8.6.1.1 Purpose

A. Prior credit approval of a principal is a specialized review of a large Borrower to manage risk and promote efficient program application processing.

• B. HUD manages risk with a prior approval review by:

1. Determining whether an active principal represents a reasonable credit risk given the operating performance, age, utility and physical condition of the principal’s existing FHA insured, including HUD assisted and other properties;

2. Determining the amount of any new mortgage insurance commitments that may be extended to a principal given their credit history, cash flow, net worth, liquidity, scheduled debt maturities and operational stability; and

3. Identifying and evaluating the risks arising from any unique combination of assets that may suggest an adverse circumstance that could impact the stability of the principal’s portfolio, such as concentration in a particular asset type, industry sector or geographic or market concentration.

C. Over time, the levels of aggregate loan balances for some principals have increased, with balances well exceeding $500 million. These portfolios can also involve varied degrees of Borrower risk generated by factors such as:

1. An imbalance of new construction in the Borrower portfolio;

2. Concentrations of insured loans in similar geographic areas;

3. Risk associated with excess and/or unwarranted litigation, including asset management and financial deficiencies; or

4. An aggregate loan balance that presents a single point of failure risk to the FHA insurance fund if a key principal (or principals) of the business entity would suffer an event that would materially, negatively affect their portfolio.

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Chapter 8 Mortgage Credit 8.6 Required Prior Credit Approval of Principals/Borrowers

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D. The prior approval of principals also assures a consistent, timely and efficient response to active principals with portfolio holdings that may be scattered among numerous Multifamily Regional Centers.

E. In addition, it enables the largest users of FHA programs to plan for future property development or acquisition relying on financing available through the insurance programs.