July 24, 2014
Credit Union Management magazine’s Web-only “On Compliance” runs the fourth Thursday of the month.
In a challenging regulatory environment, policy changes don't generally make life easier, but that is exactly what occurred on Jan. 20, 2014, with issuance of mortgage letter 2014-03 by the U.S. Department of Housing and Urban Development. The letter indicates the Federal Housing Administration accepts e-signatures on mortgage documents, including Internal Revenue Service form 4506-T, request for transcript of tax return, real estate-owned sales contracts; insurance claims; and lender, servicer and loss mitigation documents.
This update makes processing easier for lenders and resulted in immediate, positive changes for the secondary market. It opens up new opportunities for credit unions that use e-signed records to automate processes while staying within FHA lending guidelines.
What the Change Means
When a borrower applies for a loan, the best loan vehicle to match the situation is unknown; loan options are only determined after the application is reviewed and the institution receives credentialed information. FHA’s decision means that Fannie, Freddie, FHA and other third parties can now accept electronically signed records. This means not only that the FHA mortgage process itself can be more streamlined, but also that credit unions will not need to maintain separate processes for FHA loans compared to other mortgages.
While e-signatures are not allowed on the mortgage note itself today, FHA plans to accept e-signatures on mortgage notes by the end of the year. This will enable credit unions to securely streamline processes for all mortgages, without the risk of being stuck with a mortgage note they intended to pass on to the FHA.
Additionally, electronic document-based processes are inherently faster, which in turn results in easier adherence to such requirements as the Consumer Financial Protection Bureau’s guidelines for providing loan estimates within three business days of an application and other disclosures three business days prior to closing.
As more organizations and government agencies like the IRS begin to accept e-signed records, it becomes more common to encounter paperless processes and for these processes to be regarded as safe and effective. Credit unions that want to take advantage of the opportunity afforded by the new rule will need to select approach technology to support their efforts.
This FHA policy update may turn out to be more than another legal change to evaluate – it paves the way for change in how CUs do business, and signifies an opportunity to take paperless processes—and member service--to the next level.
Why Do FHA Loans?
Loans sponsored by the FHA have been a staple in the market ever since the agency was established in 1934 to help the then-struggling housing environment. For prospective borrowers and first-time home buyers in particular, FHA mortgage programs are often more affordable, as they typically offer lower down payments and closing costs.
FHA loans are valuable to current members and can also attract new members who might not qualify for other mortgage options. Because of the simplicity of working with one primary financial service provider, many members prefer to obtain a mortgage from their credit union, and some will find comfort in the fact that their credit union can provide FHA mortgages. With the FHA policy change, it is easier for credit unions to offer these loans while still opening the opportunity to transfer the loan into the secondary market if needed.
Credit unions are also in a unique position, operating as more of a non-profit than a typical financial institution, and can minimize their lending risk by offering FHA loans as they serve under-represented communities, helping members achieve home ownership and grow their assets.