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FHA Introduces new Defect Taxonomy
The Federal Housing Administrationrn(FHA) has introduced its initial steps toward a new Single Family Loan QualityrnAssessment Methodology or what it is also calling a “defect taxonomy” for categorizationrnof loan defects in loans it endorses. rnThese steps will ultimately result in a nine defect categories that willrnreplace the 99 codes currently in use. </p
FHA said it has been working for thernpast year on a series of changes aimed at improving its quality assurancernprocess. The new taxonomy centers onrnthree core concepts: identifying a defect, capturing the sources and causes ofrna defect and assessing the severity of a defect and will complement the updatedrncertification language already released by FHA and its new Handbook, the firstrnsection of which becomes effective in September. These efforts are part of the agency’s effortrnto provide greater clarity and transparency to single family lenders. FHA says it expects this increased clarity willrnallow lenders to originate loans confidently-knowing their mortgages meet FHArnstandards.</p
The current approach to qualityrnassurance consists of defect codes that focus on distinct causes, with findingsrnfor each defect classified as being either Unacceptable or Deficient. Much ofrnthe detail of the sources and causes of defects was only captured in loanrnreviewers’ notes and thus could not be aggregated.</p
The new distinct defect categories willrnbe supported by codes that will identify the source and cause of the defect,rnand offer some new insight into the significance of a given deficiency withinrneach category. This will give lenders additional information that helpsrnidentify where their challenges are in originating FHA loans and allow them tornmake changes to reduce errors that potentially trigger enforcement actions. Therntaxonomy will also allow FHA to monitor trends in deficiencies and determine ifrnpolicies can be enhanced to help lenders better comply with FHA standards.</p
The nine defect categories under thernnew taxonomy are:</p<ul type="disc"
It is expected that under this newrntaxonomy the agency’s approach to quality assurance will evolve into one with arnlimited number of defects organized within each of the above-referenced ninerncategories. Defects will then be supported by more detailed categorization ofrnthe sources and causes of a defect and assigned to one of four tiers indicatingrnthe severity of the defect. Together these changes will create a morerntransparent and informative structure.</p
FHA said no effective date for thernDefect Taxonomy has been set but by posting the information now lenders willrnhave time to consider any changes or updates they may want to make to the ownrnprocesses. The agency also stressed thatrnthis is not a comprehensive statement on all of its compliance monitoring orrnenforcement efforts which are set forth in separate law</p
“This new guidance gives lendersrngreater insight into how FHA will capture defects and their relativernseverities,” said Principal Deputy Assistant Secretary for Housing, EdwardrnGolding. “By enhancing our approach, lenders will have more confidence inrnhow they interact with FHA, and we anticipate will be more willing to lend tornfuture homeowners who are ready to own.”</p
David H. Stevens, President and CEO ofrnthe Mortgage Bankers Association (MBA) and former commissioner of FHA said in arnformal statement that the release of the FHA loan qualityrnassurance framework standards is a step in the right direction towardsrnhelping FHA’s parent Department of Housing and Urban Development (HUD) “focusrnon the most egregious risk in their portfolio and providing better clarity tornlenders on which defects pose the greatest risk.”
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Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.
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