirmative responses that conflict with the certification, the mortgagee’s Certifying Official will have support that it is reasonable to attest that an investigation was conducted and no events require disclosure. This is just one example of how mortgagees fulfill the “reasonable investigation” requirement.
4. Know which certification statements are problematic.
Mortgagees consistently struggle with some of the Certification Statements, often delaying submission of the recertification package. For example, Certification Statement 7 provides:
[T]he Mortgagee does now, and did at all times throughout the Certification Period, comply with all HUD regulations and requirements necessary to maintain the Mortgagee’s FHA approval as codified in 24 CFR § 202.5, HUD Handbook 4000.1 Sections I and V, as amended by Mortgagee Letter, and any agreements entered into between the Mortgagee and HUD, except for those instances of non-compliance, if any, that the Mortgagee reported to HUD and for which the Mortgagee received explicit clearance from HUD to continue with the certification process.
While there is a reasonable basis for reading this language to cover only substantive HUD eligibility requirements set forth in 24 C.F.R. § 202.5, Sections I (Doing Business with FHA) and V (Quality Control, Oversight and Compliance) of the HUD Handbook, and agreements with HUD, these requirements are quite broad.
For example, Section I requires that mortgagees ensure their operations are compliant with all applicable federal, state, and local laws. As such, one possible reading of Certification Statement 7 is that it requires certification to compliance with all applicable laws, rather than just FHA eligibility requirements.
Because the DOJ may still bring False Claims Act cases to enforce FHA program requirements – and Certification Statements have been at least a partial basis for such actions – it is imperative that mortgagees carefully review the Certification Statements and their risk appetite when determining whether to indicate an inability to certify to any particular Certification Statement.
5. Submit “Unable to Certify” explanations in a manner that protects CSI.
Many mortgagees must submit “Unable to Certify” explanations for statements to which the Certifying Official cannot attest in the affirmative. Such explanations may cover a range of events requiring disclosure – from an individual employee’s criminal conviction, to state examination findings or state regulatory actions. Importantly, mortgagees must take care when drafting these explanations because some state, and all prudential regulators and the Consumer Financial Protection Bureau, consider examination reports and even some enforcement actions to constitute “Confidential Supervisory Information” (CSI) that cannot be disclosed, even to HUD.
Contact regulators early on to remind them that the mortgagee may be required to disclose such events and to obtain permission to provide at least a contact name and number, if not more substantive information, to HUD.
While some mortgagees simply indicate in their “Unable to Certify” explanations that they will contact a regulator for permission to share the CSI, HUD has previously refused to move forward with recertification pending the receipt of at least a contact name and number for each matter referenced.
6. Respond promptly to requests for additional information.
Reply promptly if HUD follows up with questions or requests additional information on Unable to Certify explanations or other matters, particularly as the March 31st deadline approaches. Every year, the Mortgagee Review Board sanctions mortgagees for failure to complete recertification on time. The committee reviewing recertification packages, including Unable to Certify explanations, typically meets only once or twice per week; any delay in responding risks delaying recertification by a full week.
7. Submit notice of material event filings throughout the certification period.
Finally, like instituting a pre-certification diligence process, submitting Notice of Material Event (NME) filings as they occur during the year can speed recertification immensely. Mortgagees must submit these filings for a myriad of reasons, from routine operational changes, like the addition of an officer, to the existence of an Unresolved Finding or sanction in connection with a regulatory enforcement action. While “sanction” is not expressly defined, “Unresolved Finding” is broad and means a material, adverse written finding contained in a lawsuit or report produced in connection with an investigation, audit, or review conducted by HUD or another regulatory agency with oversight over the mortgagee.
Importantly, mortgagees must submit an NME filing within 10 days of the occurrence of a reportable event (and the events that HUD considers reportable can differ from those that state regulators require licensees to report). While this can be burdensome, it is invaluable to ensuring HUD compliance, as well as to streamlining recertification.
Specifically, the Certification Statements generally do not require disclosure during the recertification process if an item was “reported to HUD and… the Mortgagee received explicit clearance from HUD to continue with the certification process.” Mortgagees that submit NME filings throughout the year and received clearance should not need to submit individualized disclosures for those instances of non-compliance when recertifying.