10.1

OVERVIEW

The Section 184 Loan Guarantee program now provides a second method of processing 184 mortgages. HUD believes this method. Direct Guarantee (DG), will have clear advantages for many tenders and borrowers by reducing delays that can result from limited HUD resources in both pre-loan review and in post-loan issuance of the loan guarantee certificate. The DG procedure for the Section 184 Loan Guarantee program resembles the Direct Endorsement program for FHA single-family mortgage insurance. i.e. the lender will underwrite, approve and close the loan prior to submitting the loan documentation to HUD.

This chapter provides guidance about the DG procedure, the process for lender approval, underwriting procedures and submission of the loan guarantee package to the Program Office of Native American Programs (Program ONAP) for review and issuance of a loan guarantee certificate. Participation in the DG program by qualified lenders is voluntary. Lenders approved for DG may elect to submit a Section I 84 loan application to HUD for firm commitment processing

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10.2

GENERAL

A 184 loan may be processed using the DG procedure or the existing firm commitment procedure. Under the DG procedure, HUD will not issue a firm commitment for loan guarantee before the loan is closed by the lender. HUD will review the closed loan file for compliance with Section 184 closing requirements prior to issuing the loan guarantee certificate. A Section I84 quality control review may be performed on the guaranteed loan at a later date.

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10.3

MORTGAGEE APPROVAL FOR DIRECT GUARANTEE

To participate in DG, a lender must be an approved Section 184 lender as discussed in paragraph 3.1, Lender Qualification, above, and must submit the documentation to the Program ONAP, Office of Loan Guarantee, to satisfy the following requirements:

1. If the lender is an approved FHA Direct Endorsement lender, the lender may submit, in lieu of the documentation in paragraphs 10.3b through 10.3e below, verification of the Direct Endorsement approval for the lender, the underwriters, appraisers and inspectors that will participate in the DG procedure.
2. The lender must have an adjusted net worth of not less than $250,000 and must maintain liquid assets (cash, cash equivalents or readily convertible instruments) of 20 percent of its net worth up to a maximum amount of $100,000.
3. The lender, or one of its principal officers, must have 5 years of experience in the origination of single family (1 to 4 units) mortgages.
4. The lender must have on its permanent staff an underwriter with signatory authority or otherwise authorized by the lender to bind the lender on matters involving the origination of Section 184 mortgage loans through the DG program. The underwriter must have a minimum of three years of full-time recent experience reviewing both credit applications and property appraisals. Experience related solely to mortgage credit or appraisal reviews counts for one-half of the total requirement. The Mortgage Bankers Association of America (MBA) course "Seminar on Appraisal Techniques" may be substituted for one full year of full-time experience reviewing appraisals.
5. The lender must certify that its underwriter and technical staff have been trained in the Section 184 program and are knowledgeable of Section 184 program requirements.
6. Test cases. The mortgagee must submit two Section 184 loan origination packages designated as DG test cases to HUD’s Program ONAP, Office of Loan Guarantee, for firm commitment processing. If acceptable, a Section 184 firm commitment will be issued prior to loan closing. If the underwriting and processing of these two loans is satisfactory, i.e., HUD is able to issue a firm commitment without the need for additional documentation or resubmission, the lender may be approved to participate in the DG program. If the loan package and/or underwriting are not acceptable, the lender will need to submit additional test cases prior to obtaining DG approval.
7. Single Close Construction. If a lender anticipates processing single close construction loans using the DG procedure, one of the lender’s test cases must be a single close construction loan. If a lender is approved for DG without submitting an acceptable single close construction test case, the lender must submit a single close construction test case in full compliance with Section 184 requirements and receive a Section 184 firm commitment for the test case, before the lender will be approved for single close construction processing using the DG procedure.

The mortgagee may submit the documentation discussed in paragraphs 10.3(a) through 10.3(e) with its test cases. A lender will receive written notification from the Program ONAP designating the lender as a DG approved lender.

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10.4

QUALITY CONTROL REQUIREMENT

All lenders originating and/or servicing Section 184 loans must establish and implement a formalized, written quality control plan for originating and/or servicing these loans. A mortgagee which seeks DG status must review, and when necessary, modify the existing quality control plan to ensure that the mortgagee can effectively evaluate and monitor the overall quality of loans submitted for DG. The quality control plan does not have to name HUD or the DG program. For DG purposes, the elements of a quality control system should include the following:

1. Underwriting policies. Each office of the mortgagee that originates Section 184 loans shall maintain copies of all available Section 184 underwriting guidelines. This includes guidebooks, regulations, letters to all participating 184 lenders and other instructions relevant to the mortgagee’s origination of 184 mortgages.
2. Corrective measures. The system should ensure that effective corrective measures are taken promptly when deficiencies in mortgage loan originations are identified.
3. System integrity. The quality control system will be independent of the mortgage loan production function.
4. Desk and field reviews. The system would require a desk and field review of a sample of mortgage loans underwritten for DG submission. The desk review of the property appraisal would include the value conclusion, the appraisal data, the validity of comparables, any changes made by the underwriter and the overall quality of the appraisal. Ten percent of appraisals done by the mortgagee staff appraisers and a sample of appraisals performed by non-staff appraisers must be field reviewed. Field reviews may he performed by the underwriter or by appraisers employed on a contract basis. Five percent of compliance inspections done by mortgagee staff inspectors and a sample of compliance inspections done by non-staff inspectors must be field reviewed.

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10.5

MORTGAGEE SANCTIONS

Depending on the nature and extent of the noncompliance with the Section 184 Loan Guarantee program requirements for loans originated under the DG program or subject to a firm commitment issued by the Department, the Department may take such actions as are deemed appropriate and in accordance with published guidelines. Refer to paragraph 3.3, Disqualification of Lenders and Civil Money Penalties, above.

1. Fraud and Misrepresentation. Nothing in Section 184 may preclude the Department from establishing:
1. Defenses against the originating lender based on fraud or material misrepresentation;
2. Establishing partial defenses based upon regulations in effect on the date of guarantee or disbursement (whichever is earlier), to the amount payable on the guarantee. Refer to paragraph 3.3 above.
2. Probation or Withdrawal of DG Approval. The authority to apply the mortgagee sanctions (probation and withdrawal) rests with the Director, Office of Loan Guarantee, Program Office of Native American Programs.
1. Probation consists of one of the following:
1. Training. The mortgagee’s underwriter, or other technical staff, may be required to attend appropriate training sessions.
2. Pre-closing status. The mortgagee may be required to submit additional test cases for HUD review until the mortgagee demonstrates, through satisfactory performance, that the underwriting shortcomings have been corrected, or until the mortgagee’s DG approval is withdrawn.
3. Quality control plan. The Office of Loan Guarantee may require the mortgagee to make changes to its quality control plan.
2. Withdrawal. A withdrawal action would be taken where there is a pattern or practice of actions demonstrating noncompliance with 184 requirements or where any pre-closing review status period (whether the initial or imposed under the terms of a probation) has failed to demonstrate that the mortgagee can perform satisfactorily.
3. Notification. A written notice of probation or withdrawal will be sent to the lender explaining the decision. If the notice places the lender in a probationary status, the notice will explain the probationary element(s) applied.

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10.6

UNDERWRITING RESPONSIBILITIES

HUD looks to the underwriter as the focal point of the DG program. The underwriter must assume the following responsibilities:

1. Compliance with HUD instructions, the coordination of all phases of underwriting, and the quality of decisions made under the program.
2. The review of appraisal reports, compliance inspections and credit analyses performed by staff and non-staff personnel to ensure reasonable conclusions, sound reports and compliance with HUD requirements.
3. The decisions relating to the acceptability of the appraisal, the inspections, the buyer’s capacity to repay the mortgage and the overall acceptability of the mortgage loan for the Section 184 guarantee. The underwriter is responsible for ensuring that the Section 184 loans originated, underwritten and approved by the lender adhere to the Section 184 requirements and processing guidelines detailed in this guidebook.
4. The monitoring and evaluation of the performance of the personnel used for DG.
5. Awareness of the warning signs that may indicate irregularities, and an ability to detect fraud, as well as the responsibility that underwriting decisions are performed with due diligence in a prudent manner.

The underwriter’s role and responsibility are critical elements of the DG procedure. The lender’s DG underwriter is responsible for the coordination of all phases of the underwriting of the mortgage loan and is responsible for ensuring that prudent underwriting procedures are followed.

Lenders must obtain and verify information with at least the same care that would be exercised if originating a mortgage when the lender would be entirely dependent upon the property as security to protect its investment.

The DG underwriter executes and signs the Mortgage Credit Analysis Worksheet (MCAW), form HUD-53036, which enables HUD to endorse the mortgage loan without a detailed technical underwriting review.

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10.7

ELIGIBLE ACTIVITIES AND PROPERTIES

The DG procedure is limited to eligible Section 184 individual borrowers.

Section 184 loans for tribes, TDHEs and IHA/TDHEs are not eligible for DG and must be submitted to the Program ONAP for a Section 184 firm commitment.

Refer to Chapter 4 for guidance about eligible property types and the process for appraising and qualifying individual homes.

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10.8

REQUEST FOR A CASE NUMBER

The DG approved mortgagee will request a case number from the Program ONAP, Office of Loan Guarantee, as outlined in Chapter 5 of this guidebook. The DG approved lender will indicate on the Request for A Case Number that the case will be processed DG.

A case number and funding obligation for DG are valid for 180 days (from the date the case number is issued to the date of closing). A DG loan not closed within 180 days of the issuance of the case number requires an approved extension from the Office of Loan Guarantee. All requests for extension must be made by the lender in writing. Refer to paragraph 10.9 below.

The "age" limitations on the borrower’s credit and income verifications discussed in paragraph 5-2 of this guidebook apply to DG cases.

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10.9

REQUESTS FOR CASE NUMBER EXTENSIONS AND CANCELLATIONS

Case numbers assigned and funds reserved for DG loans are valid for 180 days. If for unforeseen circumstances a lender is unable to close the loan within the allotted time frame, the lender must request an extension. All requests must be in writing to the Program ONAP, Office of Loan Guarantee, before the expiration date and must include the following:

1. A copy of the Request for a Case Number issued by HUD with the assigned case number;
2. The reason an extension is required; and
3. The expected closing date.

Extensions are not automatic and failure to make a request prior to the expiration date could be cause for cancellation of the case number and the cancellation and release of the guarantee funds reserved for that case. Canceled and released guarantee funds may not be available at a later date. In situations where the case number has been canceled and funds returned to the 184 pool, the lender must request a new Section 184 loan/case number before the loan can be closed. All requests for an extension may be faxed to the Program ONAP, Office of Loan Guarantee.

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10.10

PROCESSING, CLOSING AND SUBMITTING THE LOAN FOR ENDORSEMENT

Under DG, HUD does not review the Section 184 application before closing and does not issue a firm commitment. With DG, the lender determines that the proposed loan is eligible for the Section 184 program, underwrites and approves the eligible applicant in accordance with the requirements of Chapters 1-5 and 7 of the guidebook.

The DG approved loan is closed in accordance with Chapters 6 and 7 of this guidebook as applicable. The lender submits the complete origination and closing files to the Program ONAP, Office of Loan Guarantee, within 60 days of closing. All documents contained on the Firm Commitment and Endorsement Checklists contained in Appendix 4 should be included in the submission.

The lender must review all HUD-1 Settlement Statements, certifications on-and-to the HUD-1 Settlement Statement, legal instruments and other documents executed at closing; additionally, the lender must certify that the transaction and loan meet all statutory, regulatory and guidebook requirements for the Section 184 Loan Guarantee Program and that the loan has been closed in accordance with the terms and sales price as specified in the sales contract or the construction or rehabilitation contract or agreement. The lender is responsible for assuring that all requirements imposed by the Bureau of Indian Affairs (BIA) on loans involving tribal trust or allotted land are met.

HUD will review the closed loan file for compliance with Section 184 closing requirements prior to issuing the loan guarantee certificate. HUD’s review of the 184 file will include, but is not limited, to the following:

• Compliance with the underwriter’s conclusions and/or conditions, including the mortgage amount
• Construction and rehabilitation documents (when applicable)
• The accuracy and completeness of the closing and legal documents, including when required, the execution of documents by the BIA
• Payment of the loan guarantee fee (including any late charge and interest)

The director of the Office of Loan Guarantee is the signature authority for all loan guarantee certificates. A Section 184 quality control review may be performed on the guaranteed loan at a later date.

If HUD is unable to issue a loan guarantee certificate, the lender will be notified with a Guarantee Commitment Rejection letter. Lenders have 30 days from the date of a rejection to submit additional information and request that the Office of Loan Guarantee reconsider the request for a loan guarantee certificate.

Late Submission for Endorsement. The Section 184 late endorsement procedures detailed above apply to all Section 184 loans, including I 84 loans originated under the DG program.

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10.11

POST ENDORSEMENT DOCUMENTATION

The mortgagee is responsible for the submission of all post endorsement documentation to HUD that may be required. Refer to Chapters 6 and 7 of this guidebook. The post endorsement document checklist in Appendix 4 contains the documents for submission with the exception of the Final Release Notice. The approved DG mortgagee is responsible for signing the Final Release Notice rather than HUD.

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10.12

ADMINISTRATION OF CONSTRUCTION AND REHABILITATION LOANS

Construction and rehabilitation loans processed under DG are subject to the same requirements as construction and rehabilitation loans processed with a Section 184 firm commitment. Refer to Chapter 7 of this guidebook.

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10.13

ASSURANCE OF ENDORSEMENT

The DG procedure has been created to give the mortgagee sufficient certainty of the HUD guarantee to justify the assumption of the responsibilities involved in originating and closing the Section 184 loan without prior HUD review. Mortgagees are responsible for complying with all applicable Section 184 regulations and guidebook instructions. If the mortgage loan meets the pre-endorsement review criteria, HUD will endorse the mortgage for guarantee. The guarantee is incontestable except in cases of fraud or misrepresentation by the mortgagee. If, at the time the case is submitted for endorsement, HUD has evidence that there is fraud or misrepresentation on the part of the originating mortgagee, HUD will not accept the underwriter’s signature on the MCAW and will not endorse the mortgage for guarantee.

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10.14

FIRM COMMITMENT OPTION

Lenders approved for DG may elect to submit the Section 184 application to the Program ONAP, Office of Loan Guarantee, for a HUD issued firm commitment.

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10.15

LOAN SERVICING

Loans servicing for DG loans is the same as loans processed with a Section 184 firm commitment issued by the Program ONAP, Office of Loan Guarantee.