History

• In April 2010, HUD issued a final rule for the reformation of FHA insurance programs in an effort to manage its risk. In addition to changing the approval process for lenders that underwrite and originate FHA-insured loans, a key provision of the final rule was the elimination of the approval process for mortgage brokers, or loan correspondents. Prior to the rule, FHA approved individual brokerages to process and originate loans for its insurance programs. The change came in response to an independent study by HUD, which showed FHA's capital reserve ratio dropped below its required 2 percent threshold.
  
  

Features

• Under the changed provisions, mortgage brokers are referred to as third-party originators, or TPOs. Brokers are no longer loan correspondents to the FHA, but may continue to participate in FHA programs as TPOs by obtaining sponsorship from an FHA-approved lender, or becoming FHA-approved lenders themselves. By eliminating its loan correspondent approval of brokers, FHA reiterates the lenders' responsibility for its sponsored brokers. Lenders must independently ensure that their brokers adhere to FHA's loan origination and processing requirements or face sanctions by FHA.
  
  

Function

• FHA's approval and oversight processes are rigorous; therefore, lenders, rather than brokers, are subject to them. For instance, to ensure its lenders have sufficient capital to support the loans it originates for FHA insurance, and the risk involved, it requires lenders maintain a net worth of at least $1 million with at least 20 percent in liquid assets. Broker TPOs, on the other hand, have no FHA-mandated net worth or quality control process requirement. The sponsoring lender, rather than the FHA, monitors broker activity for compliance, and is accountable to HUD.
  
  

Considerations

• Brokers may apply to become direct FHA-approved lenders. In addition to the $1 million net worth requirement, they must provide HUD with their audited financials statements as part of the approval process. Brokers must use FHA's Lender Approval Application Form 92001-A and adhere to HUD's "Nonsupervised Mortgagee" requirements. The checklist includes proof of state business license or registration; business and individual credit reports; evidence of sufficient office facilities; a quality control plan; Errors and Omissions insurance; a fidelity bond; and resumes.