The U.S. Department of Housing and Urban Development (HUD) has been diligent in efforts to incorporate COVID-19 updates and requirements under the Coronavirus Aid, Relief, and Economic Security (CARES) Act into overall Federal Housing Administration (FHA) policy information.However, with multiple agencies and investors each taking varying approaches to the issuance of requirements, guidance and flexibilities under the CARES act, keeping up with regulatory changes has become extremely taxing for lenders, including originators and servicers alike.Quality Mortgage Solutions (QMS) is working conscientiously to help add clarity to this guidance.
Most recently, FHA issued Mortgagee Letter (ML) 2020-23 on July 28, 2020, which was superseded by ML 2020-24 issued on July 29, 2020. The difference between the two mortgagee letters is isolated to timing. The first ML referred to case numbers assigned between July 28, 2020 through November 30, 2020. The more recent ML 2020-24 is applicable for loans with case numbers assigned beginning August 12, 2020 through November 30, 2020, allowing lenders a bit more time to respond.
This most recent mortgagee letter, also addressed in FHA Announcement 20-54, provides temporary guidance to assist lenders in verifying rental income and business operations for self-employed borrowers. There are three provisions in total, the first covering self-employment income and the second rental income. There is also flexibility added for 203(k) loans that permits ongoing distribution of escrow funds if the rehabilitation period can be justifiably extended under COVID-19.
The current pandemic crisis has made it more difficult to adhere to longstanding industry guidance, including that income is stable and likely to continue. ML 2020-24 adds documentation requirements to help bridge this COVID-19 gap.The ML requires that there be evidence that the business is open and operating at the time of self-employment verification, which must be completed ten (10) calendar days prior to the note date.
Current work: The business must be operating with documentation substantiating this, including signed invoices or executed contracts.
Current receipts: Documentation must be provided within ten (10) days of the note date exemplifying payment for services.
Lender certification: The lender must call or otherwise confirm that the business is both open and operating.
Business website: There must be website activity to support business operations, such as scheduling and/or estimate capabilities.
If rental income is utilized for qualification purposes, the lender must adhere to the following in addition to handbook requirements:
25% reduction: The calculated rental income must be reduced by an additional 25 percent.
PITI reserves: On all forward mortgages, the mortgagee must verify and document six (6) months of PITI reserves.
Rental payments: Receipt of the most recent two (2) months of rental payments must be documented on bank statements showing payment deposit. (Not applicable if there is no history of rental income.)
ML 2020-24 also includes 203(k) guidance on rehabilitation escrow accounts. Borrowers currently have the option of requesting disbursement of escrow funds if the rehabilitation period necessitates an extension. Under this ML and COVID-19 flexibilities, all mortgage payments must be current. The mortgagee is still required to adequately justify and document all extension requests, to include the reason for the delay and new completion timeframe.
QMS understands that identifying and implementing temporary relief requirements and programs, while managing staffing availability and consumer concerns, is a tremendous challenge. As you read through the highlights of the latest temporary guidance from HUD, please bear in mind that we are here to assist you in understanding the impact of requirement changes, as well as helping to ensure your organization remains safe and sound during COVID-19.
QMS meets a unique set of quality control and audit needs, offering traditional services, including pre-funding, pre-purchase due diligence, post-closing and early payment default, as well as sophisticated technology tools and audits. We are an active member of the Mortgage Bankers Association (MBA) and a veteran-owned small business committed to both the industry and our valued customer base.
Visit us at www.qcmortgage.com to see how our team can assist you in navigating the evolving pandemic landscape.