FHA Branch Offices Could Become a Thing of the Past: HUD Finalizes Rule Eliminating Mandatory Branch Office Registration

This Legal Update has been updated on changing requirements from the Federal Housing Administration (“FHA”) regarding branch offices. Since this Legal Update was originally published, the FHA published Mortgagee Letter 2024-04, updating the Single Family Handbook to the reflect the changes in the Final Rule. These changes include narrowing the definitions of “branch managers” and “regional managers” to apply only to managers of registered branch offices.

Federal Housing Administration (“FHA”) approved lenders and mortgagees will no longer be required to register their branch offices. The US Department of Housing and Urban Development (“HUD”) published a final rule (the “Final Rule”) on February 2, 2024, eliminating the requirement for lenders and mortgagees to register each branch office where lenders and mortgagees conduct FHA business with HUD.¹ HUD adopted the Final Rule with no changes from the proposed rule published in March 2023. Shortly after issuing the Final Rule, FHA addressed questions from stakeholders in Frequently Asked Questions (“FAQs”).² In this Legal Update, we discuss the background of HUD’s branch office requirements, the changes the Final Rule makes to those requirements, and takeaways for stakeholders.

Background

HUD regulations currently require all branch offices where an FHA-approved lender or mortgagee conducts FHA business to be registered with HUD.³ Once registered, a lender’s branch offices can conduct FHA business nationwide, although only in states where the lender or mortgagee fully complies with applicable state origination and/or underwriting licensing and approval requirements.⁴ HUD charges a fee to lenders and mortgagees for each registered branch office authorized to conduct FHA business.⁵ In March 2023, HUD published a proposed rule to eliminate the requirement for lenders and mortgagees to register all branch offices where FHA business is conducted.⁶

The Final Rule

The Final Rule eliminates the requirement for lenders and mortgagees to register all branch offices where they conduct FHA business. After the Final Rule becomes effective on March 4, 2024, lenders and mortgagees can choose whether or not to register their branch offices with HUD. The Final Rule also makes fees applicable only to each branch office that a lender or mortgagee chooses to register with HUD. Only registered branch offices, should a mortgagee choose to register them, will be placed on the HUD Lender List Search page.

HUD stated that the amendments to the branch office registration requirement are intended to reduce the administrative burden for existing lenders and mortgagees, and eliminate barriers for entities interested in FHA programs, which may expand the availability of FHA programs to underserved communities. In addition, HUD stated that it intends to provide flexibility that may encourage more lenders and mortgagees to originate FHA-insured mortgages. HUD noted that it made the updates in response to the mortgage industry’s evolution over time and the advancement of technology. In particular, during and after the COVID-19 pandemic, the use of remote services and technology to complete loan applications has increased, and a lender or mortgagee does not necessarily need to maintain several branch offices to conduct FHA business nationwide.

According to HUD, it received 11 public comments on the proposed rule, including from individuals, lenders, mortgagees, and business associations. Commenters generally supported the proposed rule based on industry trends toward remote work. Some commenters expressed concern over whether lenders and mortgagees could become lax in complying with applicable regulations and whether the activities of unregistered branches should be restricted. In response, HUD emphasized remaining mechanisms in place to support branch-level compliance. For example, lenders and mortgagees are still required to comply with all state licensing and approval requirements for origination, underwriting, and servicing. HUD also received questions on the applicability of Neighborhood Watch/Compare Ratio Data if lenders and mortgagees are not required to register branch offices. HUD noted that lenders and mortgagees that choose to register branch offices will still be able to access branch-level data in Neighborhood Watch, including Compare Ratios for registered branches. HUD also pointed to its Credit Watch process for monitoring underwriting decisions, which focuses on a lender’s or mortgagee’s enterprise performance in the HUD field office jurisdictions. HUD also stated that lenders and mortgagees are expected to continue tracking the performance of specific branches using their own data if necessary.

In the Final Rule, HUD reminded lenders and mortgagees that FHA still requires them to be responsible for the actions of its staff that participate in FHA transactions. HUD stated that lenders and mortgagees must continue to exercise control over the management and supervision of their staff, including regular and ongoing reviews of staff performance and the work performed. Lenders and mortgagees must ensure they and their employees comply with the requirements of state mortgage licensing laws.

FAQs

On February 15, 2024, FHA published FAQs that address inquiries it received from stakeholders on the Final Rule. FHA appears to have issued or revised eight FAQs in the FHA Resource Center to reflect the changes in the Final Rule. While most of the FAQs largely restate the text of the Final Rule, others provide clarifying information that may be of particular interest to lenders and mortgagees. In two of the FAQs, FHA clarified that a lender or mortgagee’s annual recertification fee will be calculated based on the number of registered branch offices as of the last business day of the lender’s or mortgagee’s Certification Period, which is the same as the lender’s or mortgagee’s fiscal year. FHA’s announcement of the FAQs specifically addresses the upcoming recertification period.⁷ In the announcement, HUD made clear that the changes to the branch office requirements under the Final Rule will not impact a lender’s or mortgagee’s fiscal year ending December 31, 2023. Accordingly, lenders and mortgagees can expect to see branch office fees charged for all branch offices registered as of December 31, 2023.

Mortgagee Letter 2024-04

On March 19, 2024, FHA published Mortgagee Letter 2024-04 (the “Mortgagee Letter”),⁸ updating the Single Family Handbook (“SFH”) to the reflect the changes in the Final Rule. The provisions of the Mortgagee Letter became effective on the date of publication. The Mortgagee Letter largely updates the SFH to reflect the Final Rule, while containing additional changes not previously addressed in the Final Rule or FAQs. Specifically, the Mortgagee Letter updated the definitions of, and requirements related to, “branch managers” and “regional managers.” The definitions have been updated to apply only to managers of registered branch offices, rather than branch offices generally. Further, a lender or mortgagee is only required to have a branch or regional manager oversee registered branch offices. Lastly, lenders and mortgagees are only required to provide the full names and titles, along with contact information, for branch and regional managers of registered branch offices in the Lender Electronic Assessment Portal (“LEAP”). Accordingly, lenders and mortgagees will not be required to have a branch or regional manager oversee branch offices the mortgagee chooses not to register with FHA. Nor will lenders and mortgagees be required to provide HUD with the names and contact information of branch and regional managers of unregistered branch offices.

In addition, the Mortgagee Letter reflects amendments to SFH Section I.A.4(a), (b), and (c), but does not include I.A.4(d), which restricts net branching. We assume the absence of Section I.A.4(d) in the Mortgagee Letter means the net branching restriction remains in place, which will be confirmed when HUD reissues the SFH to incorporate the Mortgagee Letter.

Takeaways

While FHA mortgagees will no longer be required to register their branch locations with HUD, the Final Rule does not impact a lender’s branch registration and compliance requirements under state law. If a state mortgage licensing law requires a lender to designate and register branch locations, those requirements remain. That said, lenders and mortgagees remain responsible for their staff working in branch office locations and must maintain effective controls to manage risk, even absent a requirement to register each branch office. HUD did not remove the requirement that a lender or mortgagee is fully responsible for the actions of its branch offices regardless of registration status.

HUD also maintains the authority to review the performance of a mortgagee’s branch offices individually and terminate the authority of only a specific branch or of a mortgagee’s overall operations.⁹ Under its Credit Watch termination program, HUD can terminate a lender’s or mortgagee’s origination approval agreement or direct endorsement underwriting authority, if the lender or mortgagee had a rate of defaults and claims on insured mortgages originated or underwritten in an area (HUD field office) which exceeded 200 percent of the normal rate and exceeded the national default and claim rate for insured mortgages. While HUD’s Credit Watch origination proceedings have been branch-level focused in the past, such that only a branch’s authority to originate loans in a particular field office would be terminated, the Credit Watch regulations give HUD the authority to terminate a mortgagee’s origination or underwriting authority at the enterprise level. With the change to branch registration requirements, branch-level data will only be available to HUD to the extent that a lender or mortgagee chooses to register its branch offices with HUD. Further, branches will only be placed on the HUD Lender List Search page if they are registered, and a lender or mortgagee will only be able to utilize Neighborhood Watch for branch-level data if branches are registered. For lenders or mortgagees that opt not to register branch locations, HUD will no longer be able to evaluate Credit Watch origination performance in each of the Areas Approved for Business, since all data will be aggregated under the home office identified number. As a result, it would seem that future Credit Watch origination proceedings may occur at the enterprise level within applicable HUD field office jurisdictions.

Lenders and mortgagees should also take note that although HUD has made branch registration optional, it did not remove the following branch office-related requirements from the regulations and Single Family Housing Handbook:

• Certain office facilities requirements, including the requirement to display a fair housing poster at any public-facing branch office and documentation requirements.¹⁰
• State licensing and registration requirements, including the requirement that each branch office have all required licenses, registrations, or approvals.¹¹
• Operating requirements, such as:
  • A lender or mortgagee must pay all of its own operating expenses (defined as the costs associated with equipment, furniture, office rent, overhead, employee compensation, etc.), including the expenses of its home office and any branch offices where it conducts FHA business. A lender or mortgagee must also maintain all accounts for operating expenses in its name.¹²
  • A lender or mortgagee is responsible for the actions of its staff that participate in FHA transactions. The lender or mortgagee must ensure that its corporate officers exercise control over the management and supervision of such staff, which must include regular and ongoing reviews of staff performance and of the work performed. The lender or mortgagee is also responsible for ensuring compliance with the licensing and registration requirements applicable to individual loan originators.¹³
• HUD regulations provide that a lender or mortgagee cannot register a new branch office within a HUD Field Office jurisdiction where its origination approval agreement is proposed to be terminated or has been terminated until the termination notice is withdrawn or the mortgagee’s origination approval agreement is reinstated. If the termination relates to a branch office origination approval agreement, the Single Family Handbook provides that after a six-month period has elapsed, the lender or mortgagee can make a request through LEAP to reassign the former office’s 10-digit FHA Lender ID to the new branch and pay the branch office registration fee.¹⁴
• The ineligibility criteria set forth in 24 C.F.R. § 202.5(j) still apply to any “…manager, supervisor, loan processor, loan underwriter, or loan originator employed or retained by the Mortgagee,” regardless of where they are physically situated.

FHA-approved mortgagees will need to ensure compliance with these requirements as they navigate the flexibility of branch office registration provided by the Final Rule and Mortgagee Letter 2024-04.

¹ HUD, Changes in Branch Office Registration Requirements, 89 Fed. Reg. 7,274 (Feb. 2, 2024).

² FHA, FHA INFO 2024-02, Frequently Asked Questions for Branch Registration Requirements Now Available (Feb. 15, 2024).

³ 24 C.F.R. § 202.5(k).

⁴ HUD Handbook 4000.1 I.A.4.b.

⁵ 24 C.F.R. § 202.5(i).

⁶ HUD, Changes in Branch Office Registration Requirements, 88 Fed. Reg. 12,906 (Mar. 1, 2023).

⁷ FHA, FHA INFO 2024-02, Frequently Asked Questions for Branch Registration Requirements Now Available (Feb. 15, 2024).

⁸ HUD, Mortgagee Letter 2024-04 (Mar. 19, 2024).

⁹ 24 C.F.R. § 202.3(c)(2).

¹⁰ HUD Handbook 4000.1 I.A.3.c.iii.

¹¹ Id. at I.A.3.c.vi.

¹² Id. at I.A.6.g.ii.

¹³ Id. at I.A.6.i. See also id. at I.A.6 (outlining additional operating requirements).

¹⁴ Id. at I.A.4.a.