On May 22, 2017, the U.S. Department of Housing Urban Development (“HUD”), Office of Inspector General (“OIG”) issued a report of its audit of HUD finding that HUD did not review and therefore was not aware that mortgagees improperly processed voluntary terminations of FHA insurance for single-family loans and did not ensure that mortgagees disclosed all implications of voluntary termination of mortgage insurance to the borrowers. As a result, HUD did not sanction mortgagees for improperly terminating insurance without obtaining the required borrower consent.
FHA allows borrowers and mortgagees to voluntarily cancel the FHA mortgage insurance on a loan by mutual agreement. Once the FHA insurance is voluntarily terminated by both parties, the mortgage is no longer governed by the FHA insurance program’s rules and regulations, including its loss mitigation requirements. FHA requires mortgagees to document that they have obtained the borrowers’ informed consent to terminate the insurance. Specifically, FHA requires mortgagees to inform borrowers in writing that electing to terminate the mortgage insurance means that the mortgage will no longer be governed by FHA insurance program rules, regulations, and loss mitigation requirements. Mortgagees must obtain signed consent from each borrower on the mortgage to voluntarily terminate the FHA insurance. Mortgagees must process the termination in the FHA Connection system within 15 days of receiving the signed consent.
As a result of its finding the OIG recommended that HUD: (1) investigate the loans examined in the audit and require the mortgagees to obtain the borrowers consent, reinstate the insurance coverage, or take other action as appropriate given the facts of each particular loan; (2) remind mortgagees that voluntary termination is not the correct termination type to record third-party sales and borrower consent is required to terminate insurance, even if the loans are indemnified; (3) improve its procedures to detect and sanction improper voluntary terminations; and (4) update HUD Handbook to require the consent form to include an explanation that voluntary termination differs from mortgage insurance premium cancellation and the disclosure of any outstanding partial claims when mortgagees attempt to voluntarily terminate insurance.
Given the OIG’s recommendation, it is now expected that HUD will begin auditing loan files with voluntary termination of FHA insurance to determine compliance with the borrower informed consent requirement, and will sanction mortgagees for terminating insurance without getting proper consent. Servicers of FHA loans should review their policies and procedures to ensure controls are in place to maintain compliance with FHA voluntary insurance termination requirements to avoid sanctions. Servicer should also review the procedures to ensure that voluntary termination of insurance is not used during non-conveyance foreclosure sale, where the mortgagee or third-party purchases the property at a foreclosure sale. Servicer should monitor HUD’s announcements for updated guidance on voluntary insurance termination and for any revisions required to the consent form.