WASHINGTON — The Federal Housing Administration is reissuing a loan certification proposal that has sparked industry concerns that it will make it easier for the Justice Department to sue lenders when they file claims for agency-insured loans that go into default.

Edward Golding, the principal deputy assistant secretary for the Department of Housing and Urban Development, told reporters Tuesday that the FHA is releasing the plan for an additional 30-day comment period.

"From the beginning, our goal has been to develop new certifications that clarify the lender's role in verifying borrower's information and to use common sense when deciding to take corrective action against lenders for making minor mistakes that do not affect the insurability of the mortgages," Golding said.

But industry representatives said the new plan has not reassured lenders that they will be shielded from Justice Department lawsuits.

The proposal includes a provision that would require all lenders to certify that they have completed a pre-endorsement review of all loans and that no deficiencies and defects were revealed that would render the loan ineligible for FHA insurance.

David Stevens, president and chief executive of the Mortgage Bankers Association, is concerned the measure lacks clarity and doesn't provide a reasonable diligence standard for FHA underwriters.

"The 30-day comment period is our last hope of getting some clarity in the final endorsement certification phrase so lenders will not pull back further from the FHA program," Stevens said in an interview. "If we see further retrenchment from the FHA program, that hurts housing — that hurts homeownership."

Lenders were hoping HUD would provide some assurance that they would not be held liable for minor defects or mistakes that don't affect the performance of the loans.

John Taylor, the president and CEO of the National Community Reinvestment Coalition, said pre-endorsement certification would prompt lenders to "review each application to ensure that there are no errors that would make the loan ineligible for FHA insurance."

However, the proposal should provide additional clarity that "small errors that do not affect the insurability of the loan will not lead to federal enforcement action later," Taylor said in a statement. He also called for a provision that would allow lenders to cure minor loan defects.

HUD initially issued the loan certification proposal on May 15, which sparked controversy among the industry and with lawmakers.

Sens. Sherrod Brown, D-Ohio, Elizabeth Warren, D-Mass, and Rep. Maxine Waters, D-Calif., raised concerns that the proposal might allow large lenders that had pleaded guilty to money laundering or currency manipulation to continue to originate FHA loans.

To accommodate the lawmakers, HUD proposed to modify the annual lender certification that mortgage companies must file each year.

"The most signification change is a provision requiring the lender to certify they have not been barred or suspended by any federal government agency or department and they have not been indicted or convicted of any wronging that would call into question their ability to carry out the responsibilities of the FHA program," Golding said.

The comment period on the FHA proposal ends Nov. 2.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.