FHA Branch Offices Could Become A Thing Of The Past: HUD Finalizes Rule Eliminating Mandatory Branch Office Registration - Charges, Mortgages, Indemnities

Federal Housing Administration ("FHA") approved lenders and mortgagees will no longer be required to register their branch offices. The US Department of Housing and Urban Development ("HUD") published a final rule (the "Final Rule") on February 2, 2024, eliminating the requirement for lenders and mortgagees to register each branch office where lenders and mortgagees conduct FHA business with HUD.¹ HUD adopted the Final Rule with no changes from the proposed rule published in March 2023. Shortly after issuing the Final Rule, FHA addressed questions from stakeholders in Frequently Asked Questions ("FAQs").² In this Legal Update, we discuss the background of HUD's branch office requirements, the changes the Final Rule makes to those requirements, and takeaways for stakeholders.

Background

HUD regulations currently require all branch offices where an FHA-approved lender or mortgagee conducts FHA business to be registered with HUD.³ Once registered, a lender's branch offices can conduct FHA business nationwide, although only in states where the lender or mortgagee fully complies with applicable state origination and/or underwriting licensing and approval requirements.⁴ HUD charges a fee to lenders and mortgagees for each registered branch office authorized to conduct FHA business.⁵ In March 2023, HUD published a proposed rule to eliminate the requirement for lenders and mortgagees to register all branch offices where FHA business is conducted.⁶

The Final Rule

The Final Rule eliminates the requirement for lenders and mortgagees to register all branch offices where they conduct FHA business. After the Final Rule becomes effective on March 4, 2024, lenders and mortgagees can choose whether or not to register their branch offices with HUD. The Final Rule also makes fees applicable only to each branch office that a lender or mortgagee chooses to register with HUD. Only registered branch offices, should a mortgagee choose to register them, will be placed on the HUD Lender List Search page.

HUD stated that the amendments to the branch office registration requirement are intended to reduce the administrative burden for existing lenders and mortgagees, and eliminate barriers for entities interested in FHA programs, which may expand the availability of FHA programs to underserved communities. In addition, HUD stated that it intends to provide flexibility that may encourage more lenders and mortgagees to originate FHA-insured mortgages. HUD noted that it made the updates in response to the mortgage industry's evolution over time and the advancement of technology. In particular, during and after the COVID-19 pandemic, the use of remote services and technology to complete loan applications has increased, and a lender or mortgagee does not necessarily need to maintain several branch offices to conduct FHA business nationwide.

According to HUD, it received 11 public comments on the proposed rule, including from individuals, lenders, mortgagees, and business associations. Commenters generally supported the proposed rule based on industry trends toward remote work. Some commenters expressed concern over whether lenders and mortgagees could become lax in complying with applicable regulations and whether the activities of unregistered branches should be restricted. In response, HUD emphasized remaining mechanisms in place to support branch-level compliance. For example, lenders and mortgagees are still required to comply with all state licensing and approval requirements for origination, underwriting, and servicing. HUD also received questions on the applicability of Neighborhood Watch/Compare Ratio Data if lenders and mortgagees are not required to register branch offices. HUD noted that lenders and mortgagees that choose to register branch offices will still be able to access branch-level data in Neighborhood Watch, including Compare Ratios for registered branches. HUD also pointed to its Credit Watch process for monitoring underwriting decisions, which focuses on a lender's or mortgagee's enterprise performance in the HUD field office jurisdictions. HUD also stated that lenders and mortgagees are expected to continue tracking the performance of specific branches using their own data if necessary.

In the Final Rule, HUD reminded lenders and mortgagees that FHA still requires them to be responsible for the actions of its staff that participate in FHA transactions. HUD stated that lenders and mortgagees must continue to exercise control over the management and supervision of their staff, including regular and ongoing reviews of staff performance and the work performed. Each lender and mortgagee must also continue to have a branch and/or regional manager to oversee each of its branch offices. In addition, lenders and mortgagees must ensure they and their employees comply with the requirements of state mortgage licensing laws.

FAQs

On February 15, 2024, FHA published FAQs that address inquiries it received from stakeholders on the Final Rule. FHA appears to have issued or revised eight FAQs in the FHA Resource Center to reflect the changes in the Final Rule. While most of the FAQs largely restate the text of the Final Rule, others provide clarifying information that may be of particular interest to lenders and mortgagees. In two of the FAQs, FHA clarified that a lender or mortgagee's annual recertification fee will be calculated based on the number of registered branch offices as of the last business day of the lender's or mortgagee's Certification Period, which is the same as the lender's or mortgagee's fiscal year.⁷ FHA's announcement of the FAQs specifically addresses the upcoming recertification period.⁸ In the announcement, HUD made clear that the changes to the branch office requirements under the Final Rule will not impact a lender's or mortgagee's fiscal year ending December 31, 2023. Accordingly, lenders and mortgagees can expect to see branch office fees charged for all branch offices registered as of December 31, 2023.

Takeaways

While FHA mortgagees will no longer be required to register their branch locations with HUD, the Final Rule does not impact a lender's branch registration and compliance requirements under state law. If a state mortgage licensing law requires a lender to designate and register branch locations, those requirements remain. That said, lenders and mortgagees remain responsible for their staff working in branch office locations and must maintain effective controls to manage risk, even absent a requirement to register each branch office. HUD did not remove the requirement that a lender or mortgagee is fully responsible for the actions of its branch offices regardless of registration status.

HUD also maintains the authority to review the performance of a mortgagee's branch offices individually and terminate the authority of only a specific branch or of a mortgagee's overall operations.⁹ Under its Credit Watch termination program, HUD can terminate a lender's or mortgagee's origination approval agreement or direct endorsement underwriting authority, if the lender or mortgagee had a rate of defaults and claims on insured mortgages originated or underwritten in an area (HUD field office) which exceeded 200 percent of the normal rate and exceeded the national default and claim rate for insured mortgages. While HUD's Credit Watch origination proceedings have been branch-level focused in the past, such that only a branch's authority to originate loans in a particular field office would be terminated, the Credit Watch regulations give HUD the authority to terminate a mortgagee's origination or underwriting authority at the enterprise level. With the change to branch registration requirements, branch-level data will only be available to HUD to the extent that a lender or mortgagee chooses to register its branch offices with HUD. Further, branches will only be placed on the HUD Lender List Search page if they are registered, and a lender or mortgagee will only be able to utilize Neighborhood Watch for branch-level data if branches are registered. For lenders or mortgagees that opt not to register branch locations, HUD will no longer be able to evaluate Credit Watch origination performance in each of the Areas Approved for Business, since all data will be aggregated under the home office identified number. As a result, it would seem that future Credit Watch origination proceedings may occur at the enterprise level within applicable HUD field office jurisdictions.

Lenders and mortgagees should also take note that although HUD has made branch registration optional, it did not remove the following branch office-related requirements from the Single Family Housing Handbook:

A lender or mortgagee must pay all of its own operating expenses (defined as the costs associated with equipment, furniture, office rent, overhead, employee compensation, etc.), including the expenses of its home office and any branch offices where it conducts FHA business. A lender or mortgagee must also maintain all accounts for operating expenses in its name.¹⁰
HUD regulations provide that a lender or mortgagee cannot register a new branch office within a HUD Field Office jurisdiction where its origination approval agreement is proposed to be terminated or has been terminated until the termination notice is withdrawn or the mortgagee's origination approval agreement is reinstated. If the termination relates to a branch office origination approval agreement, the Single Family Handbook provides that after a six-month period has elapsed, the lender or mortgagee can make a request through the Lender Electronic Assessment Portal ("LEAP") to reassign the former office's 10-digit FHA Lender ID to the new branch and pay the branch office registration fee.¹¹
A lender or mortgagee must have a branch and/or regional manager to oversee each of its branch offices. A lender that chooses to register its branch offices must provide the full names and titles of its branch and regional managers, along with their contact information, in LEAP.¹² Also, the ineligibility criteria set forth in 24 C.F.R. § 202.5(j) still apply to "managers" of the lender or mortgagee.
The prohibition against net branching is still in place. Specifically, HUD prohibits a lender or mortgagee from engaging an existing, legally separate mortgage company or broker to function as the lender's or mortgagee's branch office or DBA name, or to conduct FHA activities using the lender's or mortgagee's FHA approval (with exception for the acquisition of existing offices where the lease is not transferrable).¹³

In addition to the FAQs, HUD announced that it plans to publish a Mortgagee Letter that will provide additional implementation guidance for the provisions in the Final Rule.¹⁴ We presume this Mortgagee Letter will amend some of the provisions of the Single Family Handbook that need to be updated to reflect the flexibility the Department has extended to lenders and mortgagees that opt not to register some or all of their branch office locations with HUD.

Footnotes

1 HUD, Changes in Branch Office Registration Requirements, 89 Fed. Reg. 7,274 (Feb. 2, 2024).

2 FHA, FHA INFO 2024-02, Frequently Asked Questions for Branch Registration Requirements Now Available (Feb, 15, 2024).

3 24 C.F.R. § 202.5(k).

4 HUD Handbook 4000.1 I.A.4.b.

5 24 C.F.R. § 202.5(i).

6 HUD, Changes in Branch Office Registration Requirements, 88 Fed. Reg. 12,906 (Mar. 1, 2023).

7 FHA, FHA FAQs, I terminated a branch office in the Lender Data Verification section of the annual recertification package; why is the fee for that branch office still included in the annual recertification fee?, https://answers.hud.gov/FHA/s/knowledgearticledetail?recordId=ka03d0000001tKVAAY; FHA, FHA FAQs, Will my recertification fee be based on my current number of registered branches?, https://answers.hud.gov/FHA/s/knowledgearticledetail?recordId=ka03d0000001tKQAAY.

8 FHA, FHA INFO 2024-02, Frequently Asked Questions for Branch Registration Requirements Now Available (Feb, 15, 2024).

9 24 C.F.R. § 202.3(c)(2).

10 HUD Handbook 4000.1 I.A.6.g.ii.

11 Id. at I.A.4.a.

12 Id. at I.A.4.c.iii.

13 Id. at I.A.4.d.

14 FHA, FHA INFO 2024-02, Frequently Asked Questions for Branch Registration Requirements Now Available (Feb, 15, 2024).

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