PART 202—APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES Authority: 12 U.S.C. 1703, 1709 and 1715b; 42 U.S.C. 3535(d). Source: 62 FR 20082, Apr. 24, 1997, unless otherwise noted. Subpart A—General Requirements § 202.1 Purpose. This part establishes minimum standards and requirements for approval by the Secretary of lenders and mortgagees to participate in the Title I and Title II programs. § 202.2 Definitions. Act et seq. Claim Default Lender Title I lender (a) Holds a valid Title I Contract of Insurance and is approved by the Secretary under this part as a supervised lender under § 202.6, a nonsupervised lender under § 202.7, an investing lender under § 202.9, or a governmental or similar institution under § 202.10; or (b) Is under suspension or held a Title I contract that has been terminated but remains responsible for servicing or selling Title I loans that it holds and is authorized to file insurance claims on such loans. Loan Title I loan Mortgage, Title II mortgage or insured mortgage Mortgagee Title II mortgagee Multifamily mortgagee Normal rate Origination approval agreement Title I program(s) Title II program(s) [62 FR 20082, Apr. 24, 1997, as amended at 62 FR 65181, Dec. 10, 1997; 75 FR 20731, Apr. 20, 2010] § 202.3 Approval status for lenders and mortgagees. (a) Initial approval. (1) Approval is signified by: (i) The Secretary's agreement that the lender or mortgagee is considered approved under the Title I or Title II programs, except as otherwise ordered by the Mortgagee Review Board or an officer or subdivision of the Department to which the Mortgagee Review Board has delegated its power, unless the lender or mortgagee voluntarily relinquishes its approval; (ii) Consent by the lender or mortgagee to comply at all times with the general approval requirements of § 202.5, and with additional requirements governing the particular class of lender or mortgagee for which it was approved as described under subpart B at §§ 202.6 through 202.10; and (iii) Under the Title I program, the issuance of a Contract of Insurance constitutes an agreement between the Secretary and the lender and which governs participation in the Title I program. (2) Limitations on approval: (i) Separate approval as lender or mortgagee is required for participation in the Title I or Title II programs, respectively. Application must be made, and approval will be granted, on the basis of one or both categories of programs, as is appropriate. (ii) Separate approval as mortgagee is required for the Single Family Mortgage Insurance Programs and for the Multifamily Mortgage Insurance Programs. Application must be made, and approval will be granted, on the basis of either or both categories, as is appropriate. (iii) In addition to the requirements for approval as a Title II mortgagee, the Secretary may from time to time issue eligibility requirements for participation in specific programs, such as the Direct Endorsement program. (iv) A Title II mortgagee may be approved to operate either on a nationwide basis or on a geographically restricted basis in only those areas designated by the Secretary. (v) A Title I lender may originate loans or purchase advances of credit only within a geographic lending area approved by the Secretary. Expansion of this lending area shall be subject to a determination by the Secretary that the lender is able to originate loans in compliance with part 201 of this chapter within such expanded area. (3) Authorized agents. (b) Recertification. (c) Termination Termination of the Title I Contract of Insurance Notice. (ii) Informal meeting. (iii) Effect of termination. (A) The Department's obligation to provide insurance coverage with respect to eligible loans originated before the termination, unless there was fraud or misrepresentation; (B) A lender's obligation to continue to pay insurance charges or premiums and meet all other obligations, including servicing, associated with eligible loans originated before termination; or (C) A lender's right to apply for and be granted a new Title I Contract of Insurance, provided that the requirements for approval under this part are met. (2) Credit Watch Termination Scope and frequency of review. (ii) Credit Watch Status. (iii) Notice of termination Notice of termination of origination approval agreement. (B) Notice of termination of direct endorsement approval. (C) No need for prior action by Mortgagee Review Board. (D) Underserved areas. (iv) Request for informal conference. (v) Limitation on the establishment of new branches. (A) The proposed termination notice is withdrawn or (B) The Secretary reinstates the mortgagee's origination approval agreement, in accordance with paragraph (e) of this section. (vi) Effects of termination Termination of origination approval agreement. (B) Termination of direct endorsement approval. (vii) Rights and obligations in the event of termination. (A) The eligibility of the mortgage for insurance, absent fraud or misrepresentation, if the mortgagor and all terms and conditions of the mortgage had been approved before the termination by the Direct Endorsement or Lender Insurance mortgagee or were covered by a firm commitment issued by the Secretary; however, no other mortgages originated or underwritten after the date of termination by the mortgagee shall be insured unless the mortgagee's origination approval agreement and/or direct endorsement approval is reinstated by the Secretary; (B) The right of a mortgagee whose direct endorsement approval has been terminated to transfer cases to another mortgagee with direct endorsement approval for the area covered by the termination. (C) A mortgagee's obligation to continue to pay insurance premiums and meet all other obligations, including servicing, associated with insured mortgages; (D) A mortgagee's right to apply for reinstatement of the origination approval agreement and/or direct endorsement approval in accordance with paragraph (e) of this section; or (E) A mortgagee's right to purchase insured mortgages or to service its own portfolio or the portfolios of other mortgagees with which it has a servicing contract. (d) Withdrawal and suspension of approval. (e) Reinstatement General. (i) The origination approval agreement and/or direct endorsement approval for the affected branch or branches has been terminated for at least six months; and (ii) The mortgagee continues to be an approved mortgagee meeting the general standards of § 202.5 and the specific requirements of §§ 202.6, 202.7, 202.8 or 202.10, and 202.12. (2) Application for reinstatement. (i) Be in a format prescribed by the Secretary and signed by the mortgagee; (ii) Be accompanied by an independent analysis of the terminated office's operations and identifying the underlying cause of the mortgagee's unacceptable default and claim rate. The independent analysis must be prepared by an independent Certified Public Accountant (CPA) qualified to perform audits under the government auditing standards issued by the General Accounting Office; and (iii) Be accompanied by a corrective action plan addressing each of the issues identified in the independent analysis described in paragraph (e)(2)(ii) of this section, along with evidence demonstrating that the mortgagee has implemented the corrective action plan. (3) HUD action on reinstatement application. [62 FR 20082, Apr. 24, 1997, as amended at 62 FR 30225, June 2, 1997; 62 FR 65181, Dec. 10, 1997; 69 FR 75807, Dec. 17, 2004; 75 FR 20731, Apr. 20, 2010; 78 FR 57060, Sept. 17, 2013] § 202.4 Request for determination of compliance. Pursuant to section 539(a) of the Act, any person may file a request that the Secretary determine whether a lender or mortgagee is in compliance with § 202.12(a) or with provisions of this chapter implementing sections 223(a)(7) and 535 of the Act such as §§ 201.10(g), 203.18d and 203.43(c)(5) of this chapter (only section 535 applies to lenders). The request for determination shall be made to the following address: Department of Housing and Urban Development, Office of Lender Activities and Program Compliance, 451 Seventh Street SW., Washington, DC, 20410. The Secretary shall inform the requestor of the disposition of the request. The Secretary shall publish in the Federal Register § 202.5 General approval standards. To be approved for participation in the Title I or Title II programs, and to maintain approval, a lender or mortgagee shall meet and continue to meet the general requirements of paragraphs (a) through (n) of this section (except as provided in § 202.10(b)) and the requirements for one of the eligible classes of lenders or mortgagees in §§ 202.6 through 202.10. (a) Business form. (i) Each general partner must be a corporation or other chartered institution consisting of two or more persons. (ii) One general partner must be designated as the managing general partner. The managing general partner shall comply with the requirements of paragraphs (b), (c), and (f) of this section. The managing general partner must have as its principal activity the management of one or more partnerships, all of which are mortgage lenders or property improvement or manufactured home lenders, and must have exclusive authority to deal directly with the Secretary on behalf of each partnership. Newly admitted partners must agree to the management of the partnership by the designated managing general partner. If the managing general partner withdraws or is removed from the partnership for any reason, a new managing general partner shall be substituted, and the Secretary shall be immediately notified of the substitution. (iii) The partnership agreement shall specify that the partnership shall exist for the minimum term of years required by the Secretary. All insured mortgages and Title I loans held by the partnership shall be transferred to a lender or mortgagee approved under this part prior to the termination of the partnership. The partnership shall be specifically authorized to continue its existence if a partner withdraws. (iv) The Secretary must be notified immediately of any amendments to the partnership agreement that would affect the partnership's actions under the Title I or Title II programs. (2) Use of business name. (3) Non-FHA-approved entities. (b) Employees. (c) Officers. (d) Escrows. (e) Servicing. (f) Business changes. (1) All changes in its legal structure, including, but not limited to, mergers, terminations, name, location, control of ownership, and character of business; and (2) Any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, loan originator, of the lender or mortgagee, or the lender or mortgagee itself, that is subject to one or more of the sanctions in paragraph (j) of this section. (g) Financial statements. (1) Furnish to the Secretary a copy of its audited financial statements within 90 days of its fiscal year end, except as provided in § 202.6(c); (2) Furnish such other information as the Secretary may request; and (3) Submit to an examination of that portion of its records that relates to its Title I and/or Title II program activities. (h) Quality control plan. (i) Fees. (j) Ineligibility. (1) Be suspended, debarred, under a limited denial of participation (LDP), or otherwise restricted under 2 CFR part 2424 or 24 CFR part 25, or under similar procedures of any other federal agency; (2) Be indicted for, or have been convicted of, an offense that reflects adversely upon the integrity, competency, or fitness to meet the responsibilities of the lender or mortgagee to participate in the Title I or Title II programs; (3) Be subject to unresolved findings as a result of HUD or other governmental audit, investigation, or review; (4) Be engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility; (5) Be convicted of, or have pled guilty or nolo contendere (i) During the 7-year period preceding the date of the application for licensing and registration; or (ii) At any time preceding such date of application, if such felony involved an act of fraud, dishonesty, or a breach of trust or money laundering; (6) Be in violation of provisions of the Secure and Fair Enforcement (SAFE) Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq. (7) Be in violation of any other requirement established by the Secretary. (k) Branch offices. (l) Conflict of interest and responsibility. (m) Reports. (1) An audited or unaudited financial statement, within 30 days of the end of each fiscal quarter in which the mortgagee experiences an operating loss of 20 percent of its net worth, and until the mortgagee demonstrates an operating profit for 2 consecutive quarters or until the next recertification, whichever is the longer period; and (2) A statement of net worth within 30 days of the commencement of voluntary or involuntary bankruptcy, conservatorship, receivership, or any transfer of control to a federal or state supervisory agency. (n) Net worth Applicability. (2) Requirements Single family net worth requirements. (ii) Multifamily net worth requirements. (iii) Dual participation net worth requirements. [75 FR 20732, Apr. 20, 2010; 75 FR 23582, May 4, 2010; 77 FR 51468, Aug. 24, 2012; 78 FR 57060, Sept. 17, 2013; 89 FR 7277, Feb. 2, 2024; 89 FR 30276, Apr. 23, 2024] Subpart B—Classes of Lenders and Mortgagees § 202.6 Supervised lenders and mortgagees. (a) Definition. (b) Additional requirements. (1) Net worth. (2) Notification. (3) Fidelity bond. (4) Audit report. (i) Comply with the financial reporting requirements in 24 CFR part 5, subpart H. Audit reports shall be based on audits performed by a certified public accountant, or by an independent public accountant licensed by a regulatory authority of a State or other political subdivision of the United States on or before December 31, 1970, and shall include: (A) Financial statements in a form acceptable to the Secretary, including a balance sheet and a statement of operations and retained earnings, a statement of cash flows, an analysis of the lender's or mortgagee's net worth adjusted to reflect only assets acceptable to the Secretary, and an analysis of escrow funds; and (B) Such other financial information as the Secretary may require to determine the accuracy and validity of the audit report. (ii) Submit a report on compliance tests prescribed by the Secretary. (c) Financial statement requirements for small supervised lenders and mortgagees Definitions. (i) Federal banking agency (ii) Small supervised lender or mortgagee (2) Financial statement requirements. (3) Requirement for audited financial statement and other information based on determination of heightened risk to the FHA insurance fund. (i) Failing to provide required financial submissions under § 202.6(c)(2) within the required 90-day period following the lender's or mortgagee's fiscal year end; (ii) Maintaining insufficient adjusted net worth or unrestricted liquid assets as required by § 202.5(n); (iii) Reporting opening cash and equity balances that do not agree with the prior year's reported cash and equity balances; (iv) Experiencing an operating loss of 20 percent or greater of the lender's or mortgagee's net worth for the annual reporting period as governed by § 202.5(m)(1); (v) Experiencing an increase in loan volume over the prior 12-month period, determined by the Secretary to be significant; (vi) Undertaking significant changes to business operations, such as a merger or acquisition; and (vii) Other factors that the Secretary considers appropriate in indicating a heightened risk to the FHA insurance fund. [75 FR 20734, Apr. 20, 2010, as amended by 78 FR 57060, Sept. 17, 2013] § 202.7 Nonsupervised lenders and mortgagees. (a) Definition. (b) Additional requirements. (1) Net worth and liquid assets. (2) Credit source Title I. (ii) Title II. (3) Audit report. (A) A financial statement in a form acceptable to the Secretary, including a balance sheet and a statement of operations and retained earnings, a statement of cash flows, an analysis of the mortgagee's net worth adjusted to reflect only assets acceptable to the Secretary, and an analysis of escrow funds; and (B) Such other financial information as the Secretary may require to determine the accuracy and validity of the audit report. (ii) A mortgagee must submit a report on compliance tests prescribed by the Secretary. (4) Fidelity bond. [62 FR 20082, Apr. 24, 1997, as amended at 62 FR 65182, Dec. 10, 1997; 63 FR 9742, Feb. 26, 1998; 63 FR 44361, Aug. 18, 1998; 67 FR 53451, Aug. 15, 2002; 77 FR 51468, Aug. 24, 2012] § 202.8 Sponsored third-party originators. (a) Definitions Sponsor. (2) With respect to Title II programs, a sponsor is a mortgagee that holds a valid origination approval agreement, is approved to participate in the Direct Endorsement program, and meets the net worth requirement for the class of mortgagee to which it belongs. (3) Each sponsor shall be responsible to the Secretary for the actions of its sponsored third-party originators or mortgagees in originating loans or mortgages, unless applicable law or regulation requires specific knowledge on the part of the party to be held responsible. If specific knowledge is required, the Secretary will presume that a sponsor has knowledge of the actions of its sponsored third-party originators or mortgagees in originating loans or mortgages and the sponsor is responsible for those actions unless it can rebut the presumption with affirmative evidence. Sponsored third-party originator. (b) Eligibility to originate loans to be insured by FHA. (1) The sponsored third-party originator is working with and through an FHA-approved lender or mortgagee; and (2) The sponsored third-party originator or an officer, partner, director, principal, manager, supervisor, loan processor, or loan originator of the sponsored third-party originator has not been subject to the sanctions or administrative actions listed in § 202.5(j), as determined and verified by the FHA-approved lender or mortgagee. [75 FR 20734, Apr. 20, 2010, as amended at 77 FR 51468, Aug. 24, 2012] § 202.9 Investing lenders and investing mortgagees. (a) Definition. (b) Additional requirements. (1) Funding arrangements. (2) Officers and staff. (3) Fidelity bond. (4) Audit report. (i) A financial statement in a form acceptable to the Secretary, including a balance sheet and a statement of operations and retained earnings, a statement of cash flows, an analysis of the investing lender's or mortgagee's net worth adjusted to reflect only assets acceptable to the Secretary, and an analysis of escrow funds; and (ii) Such other financial information as the Secretary may require to determine the accuracy and validity of the audit report. [62 FR 20082, Apr. 24, 1997, as amended at 63 FR 9742, Feb. 26, 1998; 75 FR 20734, Apr. 20, 2010; 89 FR 30277, Apr. 23, 2024] § 202.10 Governmental institutions, Government-sponsored enterprises, public housing agencies and State housing agencies. (a) Federal, state, and municipal governmental agencies and Federal Reserve Banks. (b) Government-Sponsored Enterprises. (c) Public housing agencies and State housing agencies. (d) Audit requirements. [62 FR 20082, Apr. 24, 1997, as amended at 80 FR 75936, Dec. 7, 2015; 89 FR 30277, Apr. 23, 2024] Subpart C—Title I and Title II Specific Requirements § 202.11 Title I. (a) Types of administrative action. (b) Grounds for action. (1) Failure to properly supervise and monitor dealers under the provisions of part 201 of this title; (2) Exhaustion of the general insurance reserve established under part 201 of this title; (3) Maintenance of a Title I claims/loan ratio representing an unacceptable risk to the Department; or (4) Transfer of a Title I loan to a party that does not have a valid Title I Contract of Insurance. [75 FR 20734, Apr. 20, 2010] § 202.12 Title II. (a) Tiered pricing General requirements Prohibition against excess variation. (ii) Customary lending practices. (iii) Basis for permissible variations. (2) Area. (i) An area used by HUD for purposes of § 203.18(a) of this chapter to determine the median 1-family house price for an area; or (ii) The area served by a HUD field office but excluding any area included in paragraph (a)(2)(i) of this section. (3) Mortgage charges. (4) Interest rate. (5) Mortgage charge rate. (6) Determining excess variations. (7) Mortgage type. (8) Recordkeeping. (b) Servicing. (c) Report and corrective plan requirements. [62 FR 20082, Apr. 24, 1997, as amended at 75 FR 20734, Apr. 20, 2010; 77 FR 51469, Aug. 24, 2012]