A.15.3 Loan Underwriting or Application Processing Deficiencies

A. The MAP Guide has many requirements for lender underwriting and application processing, and it imposes a wide range of responsibilities on the lender. A lender’s deficient performance of necessary due diligence or market analysis, or failure to adequately identify, assess and mitigate loan transaction issues and risks, may increase risk to the FHA insurance fund.

B. HUD will review the quality of the lender’s underwriting analysis in the 5 technical disciplines of MAP underwriting, including:

1. Borrower mortgage credit and REO analysis under Chapter 8;

2. Valuation and market analysis under Chapter 7;

3. Architectural and cost analysis under Chapter 5;

4. Cash flow analysis of project income and expenses under Chapter 3 and Chapter 7;

5. Synthesis of all technical disciplines to evaluate risk under Chapter 3.

C. The list of MAP underwriting and processing standards and obligations, below, indicates whether a deficiency is of low or high severity, whether a deficiency will result in referral to COB for a full or limited lender monitoring review or an enforcement action, and the likely sanctions for a deficiency under Chapter 15. For purposes of this taxonomy, a material underwriting deficiency is an omission or representation by the lender that would significantly alter the underwriting conclusion and result in increased risk to HUD. A significant finding of underwriting deficiencies is a weakness in the lender’s risk analysis which the HUD underwriter identified and addressed during processing but which would not alter the underwriting conclusion or result in increased risk to HUD.

D. Deficiencies in application processing which are of low severity and for which a Letter of Caution may be issued include, but are not limited to:

1. Repeated failure to submit with its applications the required exhibits or certifications, repeated submission of incomplete or inaccurate exhibits or certifications, or inadequate disclosure of material facts affecting the loan application as evidenced by multiple deficiency letters issued to the lender during application processing in response to the missing, incomplete or inaccurate exhibits or certifications or inadequate disclosures.

2. Identification of 2 or more material underwriting deficiencies in any of the 5 technical disciplines during processing of any single application, or repeated material underwriting deficiencies in any of the 5 technical disciplines for all applications submitted by the lender within any 12 month period,

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whether or not the lender was notified of the underwriting deficiencies via deficiency letters issued during application processing.

3. Repeated failure to complete application processing to a Firm Commitment, unrelated to the project underwriting analysis, which demonstrates that the application process should not have been initiated.

4. Failure to notify the HUD processing office promptly of material changes in the application for a Firm Commitment that has been submitted, such as changes in rents, unit count or configuration, or gross project area.

5. Repeated failure to meet MAP closing requirements or construction loan administration requirements.

6. A violation of MAP procedures or requirements by a third party contractor (appraisers, PCNA inspectors, cost analysts, architectural and engineering studies, etc.) that the MAP Lender knew, or should have known, was occurring and that, if performed by the MAP Lender itself, would constitute grounds for sanctions under this Appendix.

7. Submission of an application which is not signed by an authorized MAP underwriter or chief underwriter, as required by Chapter 2, Section 2.10 and Section 2.5.1, unless the failure to sign the application was inadvertent and the result of an oversight that is immediately corrected.

E. Deficiencies in loan underwriting or application processing which are of high severity and for which a Warning Letter may be issued and targeted enforcement measures or other sanctions may be imposed include, but are not limited to:

1. Any early claims, loan assignments or loan defaults occurring within the first 5 years after Final Endorsement which indicate that the claims, loan assignments or loan defaults were likely due to deficiencies in the lender’s loan underwriting and risk analysis.

2. Evidence that a lender’s improper, inadequate, inaccurate or negligent underwriting was a likely cause for a serious loan delinquency, default, assignment of an insured mortgage or a claim for insurance benefits to HUD, including a material failure to perform appropriate due diligence and quality oversight over third party contractors.

3. Submission of 2 or more applications within any 12 month period which are subsequently rejected by HUD due to noncompliance with MAP standards.

4. Identification of 3 or more instances of material underwriting deficiencies in any of the 5 technical disciplines during processing of any of the lender’s applications within any 12 month period, whether or not the lender was notified of the underwriting deficiencies via deficiency letters issued during application processing.

5. Identification of continued material underwriting deficiencies in any of the 5 technical disciplines during processing of any of the lender’s applications within any 12 month period after receipt of a Letter of Caution under Appendix 15, Section A.15.3.D.2, above, whether or not the lender was notified of the underwriting deficiencies via deficiency letters issued during application processing.

6. Issuance of 2 or more Warning Letters within any 24 month period will result in the lender being referred to the MAP Lender Review Board or the Mortgagee Review Board.

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A.15.3 Loan Underwriting or Application Processing Deficiencies

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7. Lender collusion with or influence upon third party contractors to modify reports prepared by the contractor that affect the contractor’s independent evaluation.

8. Knowingly submitting false information or a false certification to HUD in connection with any MAP application or mortgage transaction.

9. Failure to fund an FHA insured mortgage loan or any misuse of mortgage loan proceeds.

F. Deficiencies in loan underwriting for which the lender may be referred to COB for a lender monitoring review: HUD will use the following process to review and assess the quality of a lender’s underwriting for each Firm Commitment that has been issued, which review may result in a referral to COB for a full or limited lender monitoring review under Chapter 15, Section 15.2.3.

1. Each Region will maintain a record which summarizes the HUD underwriter’s determinations of any significant findings of underwriting deficiencies in a lender’s risk analysis in each of the 5 technical disciplines for all transactions on which Firm Commitment were issued.

2. HUD will review annually each Region’s records for all Firm Commitments issued to the lender during the previous 12 months to identify significant findings of underwriting deficiencies in any of the 5 technical disciplines. HUD will compare the average number of the lender’s significant findings in any individual discipline to the average number of significant findings in that same discipline for all lenders which were issued Firm Commitments in that Region during the 12 month review period. Lenders whose average number of significant findings of underwriting deficiencies in any of the 5 technical disciplines were higher than the average number of findings in that discipline for all lenders which were issued Firm Commitments by that Region will be referred by to COB for a full or limited lender monitoring review.

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Appendix 16 Organizational Chart for Lease Structure A.16.1 Sample Master Lease Ownership Structure

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