CHAPTER 2

REQUIREMENTS FOR INITIAL AND CONTINUING FHA APPROVAL

Part A. Requirements for all Mortgagees

2-1 Introduction. A mortgagee must meet the following general

requirements to be approved for participation in the FHA mortgage

insurance programs. A mortgagee also must meet the specific requirements

that apply to the type of mortgagee for which it seeks approval. The

additional requirements are specified in Part B of this chapter.

2-2 Business Form. A mortgagee seeking approval must be a

corporation, partnership, or other chartered institution, and must be a

permanent organization having succession. A sole proprietorship or trust
is

not an acceptable business form for approval as a FHA mortgagee.

A. Corporation. To be approved as a FHA mortgagee a corporation

must be an entity, chartered in the United States; and meet all
applicable

laws regarding corporations.

The corporation must be able to survive the death or incapacity of an
officer

or shareholder. In determining official capacity or ownership, the

Department, while accepting familial relationships, requires that there
be a

bona fide intent to share responsibilities and duties. If a related
individual

has no substantive role in the management or operation of the mortgagee,

ownership interest by that related party is aggregated with that of the

individual having the operational or management role. However, in

determining ownership, all classes of stock for each owner must be

aggregated to determine someones ownership interest.

B. Partnership. A partnership may be approved as a FHA mortgagee.

However, each general partner that is a corporation or other chartered

institution that consists of two or more persons. An individual person
or a

personal corporation is not eligible as a general partner in an approved

mortgagee.

1\. Managing General Partner. One general partner must be designated

as the managing general partner. The managing general partner must have

as its principal activity the management of one or more partnerships,
all of

which are mortgage lenders, property improvement or manufactured home

lenders; and must have exclusive authority to deal with FHA on behalf of

each partnership. The managing general partner, if itself a FHA approved

mortgagee, may only be an investing mortgagee. The managing general

partner must meet the requirements with respect to officers.

2\. Partnership Agreement. The partnership agreement must specify

that the partnership will exist for a minimum term of 10 years. In the
event

that a partner withdraws, the partnership must be specifically
authorized to

continue its existence.

C. Limited Liability Company (LLC). A limited liability company is

an unincorporated legal entity created under applicable State law
combining

legal and tax attributes of corporations and partnerships. The owners
are

referred to as members and generally have their liability limited to
their

investment. A LLC is neither a partnership nor a corporation but rather
a

different kind of legal entity formed and operated under the States LLC

laws. Some States do not allow LLCs to be used in certain businesses.
For

FHA, the key factors as to whether an LLC may be approved are

permanence and succession of the LLC. The LLCs Articles of

Organization and/or Operating Agreement must:

\* Specify that the LLC consist of two or more members. A single member

LLC is acceptable only if the member is a corporation consisting of two
or

more persons;

\* Specify a minimum term of existence of at least ten years;

\* Provide for succession;

\* Authorize continuance in the event of the withdrawal or death of a

member; and

\* Specify that the LLC will not terminate until all FHA-insured
mortgages

have been transferred to another approved mortgagee.

The LLC must submit its Operating Agreement. Some States LLC laws

may conflict with FHA requirements, thus precluding approval of an LLC

as a FHA lender in those States. Also, there is the possibility that an
LLC

formed in one State may not have the same legal standing in another
State.

State laws must be considered in both the application and approval

processes. A managing member must be designated as the FHA contact. A

single-member LLC is an acceptable form of business for approval as a

FHA mortgagee only if the single member is a corporation consisting of

two or more persons.

2-3 State Licensing Requirements. A mortgagee must obtain all

required business licenses prior to, or in conjunction with, approval as
a

FHA mortgagee. Except for a supervised mortgagee, copies of all required

licenses must be submitted with the application. A state-licensed

mortgagee must also submit a letter certifying to the Department that it
has

not been refused a license or sanctioned. If the mortgagee has been
subject

to an action against its license, it must submit documentation
concerning

the action.

2-4 Mortgagee Name. All applicants must submit documentation that

they have State approval for both their legal name and any doing
business

as name they use. All applications for approval as a non-supervised

mortgagee, non-supervised loan correspondent, or investing mortgagee

whose legal or dba name includes national, Federal, or another
restricted

word, must as part of their application provide documentation that they

have a legal right to its use (see 18 U.S.C. º709. False advertising or

misuse of names to indicate Federal agency). Generally, this right is
only

available to applicants that are a wholly owned subsidiary of a
federally

regulated financial institution.

2-5 Net Worth Requirements. Except for investing mortgagees and

government institutions, mortgagees must meet specified net worth

requirements for initial approval and to maintain approval. Adjusted net

worth is owners equity in the mortgagee less unacceptable assets.
Adjusted

net worth must equal or exceed the minimum requirement for the

mortgagee. The net worth requirement for a supervised mortgagee or a

non-supervised mortgagee increases after approval according to its

FHA-insured single-family mortgage volume.

A. Requirements.

1\. Supervised and Non-supervised Mortgagees.

a\. Initial Approval. For initial approval, any supervised mortgagee or

non-supervised mortgagee must have an adjusted net worth of not less
than

\$250,000. Supervised applicants are not required to verify adjusted net

worth in their application, but may be asked to verify compliance during

application processing.

b\. Continued Approval. For continued approval, any supervised

mortgagee or non-supervised mortgagee must maintain an adjusted net

worth of one percent of the volume of FHA single family insured

mortgages the mortgagee originated, purchased, or serviced during the
prior

fiscal year, but not less than \$250,000, up to a maximum requirement of
\$1

million. Supervised mortgagees are not required to verify adjusted net

worth to renew their approval, but may be asked to verify compliance

during the renewal process.

c\. Mortgage Volume. In calculating mortgage volume, only

single-family FHA-insured mortgages are counted. The mortgage volume

for a sponsor of a loan correspondent includes the aggregate original

principal amount of mortgages purchased from its loan correspondents

during the mortgagees fiscal year. HECMs are included at their maximum

claim amount irrespective of outstanding principal.

To determine mortgage volume at the end of the fiscal year under audit:

\* Start with the aggregate unpaid principal balance in the servicing

portfolio as of the end of the mortgagees fiscal year;

\* Add the aggregate original principal amount of insured mortgages

endorsed during the fiscal year;

\* Add the aggregate original principal amount of insured mortgages

purchased from sponsored loan correspondents during the fiscal year; and

\* Subtract from this total the aggregate outstanding principal balance
of

insured mortgages originated by the mortgagee or purchased from its loan

correspondent(s) during the mortgagees fiscal year that were retained
for

servicing.

Examples of calculations to determine net worth requirements are
included

in chapter 7 of the most recent version of HUD IG Handbook 2000.04,

Consolidated Audit Guide for Audits of HUD Programs.

2\. Mortgagee Approved Only for Multifamily Programs. Any

mortgagee approved for participation only in the multifamily mortgage

insurance programs must have an adjusted net worth of not less than

\$250,000, but is not subject to net worth requirements based on
mortgage

volume.

3\. Supervised and Non-supervised Loan Correspondents. For initial

approval and for continued approval, a loan correspondent must have and

maintain an adjusted net worth of at least \$63,000, plus \$25,000 for
each

registered branch office up to a maximum required adjusted net worth of

\$250,000. Loan correspondents are not subject to net worth requirements

based on mortgage volume. Supervised entities are not required to verify

adjusted net worth, but may be asked to verify compliance during the

approval or renewal process.

4\. Investing Mortgagee. There is no specific net worth requirement for

this type of mortgagee. However, it must have funds or funding

arrangements for investment. See paragraph 2-30 for details.

5\. Governmental Institution. There is no specific net worth

requirement for this type of mortgagee.

B. Calculation of Adjusted Net Worth. All calculations must be

prepared by a CPA pursuant to chapter 7 of the most recent version of
HUD

IG Handbook 2000.04, Consolidated Audit Guide for Audits of HUD

Programs. Applicants seeking approval as a non-supervised mortgagee or

non-supervised loan correspondent must also submit to the FHA a CPA

certified audit report; see paragraph 3 2(A)(6) for details.

2-6 Liquid Assets.

A. Requirement. A supervised or non-supervised mortgagee or loan

correspondent must maintain liquid assets of 20 percent of its adjusted
net

worth or \$100,000 whichever is lesser. Supervised applicants are not

required to verify liquid assets in their application, but may be asked
to

verify compliance during application processing.

B. Acceptable. Cash and cash equivalents constitute liquid assets.

Cash includes cash on hand, checking accounts, savings accounts, and

certificates of deposit. Cash equivalents are readily marketable

investments, e.g. securities readily convertible into cash. To be
considered

a liquid asset, the cash or cash equivalent must not be restricted or

otherwise reserved for any purpose other than the payment of a current

liability.

C. Unacceptable. FHA does not consider a line of credit or loans or

mortgages held for resale by the mortgagee to be liquid assets.

2.7 Application Fees. All fees are nonrefundable

A.. Fee Amount.

1\. Mortgagee Approval. The fee is \$1,000 except for those entities

already approved as a Title I lender, governmental institutions or

non-depository not-for profit entities.

2\. Branch Office Registration. The fee is \$300, except for

governmental institutions or non-depository not-for profit entities.

B. Fee Payment. The application fee must be mailed to HUDs lockbox

together with the HUD form, Application Fee for Title II Mortgagee

Approval to the following address:

U.S. Department of HUD

P.O. Box 198619

Atlanta, GA 30384

Copies of the check and application fee form must accompany the FHA

lender application form. If not, a copy of the front and back of the

cancelled check will be requested.

2-8 Operating Expenses. A mortgagee must pay all its own operating

expenses. This includes expenses of its main and branch offices involved

in originating or servicing any FHA insured mortgages. Operating

expenses include, but are not limited to, equipment, furniture, office
rent,

overhead, employee compensation, and similar expenses.

2-9 Employees and Officers. An approved mortgagee must employ

trained personnel that are competent to perform their assigned

responsibilities.

A. Employees. Employees are those individuals who are under the

direct supervision and control of an FHA approved mortgagee and where

the individuals are exclusively employed by the FHA approved mortgagee

in the mortgage lending and real estate fields. The mortgagee must

demonstrate the essential characteristics of the employer-employee

relationship upon inquiry by the Department. \[See also paragraphs
2-9(D)

and 2-9(G)\]

Compensation of employees may be on a salary, salary plus commission, or

commission only basis and includes bonuses. All compensation must be

reported on Form W-2. Employees who perform underwriting and loan

servicing activities may not receive commissions.

B. Officers. Individuals are officers for the purposes of FHA

requirements if they bear the corporate title of Vice President or
higher and

also include Branch Managers. A mortgagee must have one or more

officers with authority over the mortgagees loan origination and
servicing

operations. An officer is either a corporate officer, or a principal of
a

non-corporate entity, who has authority to legally bind the corporation
or

entity. In the case of a government institution, this role would be
filled by a

designated staff person(s). At least one officer must spend full time

managing and directing the mortgagees operations. That officer must have

a minimum of three years acceptable experience in the mortgage
activities

for which the mortgagee is seeking approval. Relevant training may be

substituted for some of the required experience. An applicant must
submit,

with its application, current resumes documenting this experience. In

determining the acceptability of an officers experience, the Department
will

consider:

\* Experience in originating single family and multifamily mortgages;

\* Experience in servicing single family and multifamily mortgages;

\* Experience in investing funds in real estate mortgages;

\* Experience in managing other individuals performing these services;
and

\* Experience in real estate sales or brokerage does not qualify.

A Branch Managers compensation may be based upon the net profit of the

branch. For example, the FHA approved mortgagee may collect the

revenue from the branch, pay the branch expenses, and then pay the
branch

manager the remaining revenues, if any, as a commission. Such an

arrangement is, essentially, an alternative compensation program for the

branch manager and is an acceptable arrangement if all other branch

requirements are met.

C. Companies with Joint Officers. If a mortgagee has any of the same

officers, stockholders, partners, or members as another entity, the
officers

may represent more than one entity if:

1\. There is a clear and effective separation of the two entities, and

mortgagors know at all times exactly with which entity they are doing

business.

2\. There is a duly appointed or elected senior officer, with the
required

minimum three years of acceptable experience, designated to conduct

exclusively the affairs of the mortgagee during normal business hours.

D. Control and Supervision of Staff. A mortgagee must exercise

control and responsible management supervision over its home office and

branch employees. Control and supervision must include, at a minimum,

regular and ongoing reviews of employee performance and of work

performed.

E. Signatory Authority. Any employee who signs applications for

mortgage insurance on behalf of the mortgagee must be a Vice President,
or

be authorized to bind the mortgagee in matters involving the origination

and servicing of insured mortgages.

F. Conducting Mortgagee Business. During his/her normal duty hours,

employees, who are involved with FHA transactions, may conduct only the

business of the mortgagee.

G. Full Time, Part Time and Outside Employment. A mortgagee may

employ staff full time or part time (less than the normal 40 hour work

week). They may have other employment including self employment.

However, such outside employment may not be in mortgage lending, real

estate, or a related field. Direct endorsement underwriters are included
in

this provision. An underwriter may not work on a part time basis for any

other mortgagee, even underwriting conventional mortgage loans. An

underwriter may not underwrite loans for a parent or subsidiary of the

underwriters approved employer. A direct endorsement underwriters

authority is through the employer and does not extend under any
corporate

umbrella.

2-10 Ineligible Participants. An applicant is ineligible for approval if
the

mortgagee or any officer, partner, director, principal, or employee of
the

applicant mortgagee is:

A. Suspended, debarred, under a limited denial of participation (LDP),

or otherwise restricted under 24áCFRáPart 24 or 25 or under similar

provisions of any other Federal agency;

B. Under indictment for, or has been convicted of, an offense that

reflects adversely upon the applicants integrity, competence or fitness
to

meet the responsibilities of an approved mortgagee;

C. Subject to unresolved findings contained in a HUD or other

governmental audit, investigation, or review;

D. Engaged in business practices that do not conform to generally

accepted practices of prudent mortgagees or that demonstrate

irresponsibility; and

E. Under investigation for any HUD-related violation.

2-11 Office Facilities. The mortgagee may conduct its loan origination

and/or servicing activities from any approved and adequately staffed
office.

A mortgagee is fully responsible for the actions of its offices.
Mortgagees

that lease space from a real estate agent must assure compliance with

RESPA requirements.

A. Home office. Each applicant must identify which location they

consider their main or home office for FHA mortgage activities. It
doesnt

have to be the entitys corporate office. A mortgagees home office
facilities

must:

1\. Have adequate office space and equipment;

2\. Be in a location conducive to mortgage lending;

3\. Be located in a commercial space that is separate and apart from any

other entity. A mortgagee may share general reception-type entrances or

lobbies with another business;

4\. Be clearly identified to the public so that loan applicants and

mortgagors will know, at all times, exactly with whom they are doing

business. This includes a permanently affixed business sign and other

common means of identification used by a business entity;

5\. Display a fair housing poster;

B. Traditional branch office. A traditional branch office is a
separately

located unit of the mortgagee in commercial space. A traditional branch

office must:

1\. Have adequate office space and equipment;

2\. Be in a location conducive to mortgage lending;

3\. Be separated from any other entity by walls or partitions.

(Entrances and reception areas may be shared.);

4\. Be identified to the public;

5\. Display a fair housing poster;

6\. Provide privacy for conducting interviews; and

C. Nontraditional branch office. A nontraditional branch office is

required to meet branch office staffing requirements and the following

requirements concerning office facilities:

1\. It may be located in non-commercial space, but it must have

adequate office space and equipment and must conform to the local

government use requirements.

2\. It must display a fair housing poster if the public is ever
received.

D. Direct lending branch office. A direct lending branch is an office

whose origination operation only uses a call center and/or the Internet
for

contacting consumers. It must meet the office facilities and staff

requirements of a traditional branch office except that it must have a

separate manager and can be collocated with a lenders home office or one

of its traditional branches. See paragraph 5-8 for the approval criteria
of a

direct lending branch.

2-12 Staffing Requirements. An approved mortgagee must have

sufficient staff or permitted contractor support for loan origination,

processing, underwriting, servicing, and collection activities, to the
extent

that the mortgagee engages in these activities.

A. Home office. The mortgagee must have a home office staff of at

least two full time employees. A shared receptionist, while permitted,
may

not be used to meet this requirement.

B. Branch office. A mortgagee must have at least one full time

employee at each branch office. A manager must be assigned to each

traditional and nontraditional branch office. A separate manager must be

located at each direct lending branch.

C. Branch Managers, Loan Officers and Underwriters. Loan officers

(also known as loan originators) of FHA-insured mortgages must be

employees of the mortgagee. Underwriters of FHA-insured mortgages

must be employees of the mortgagee; its authorized agent; or, if the

mortgagee is a loan correspondent, its sponsors. Managers, loan
originators

and underwriters may not be independent contractors or contract

employees.

D. Centralized Centers. Processing and/or underwriting functions may

be centralized in any office(s) of the mortgagee or performed at each
office

of the mortgagee.

2-13 Outsourcing. A mortgagee may contract out certain administrative

and clerical functions that do not materially affect underwriting
decisions or

increase the risk to FHA. However, the mortgagee is still responsible
for

the quality of the mortgages and must ensure compliance with program

requirements and RESPA requirements. The management, underwriting,

and loan originator functions may not be contracted out.

A. Types of functions that may be contracted out are:

\* Clerical Assistance;

\* Loan processing: typing of loan documents, mailing out and collecting

verification forms, ordering credit reports, and/or preparing for

endorsement and shipping loans to investors;

\* Loan servicing: ministerial processing of a foreclosure action,

preservation and protection, and/or tax services;

\* Legal functions;

\* Quality control reviews; and

\* Such other functions as may be approved in advance by the Department.

B. Provider Requirements. The functions listed above in paragraph

2-13(A) may not be contracted out to third party loan originators, real
estate

brokers, or similar entities. An approved mortgagee may own or have an

ownership interest in a separate business entity that offers such
contract

services. An affiliated business arrangement, in which affiliated or
related

companies make referrals to each other, is regulated under RESPA. (See

RESPA \[12 U.S.C. º2602\]: (7) the term affiliated business arrangement

means an arrangement in which (A) a person who is in a position to refer

business incident to or a part of a real estate settlement service
involving a

federally related mortgage loan, or an associate of such person, has
either

an affiliate relationship with or a direct or beneficial ownership
interest of

more than 1 percent in a provider of settlement services; and (B) either
of

such persons directly or indirectly refers such business to that
provider or

affirmatively influences the selection of that provider.)

Mortgagees may not contract with entities or persons that are

suspended, debarred, or under a relevant LDP or have agreed to a
voluntary

exclusion under 24 CFR part 24.

C. Costs of Outsourced Services. The costs of such services may not

be imposed on a FHA borrower or mortgagor as allowed in the various

FHA loan programs.

2-14 Prohibited Branch Arrangement. An approved mortgagee may not

originate or service FHA insured mortgages from branches that do not
meet

FHA requirements.

A. Separate Entities Acting as a Branch Office. An approved

mortgagee is prohibited from engaging an existing, separate mortgage

company or broker to function as a branch of the approved mortgagee and

allowing that separate entity to originate insured mortgages under the

approved mortgagees FHA mortgagee number. This constitutes a

prohibited branch arrangement. Separate entities may not operate as

branches or DBAs of a FHA approved mortgagee. If the separate entity was

purchased and legally merged into the approved mortgagee in compliance

with applicable state law(s), the approved mortgagee must provide a copy

of the merger documents and state license(s) to FHAs Lender Approval and

Recertification Division, as described in paragraph 6-17.

B. Certain Employment Agreements. A FHA approved mortgagee must

pay all of its operating expenses including the compensation of all

employees of its main and branch offices. Other operating expenses that

must be paid by the FHA approved mortgagee include, but are not limited

to, equipment, furniture, office rent, utilities and other similar
expenses

incurred in operating a mortgage lending business. A branch compensation

plan that includes the payment of operating expenses by the branch

manager, any other employee or by a third party is a prohibited

arrangement. The following includes some, but not all, examples of

unacceptable provisions in employment agreements:

\* Require all contractual relationships with vendors such as leases,

telephones, utilities, and advertising to be in the name of the employee

(branch) and not in the name of the FHA approved mortgagee;

\* Require the employee (branch) to indemnify the FHA approved

mortgagee if it incurs damages from any apparent, express, or implied

agency representation by or through the employees (branchs) actions; and

\* Require the employee (branch) to issue a personal check to cover

operating expenses if funds are not available from an operating account.

2-15 Communications Capability and Responsibility. Except for a

mortgagee that only services multifamily mortgages, a mortgagees home

office and each branch office must be able to provide prompt responses
to

applicant or mortgagor inquiries by one of the following methods:

\* The office staff need not maintain complete records on each mortgage
in

it area, but it must be able to secure such information for the
applicant or

mortgagor;

\* Have toll-free telephone service at an office that can provide needed

information; and

\* Accept collect telephone calls from mortgagors at an office that can

provide the same sort of information as that described above.

To ensure equal opportunity for persons with hearing or speech

impairments, it may be necessary for offices to purchase a TTY

(telecommunications device for hearing and speech impaired persons) or

provide equally effective communication systems. If an office offers a

toll-free telephone number for non-disabled persons, it must also offer
a

toll-free opportunity for hearing and speech impaired persons, e.g., a
relay

system.

2-16 Fair Housing and Other Federal Laws.

A. A mortgagee must comply with the Fair Housing Act, Executive

Order 11063 on Equal Opportunity in Housing, the Equal Credit

Opportunity Act (ECOA), the Real Estate Settlement Procedures Act

(RESPA), the Home Mortgage Disclosure Act (HMDA), and all other

Federal laws relating to the lending or investing of funds in real
estate

mortgages.

B. A mortgagee must fully cooperate with any investigations brought

by HUD pursuant to the any authority. A mortgagee must make all officers

and employees available for interviews and must promptly provide (within

not more than 30 days) information and documents requested by HUD, in

the format HUD requests. Failure to fully cooperate may result in

administrative action by the Mortgagee Review Board and possible
referral

to the U.S. Department of Justice for further action.

C. Fair housing posters. A mortgagee must post and maintain a fair

housing poster at each place of business that participates in activities

covered by Section 805 of the Fair Housing Act (i.e. making or
purchasing

of loans or providing other financial assistance: a) for purchasing,

constructing, improving, repairing, or maintaining a dwelling; or

b)ásecured by residential real estate). Fair housing posters must be

prominently displayed so as to be readily apparent to all persons
seeking

residential real estate related transactions or brokerage services.

2-17 Misrepresentative Advertising. An approved mortgagee may not

use misrepresentative advertising. If a mortgagee determines its
branches

or employees have engaged in such activity, then mortgagees must take

action necessary to ensure that such practices do not occur again. All

advertisements must emphasize the name of the company and not the

government. See 18áU.S.C. º709 False advertising or misuse of names to

indicate Federal agency and 18 U.S.C. º1017 Government seals wrongfully

used.

A. Examples. This list is illustrative and should not be considered

all-inclusive.

\* Improperly using the name or seal of FHA or HUD to imply that the

advertisement is from or is endorsed by FHA or HUD;

\* Improperly advertising on a government type form designed to simulate

an official Federal government document; and

\* Stating that the advertisement will serve as your official MIP
account

notice.

B. Actions. When HUD finds advertising abuses by mortgagees, it

will take prompt action, as appropriate:

\* The Mortgagee Review Board may sanction the mortgagee and/or impose

civil money penalties; or

\* A referral may be made to the Departments Inspector General for its

review; or further referral to the Department of Justice which has

jurisdiction over criminal prosecution; or a referral may be made to the

Federal Trade Commission which has jurisdiction over deceptive trade

practices.

2-18 Loan Origination Requirement. All mortgagees must follow all

applicable statutes, regulations and HUD written instructions, including

program handbooks and mortgagee letters on loan originations. Non-FHA

approved mortgage brokers meeting the requirements in Mortgagee Letter

00-10 may participate in the origination of a FHA Insured Reverse

Mortgages (HECMs).

With few exceptions, a mortgagee must originate, close, fund, and

submit mortgages for FHA insurance endorsement in its own name. A

mortgagee may not perform only a part of the loan origination process,
such

as taking the loan application, and routinely transfer the underwriting

package (appraisal report and/or mortgage credit package) to another

mortgagee except between a loan correspondent and its sponsor, and a

principal and its authorized agent. A loan correspondent may process an

application and submit it to one of its sponsors for underwriting. The
loan

correspondent must close the loan in its own name, or in the name of the

sponsor that underwrote the loan. An Authorized Agent may perform any

part of the loan origination process, including underwriting, on behalf
of its

Principal; however the loan must be closed in the name of the Principal.

For further information on the Principal-Authorized Agents, see chapter
5,

Part B.

2-19 Geographic Restrictions for Loan Origination and Underwriting.

Each office of a mortgagee (main office or branch office) is authorized
to

operate only in those states, the District of Columbia, and/or Puerto
Rico as

designated by the Department. Geographic restrictions apply to the loan

origination component of taking a loan application and underwriting. The

processing of loan applications can be done at any office of a
mortgagee.

Approved mortgagees may purchase, hold, service, and sell insured FHA

mortgages without regard to geographic restrictions. Offices must not be

located so as to avoid receiving applications from, or providing
assistance

to, minority loan applicants.

A. Origination Lending Area for Home Offices, Traditional Branches

and Nontraditional Branches: The single family origination lending area
of

each office is based on its geographic location and is composed of one
or

more States. This lending area is also known as the Area Approved for

Business (AAFB) and can be verified via the FHA Connection. A

complete table of all lending areas is included in the Lender Approval

FAQs in the FHA Connection FAQ section.

B. Origination Lending Area for Direct Lending Branches: The single

family origination lending area of these branches are determined on a

case-by-case basis, but normally contain all of the HUD Field Office

jurisdictions in all States where the lender is State approved,
registered or

exempt to conduct direct lending. See paragraph 5-8 for the approval

criteria of a direct lending branch.

C. Underwriting Area of a DE Mortgagee. A DE mortgagees initial

approval to underwrite is granted by its respective HOC and covers all

HUD Field Office jurisdictions within its AAFB plus those of any loan

correspondents it sponsors and the AAFB for mortgagee that it
established

an Authorized Agent-Principal relationship.

D. Streamline Refinance. There are no geographic restrictions on the

origination of streamline refinanced single-family loans. See HUD

Handbook 4155.1 for details on streamline refinancing.

E. Sponsoring Loan Correspondents. DE Mortgagees may sponsor

loan correspondents operating in any HUD Field Office jurisdiction,

whether or not they have origination approval for the same office. The
DE

mortgagee uses their FHA Connection account to add a loan correspondent

they want to sponsor.

F. Multifamily Mortgagees. A mortgagee participating in the

Departments multifamily mortgage insurance programs may originate

project mortgages in the jurisdiction of any Field Office. The mortgagee

must request and receive written permission from each Field Office in

whose jurisdiction it seeks to do business.

2-20 Loan Servicing Responsibility. Each mortgagee that services or sub

services FHA insured single-family mortgages must be an approved

mortgagee and must follow the requirements of HUD Handbook 4330.1,

Administration of Insured Home Mortgages. Multifamily servicing

mortgagees must meet the requirements of HUD Handbook 4350.4, Insured

Multifamily Mortgagee and Field Office Remote Monitoring.

A Title II mortgagee may assign or otherwise transfer an insured Title
II

mortgage only to another approved Title II mortgagee. The transferee or

assignee may be any lender type except a non-supervised loan

correspondent.

2-21 Escrow Funds.

A. Use of Escrow Funds. Mortgagees may not use mortgagor escrow

funds for any purpose other than for which they were received. Escrow

commitment deposits, work completion deposits, and all periodic payments

received by the mortgagee, including ground rents, taxes, assessments,
and

insurance premiums, must be deposited with one or more financial

institutions in a special account or accounts fully insured by the FDIC
or

the NCUA. This requirement may be modified only with the written

permission of the Department. See HUD Handbook 4330.1 for details on

escrow accounts.

B. Reporting of Escrow Funds. If escrow funds are reported on the

balance sheet, they must be fully offset by a corresponding liability
and

must be segregated on the balance sheet. A mortgagee may not report

escrows as its own assets. The annual audit of non-supervised mortgagees

and loan correspondents must cover such fiduciary accounts.

2-22 Prohibited and Permissible Payments. A mortgagee may not pay

any fee, kickback, compensation or thing of value (including a fee

representing all or part of the mortgagees origination fee) to any
person or

entity in connection with a FHA insured mortgage transaction, except for

services actually performed and permitted by the Department.

A. Prohibited Payments. A mortgagee is not permitted to:

1\. Advance funds to a real estate agent, real estate broker, mortgage

broker, or packager as an advance of anticipated commissions on sales to

be financed with a FHA-insured mortgage loan to be provided by the

mortgagee.

2\. Make low interest or no interest loans to a real estate broker, real

estate agent, mortgage broker, packager, builder or any other party from

whom the mortgagee accepts proposals involving FHA-insured mortgages.

3\. Pay a gratuity or make a gift valued above items that are

customarily distributed in the normal course of advertising, public
relations,

or as a general promotion device, to any person or entity involved in

FHA-insured mortgage transactions of the mortgagee.

4\. Pay any compensation or fee that is prohibited by RESPA.

B. Permissible Payments for Services Performed. In connection with

FHA insured mortgages and mortgage insurance applications, a mortgagee

may pay fees permitted by program policy as identified in HUD

Handbooks, Mortgagee Letters or Circular Letters. Generally, the policy

for:

1\. Single Family Origination is in HUD Handbook 4000.2 ,

Mortgagees Handbook, Application Through Insurance (Single Family),

HUD HUD Handbook 4000.4, Single Family Direct Endorsement Program,

or HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage

Insurance on One to Four-Family Properties.

2\. Single Family Servicing is in HUD Handbook 4330.1,

Administration of Insured Home Mortgages.

3\. Multifamily Development is in HUD Handbook 4430.1, Initial

Closing Requirements for Project Mortgage Insurance..

4\. Multifamily Servicing is in HUD Handbook 4350.4, Insured

Multifamily Mortgagee and Field Office Remote Monitoring.

2-23 Quality Control. A mortgagee must maintain a written Quality

Control Plan for the origination and servicing of FHA insured mortgages.

The Quality Control Plan and its implementation must meet the

requirements set forth in chapter 7. Mortgagees are required to report
to

HUD any fraud, illegal acts, irregularities or unethical practices.

2-24 Requirement to Notify HUD of Changes Subsequent to Approval.

A mortgagee must notify the Department in writing within a specific

number of days of any business change that affects its standing as an

approved institution, or which changes the information on which it was

originally approved, including: corporation conversion, merger,

consolidation, succession, liquidation, termination; or a change in its

charter provisions, name, bylaws, location, ownership, character of

business, or senior officers; or a significant reduction in its
revenues, assets

or net worth. See chapter 6 for details.

Part B. Additional Requirements for Specific Mortgagee Types

2-25 Introduction. A mortgagee may be approved to participate in the

Departments mortgage insurance programs as one of the following

designated types of mortgagee. In addition to the general approval

requirements of Part A of this chapter, it must meet specific
requirements

for its particular mortgagee type.

2-26 Supervised Mortgagees. A supervised mortgagee is a financial

institution that is a member of the Federal Reserve System or an
institution

whose accounts are insured by the FDIC or the NCUA. Such a mortgagee

is not required to have mortgage lending as a principal activity as
described

in paragraph 2 29(C). A subsidiary or an affiliate of a supervised
financial

institution is not considered to be supervised for approval as an FHA

mortgagee. Examples of supervised mortgagees are banks, savings

associations, and credit unions.

A. Permissible Mortgage Lending Activities. A supervised mortgagee

may originate, underwrite, purchase, hold, service, and sell FHA insured

mortgages and submit applications for mortgage insurance.

B. Branch Offices. A supervised mortgagee may maintain FHA

registered branch offices that originate insured mortgages. Specific

approval requirements are in chapter 5. The mortgagee is fully
responsible

to HUD for the actions of its offices.

C. Fiduciary Relationships. Approval of a financial institution as a

supervised mortgagee constitutes approval for it to act in a fiduciary

capacity in investing fiduciary funds, which are under its individual or
joint

control. When such a fiduciary relationship is ended, any insured

mortgages held in the fiduciary estate must be transferred to an
approved

supervised mortgagee; the fiduciary relationship must permit the
transfer.

2-27 Non-supervised Mortgagees. A non-supervised mortgagee is a

financial entity that has as its principal activity the lending or
investing of

funds in real estate mortgages.

A. Permissible Mortgage Lending Activities. A non-supervised

mortgagee may originate, underwrite, purchase, hold, service, and sell
FHA

insured mortgages and submit applications for mortgage insurance.

B. Branch Offices. A non-supervised mortgagee may maintain FHA

approved branch offices for the origination of FHA insured mortgages as

described in chapter 5.

C. Warehouse Line of Credit Requirement. A non-supervised

mortgagee, except a mortgagee approved for participation only in the

multifamily mortgage insurance programs, must maintain a warehouse line

of credit or other mortgage-funding program acceptable to the
Department.

Acceptable programs include table funding and concurrent funding

arrangements. The program must be adequate to fund the mortgagees

average 60-day origination production pipeline, but not less than a \$1

million warehouse line of credit or funding program. The line of credit

must be issued directly to the mortgagee. In lieu of a warehouse line of

credit, a mortgagee may have a letter from a financial institution
stating that

it will fund all mortgages originated by the mortgagee.

D. Principal Activity. A non-supervised mortgagee must spend a

majority of its time and assets in the production of real estate
mortgages

and in the lending or investment of funds in real estate mortgages, or a

directly related field. For FHA purposes, the principal activity of a

non-supervised mortgagee, other than one organized as a not-for-profit

entity, must contribute at least one-half of the entitys gross revenues,
unless

otherwise approved by FHA.

E. Annual Certified Audit Report. For continued approval, a

non-supervised mortgagee must submit to the Department an acceptable

audit report within 90 days after the close of the mortgagees fiscal
year.

The audit report must be prepared in accordance with the requirements of

the most recent off HUD IG Handbook 2000.04, Consolidated Audit Guide

for Audits of HUD Programs.

2-28 Supervised Loan Correspondents. A mortgagee that meets the

Departments definition of a supervised mortgagee may apply for and

receive approval as a loan correspondent. The approval must be requested

by at least one Sponsor. An approved loan correspondent is required to

have at least one qualified sponsor at all times.

A. Sponsor. A sponsor of a loan correspondent must be a DE

mortgagee.

1\. Responsibility for Loan Correspondents. The Sponsor is

responsible to the Department for the actions of each of its loan

correspondents in originating FHA-insured mortgages. A Sponsor must

supervise and perform quality control reviews of each of its loan

correspondents. See chapter 7 for details.

2\. Underwriting. The Sponsor performs loan underwriting on behalf

of a loan correspondent. All mortgages originated by the loan

correspondent must be closed in the name of the loan correspondent or
the

sponsor underwriting the loan.

B. Permissible Mortgage Lending Activities. A supervised loan

correspondent may originate FHA insured mortgages and submit

applications for mortgage insurance.

1\. Sale only to Sponsor(s). It may not sell or otherwise transfer any

FHA mortgage to any mortgagee other than its registered Sponsor that

underwrote the loan, without prior written approval from the Department.

2\. Servicing. A supervised loan correspondent may service

FHA-insured mortgages in its own portfolio with the prior permission of

the Department. Such requests should be submitted to the Lender Approval

and Recertification Division.

C. Funding agreement. A supervised loan correspondent must have a

letter or written agreement from each of its Sponsors that the Sponsor
will

purchase all FHA mortgages that the loan correspondent originates and
that

the Sponsor underwrites.

D. Branch Offices. A supervised loan correspondent may maintain

FHA registered branch offices for the origination of insured mortgages
as

described in chapter 5, PartáA.

2-29 Non-supervised Loan Correspondents. A non-supervised loan

correspondent is a financial entity that has as its principal activity
the

origination of mortgages for sale or transfer to one or more registered

Sponsors. An approved loan correspondent is required to have at least
one

qualified sponsor at all times.

A. Selection of a Sponsor. A Sponsor of a loan correspondent must be

a DE mortgagee.

1\. Responsibility for Loan Correspondents. The Sponsor is

responsible to the Department for the actions of each of its loan

correspondents in originating FHA-insured mortgages. A Sponsor must

supervise and perform quality control reviews of each of its loan

correspondents. See chapter 7 for details.

2\. Underwriting. The Sponsor performs the loan underwriting

function on behalf of the loan correspondent. All mortgages originated
by

the loan correspondent must be closed in the name of the loan

correspondent or the Sponsor underwriting the loan.

B. Permissible Mortgage Lending Activities. A non-supervised loan

correspondent may originate FHA insured mortgages and submit

applications for mortgage insurance.

1\. Sale only to Sponsor(s). It may not sell or otherwise transfer any

FHA mortgage to any mortgagee other than its registered Sponsor that

underwrote the loan, without prior written approval from the Department.

2\. May not hold, purchase, or service. It may not hold, purchase, or

service FHA-insured mortgages.

C. Principal Activity. A non-supervised loan correspondent must

spend a majority of its time and assets in the production of real estate

mortgages and in the lending or investment of funds in real estate

mortgages, or a directly related field. For FHA purposes, the principal

activity of a non-supervised loan correspondent, other than one
organized

as a not-for-profit entity, must contribute at least one-half of the
entitys

gross revenues, unless otherwise approved by FHA.

D. Funding agreement. It must have a written agreement with each of

its Sponsors to fund all mortgages that it originates and that the
Sponsor

underwrites

E. Branch Offices. A loan correspondent may maintain FHA

registered branch offices for the origination of insured mortgages as

described in chapter 5, Part A.

2-30 Investing Mortgagees. An investing mortgagee is an organization,

including a charitable or not-for-profit institution or pension fund,
that

invests funds under its own control.

A. Permissible Mortgage Lending Activities. An investing mortgagee

may purchase, hold, and sell FHA-insured mortgages. It may not submit

applications for mortgage insurance. It may not service insured
mortgages

without the prior approval of the Department, and must arrange for an

approved mortgagee to service all insured mortgages the investing

mortgagee acquires and monitor the performance of any service they hire.

B. Special Requirements. An investing mortgagee must meet the

following requirements:

1\. It must have lawful authority to purchase insured mortgages in its

own name.

2\. It must have available, or have arranged for, funds sufficient to

support a projected investment in real estate mortgages of at least \$1

million. For example, a \$1 million line of credit is acceptable.

2-31 Governmental Institutions. Any of the following may be approved

as a mortgagee:

\* A Federal, State or municipal government agency;

\* A Public Housing Authority or State Housing Agency;

\* A Federal Reserve Bank;

\* A Federal Home Loan Bank;

\* Freddie Mac; and

\* Fannie Mae.

A. Permissible Mortgage Lending Activities. A governmental

institution may originate, underwrite, purchase, hold, service, and sell
FHA

insured mortgages and submit applications for mortgage insurance to the

extent authorized by Federal, State, or local law.

B. Branch Offices. These mortgagees may maintain branch offices that

originate and service insured mortgages as described in chapter 5, Part
A.

C. Audit Requirements. Except upon request, a governmental

institution is not required to submit an audit to obtain or retain
approval to

participate in the Departments mortgage insurance programs. The Single

Audit Act Amendments of 1996 placed State and local governments,

colleges and universities, and other not-for-profit grantees under the
same

audit process. As a result of this modification of the Single Audit Act,
the

Office of Management and Budget (OMB) issued uniform standards for the

audit of such entities receiving Federal financial assistance, in
Circular

A 133, Audits of States, Local Governments, and Non-Profit

Organizations. For additional information see HUD IG Handbook

2000.04, Consolidated Audit Guide for Audits of HUD Programs and

AICPA Statement of Position 98 3, Audits of States, Local Governments,

and Not-for-Profit Organizations Receiving Federal Awards.