Updates to the Federal Housing Administration’s (FHA) Defect Taxonomy aim to address issues of fraud and material misrepresentation involving sponsored third-party originators (TPOs). The updates apply to all FHA Title II Single Family mortgage programs and are effective immediately.
Mortgagee Letter (ML) 2024-14 defines such issues as Tier 1 severity defects, which indicate that a mortgagee “knew or should have known” that:
- “an employee of the Mortgagee or sponsored Third-Party Originator was involved and/or
- “red flags in the loan file should have been questioned by the underwriting Mortgagee.”
Mortgagees are responsible for the actions of their sponsored TPOs under 24 CFR § 202.8(a)(3) and Handbook 4000.1 Section I.A.5.a.v., according to the FHA. The updates are intended to better align the FHA Defect Taxonomy with existing requirements and to mitigate risk to the Mutual Mortgage Insurance Fund (MMI Fund).
The FHA’s Defect Taxonomy serves as the agency’s quality assurance framework for all Title II loan reviews. Lenders can refer to it for a consistent methodology for identifying loan-level defects. It also provides useful data, feedback through structured defect categories, and information about the FHA’s risk management and quality assurance business processes.
This policy update will be incorporated into a future version of FHA’s Single Family Housing Policy Handbook 4000.1, according to the FHA. More information is available here.