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FHA issues reporting requirements on significant cybersecurity incidents
On May 23, HUD issued Mortgagee Letter (ML) 2024-10 titled “Significant Cybersecurity Incident (Cyber Incident) Reporting Requirements” which required FHA-approved mortgagees to notify HUD when a “Cyber Incident” occurs. A Cyber Incident would be any unauthorized event that could harm information or computer systems, breaching security rules, and affecting a mortgagee’s ability to meet FHA program requirements. It also would include actions that threaten data confidentiality, integrity, or availability, potentially disrupting mortgage operations. Mortgagees must report all suspected Cyber Incidents to HUD's FHA Resource Center and Security Operations Center within 12 hours of detection. The report must include several details, including the mortgagee's name and ID, contact information, a description of the incident (including the date, cause, and impact to PII, login credentials, and IT systems), any affected subsidiary or parent companies, and the status of the mortgagee’s incident response, including whether law enforcement has been notified. The provisions of this ML are effective immediately and will be reflected in a forthcoming update to the HUD Handbook 4000.1.
HUD and mortgage lender reach agreement on Montana fair lending complaint
On May 13, HUD announced an agreement with a mortgage lender to resolve allegations of Fair Housing Act violations. According to the redacted agreement, a complaint was filed with HUD last August accusing the mortgage company of engaging in housing discrimination based on race, in violation of the Fair Housing Act. The complainants claim they faced discriminatory housing terms, were denied housing, and were subject to racially discriminatory notices and advertisements. The mortgage company denied all allegations of discrimination, asserted its commitment to fair housing and equal opportunity, and agreed to a Conciliation Agreement to resolve the matter without admitting any wrongdoing or liability.
The mortgage company agreed to a $65,000 settlement and will commit to upholding its fair lending policies, ensuring applicants on Native American reservations are able to obtain residential mortgage loans without fear of discrimination based on race, color or national origin. Respondent will also contribute at least $30,000 towards initiatives designed to enhance housing conditions, financial literacy, and homeownership education for Native Americans near reservations. During the three-year term of the agreement, HUD may review compliance and conduct fair housing tests, among other oversight methods. The terms of the agreement also required the mortgage company to submit a training curriculum on its fair lending training courses for new employees and perform annual trainings with current employees; additionally, the mortgage company must submit an annual report on the mortgage company’s progress and performance in complying with the public interest provisions of the agreement. The agreement has been approved by the regional director of the Office of Fair Housing and Equal Opportunity.
HUD guidance on AI to prevent housing discrimination
On April 29, the Office of Fair Housing and Equal Opportunity of HUD issued two guidance documents concerning the use of artificial intelligence (AI) in housing-related practices, specifically in tenant screening and housing advertising. The guidance came in response to Biden's Executive Order to address potential biases in automated systems within the housing sector (covered by InfoBytes here).
HUD emphasizes the need for transparency and fairness when housing providers and screening companies use AI-assisted tenant screening processes. The tenant screening guidance recommended best practices for housing providers and screening companies to prevent discrimination based on race, color, national origin, religion, sex, disability, and familial status. The HUD guidance provided the following six “Guiding Principles for Non-Discriminatory Screenings”: (i) choose relevant screen criteria; (ii) use only accurate records; (iii) follow the applicable screening policy; (iv) be transparent with applicants; (v) allow applicants to challenge negative information; and (vi) design and test complex models for Fair Housing compliance.
Regarding housing advertising, HUD’s guidance warned advertisers and online platforms about the risks of using targeted advertising tools that could violate the Fair Housing Act by denying consumers information about housing opportunities or targeting individuals based on their protected characteristics. To reduce the risk of violating the Fair Housing Act, HUD recommended that advertisers should: (i) utilize advertising platforms that are taking steps to manage the risk of discriminatory delivery of housing-related ads; (ii) ensure the advertisements related to housing are accurately identified to the platform; (iii) analyze the composition of audience datasets; and (iv) monitor outcomes of advertising campaigns to identify and mitigate discriminatory outcomes. Advertising platforms are recommended to: (i) ensure that housing-related ads are run in a separate process designed to avoid discrimination; (ii) avoid providing targeting options for housing-related ads that describe or are related to FHA-protected characteristics; (iii) conduct regular end-to-end testing of advertising systems; (iv) proactively identify and adopt less discriminatory alternatives for AI models and algorithmic systems; (v) ensure that algorithms are similarly predictive; (vi) ensure that ad delivery systems are not resulting in differential charges on the basis of protected characteristic; and (vii) document, retain, or publicly release in-depth information about ad targeting functions and internal auditing.
HUD announces FFRMS final rule
Recently, HUD announced a final rule to implement the Federal Flood Risk Management Standard to “protect communities from flood risk, heavy storms, increased frequency of severe weather events and disasters, changes in development patterns, and erosion.” The final rule will enact the FFRMS as mandated by Executive Order 13690 by amending two HUD regulations: (i) Part 55, Floodplain Management and Protection of Wetlands; and (ii) Part 200, Minimum Property Standards. Among other things, the final rule will raise the elevations and flood proofing requirements of properties in flood-prone areas that use federal funds for new construction or are financed through HUD’s grant or subsidy programs. The revisions to Minimum Property Standards specifically target Federal Housing Administration-insured new constructions located within the 100-year floodplain. The final rule becomes effective on May 23.
FHA implements changes to branch office registration requirements
On March 19, the FHA issued Mortgagee Letter 2024-04 to implement the provisions of a Final Rule, “Changes in Branch Office Registration Requirements.” The Final Rule will eliminate the requirement for mortgagees and lenders to register with HUD in each branch office from which they conduct FHA business, making branch registration optional and branch registration fees applicable only to branch offices that mortgagees or lenders choose to register with FHA. As previously covered by InfoBytes, FHA proposed the rule last March. Following public comments, HUD published the Final Rule without changes from the proposed rule, and the Final Rule became effective on March 4.
The Final Rule will exclude branch offices not registered with HUD from the HUD Lender List Search page. The Mortgagee Letter will summarize changes that will be incorporated into Handbook 4000.1 to implement the Final Rule, including updating the policy for registering branch offices, clarifying the “Area Approved for Business” for home offices and branch offices, updating the definitions for Branch Manager and Regional Manager, and clarifying the policy requirements that apply to registered branch offices. Although the Mortgagee Letter will go into effect immediately, it will not impact annual recertifications due to be completed by March 31; rather, the recertification fee “will be calculated based on the registered branches as of the last business day of the mortgagee’s certification period (fiscal year end).”
HUD sued for allegedly failing to refund mortgage insurance premiums for early-terminated FHA-insured mortgages
On March 12, a putative class action complaint was filed against the Department of Housing and Urban Development (HUD) for allegedly denying homeowners their Mortgage Insurance Premium (MIP) refunds upon the early termination of their FHA-insured mortgages. According to the complaint, HUD must refund unearned MIPs, but has refused to refund homeowners by creating “unnecessary bureaucratic hurdles.” The plaintiffs alleged that the OIG had confirmed “the validity of complaints regarding HUD’s handling of MIP refunds.”
Citing HUD regulations, the plaintiffs alleged that when an FHA mortgage is terminated early, within seven years of the purchase of the refinancing of the property, there is an overpayment of the MIP which should be refunded by HUD. According to the plaintiffs it is a “widespread practice” for HUD not to automatically refund MIPs, but instead require a burdensome, lengthy process which hindered the prompt refund of fees in multiple ways. The 2022 OIG report cited by plaintiffs allegedly found, among other things, that HUD did not have adequate controls in place to ensure that refunds were appropriately tracked, monitored, and issued. The plaintiffs alleged that Floridians are owed over $21.7 million in refunds.
The plaintiffs are seeking injunctive and declaratory relief and a return of all unfairly retained refunds “together with damages in the amount of the total earned interest and other investment monies accrued by Defendant with Plaintiff’s and Class Members’ monies.”
HUD Secretary Fudge resigns effective March 22
On March 11, Housing and Urban Development Secretary Marcia L. Fudge announced her resignation and will transition to life as a private citizen. Her statement highlighted her five decades of public service, including as a mayor, congressional staffer, congresswoman, and Secretary. According to Secretary Fudge, during her tenure, HUD has helped more than two million families avoid foreclosure; removed barriers for those with student loans buy a home with an FHA mortgage; and strengthened the number of Black and Hispanic borrowers based on the percentage of volume, among other accomplishments. According to the White House’s brief, Fudge provided HUD with the largest investment in affordable housing in U.S. history. Secretary Fudge’s resignation will go into effect on March 22, and Deputy Secretary Adrianne Todman will succeed her as Acting Secretary.
HUD Secretary Fudge confirms interest in eliminating Mortgage Interest Premiums
On January 11, the Secretary for Housing and Urban Development, Marcia Fudge, testified at the House Financial Services Committee hearing on the Oversight of HUD and the FHA. Topics included qualification for housing programs by veterans, HUD efforts to support more affordable housing, and oversight of public housing authorities, among other things.
Secretary Fudge addressed the possibility of eliminating the Mortgage Insurance Premiums (MIP) from Federal Housing Administration (FHA) mortgages. Specifically, Rep. Brad Sherman (D-CA) asked Secretary Fudge whether she would be willing to eliminate MIPs, to which Secretary Fudge replied “Yes, I’m willing to look at it.” Rep. Gregory Meeks (D-NY) asked whether FHA insurance could follow the same model as private mortgage insurance, where the product is terminated after a certain amount of payment on the principal of the loan. In response, the Secretary replied positively with “I would love to see it happen.”
HUD increases inspection fee limits for single-family homes
On November 15, HUD increased its fee limits for property inspections for single-family homes. HUD requires federal mortgage holders to perform property inspections to determine “occupancy status, ascertain property condition and to maintain property preservation.” For example, according to the Mortgage Letter, the cost for an initial occupancy inspection increased from $20 to $30, with the cost per additional unit increased from $15 to $20, to “align with industry standards,” as found in the FHA Single Family Housing Policy Handbook 4000.1. Deputy Assistant Secretary for Single Family Housing Sarah Edelman called this the “first step in updating our policies governing property and preservation fees,” and will help prevent blight from poorly maintained homes.
HUD seeks comments on update to HECM policy
On November 9, FHA posted a proposed update to its Home Equity Conversion Mortgage (HECM) policy. According to FHA, the proposal “enables certain categories of… HECMs that were previously ineligible for assignment to be assigned to HUD… This change will support servicer liquidity and strengthen the HECM market for senior homeowners.” Under current HECM policy, mortgage servicers can assign a HECM to HUD “when the mortgage reaches 98 percent of the Maximum Claim Amount and… an eligible borrower or non-borrowing spouse is residing in the property.”
The draft mortgage letter “proposes to expand the assignment eligibility criteria to include HECMs that are due and payable resulting from the death of all borrowers and non-borrowing spouses.” A redline of the proposed language of the updated HECM Assignment Eligibility can be found here. FHA seeks comments on its proposal through December 11, 2023, using the Feedback Response Worksheet download here, and can be sent to sffeedback@hud.gov.