A change to the FHA claim filing rule is coming. Learn how you can prepare for it with this joint point of view from PwC's Consumer Finance Group and Financial Services Regulatory Practice.

1. A joint point of view by PwC’s Consumer Finance Group
and Financial Services Regulatory Practice
FHA claim filing rule change looms
August 2015
The FHA has proposed rule changes that could have a very significant financial impact and impose substantial
additional risk to mortgage businesses. Learn about the possible implications, and make use of the FHA comment
period, due to close September 4, 2015.
On July 6, 2015, the Federal Housing
Administration (FHA) issued a proposal to establish
claim-filing timelines, modify interest curtailment
requirements and establish new servicing expense
claim curtailment requirements.1
These proposed
rules are intended to streamline the claim filing
process for servicers, help the FHA manage
resources and produce better funding forecasts for
the Mutual Mortgage Insurance Fund (MMIF). The
proposed rules, applicable to single family loans
endorsed after the rule goes into effect, are poised
to have a significant financial impact on mortgage
lenders and may be perceived by lenders as an
attempt by the FHA to transfer credit risk to them.
This may change the market’s perspective on the
overall value of FHA mortgage lending.
Given that lenders have never been held to a
timeline for FHA claims and that non-compliance
can result in the termination of the mortgage
insurance contract, these changes could have a
very real, material impact to the P&L and pose
significant additional risk to mortgage businesses.
While proposed changes in interest curtailment
rules may help offset some of these financial
risks, on balance, it does little to mitigate the
overall impact. If the proposal becomes rule, the
operational implications of these rule changes
are expected to be far reaching requiring a
heightened level of management attention and
improved operational processes. In addition,
mortgage finance teams will need additional
visibility into operational processes in order to
make enhancements to reserving, allowance
and valuation models for impacted balance sheet
accounts. This includes servicing for advances,
loans, real estate owned (REO), accrued interest
and mortgage servicing rights (MSR). To satisfy
timelines and mitigate risk of losses, lenders will
have to improve operational processes and manage
their impact with significant investments to
enhance processes, technology and reporting.
Overview
To satisfy timelines and mitigate
risk of losses, lenders will have to
improve operational processes and
manage their impact with significant
investments to enhance processes,
technology and reporting.
FHA’s comment window on the proposed rule is
open through September 4, 2015. You can provide
feedback by submission to the Office of the General
Counsel, HUD via mail or through the federal
rulemaking portal.
FHA believes that the cost of complying with the
proposed new rules would be minimal. Lenders,
with an understanding of the financial risks
involved in termination of insurance and the
increases in operational, resource and technology
costs that this proposal would require, should
consider providing comments as soon as possible.
Thorough comments from lenders can actually
help the FHA generate a more accurate cost-
benefit analysis, and may improve the rule-making
process going forward.
Comment period closes soon: Act now
Lenders, with an understanding
of the financial risks involved in
termination of insurance and the
increases in operational, resource
and technology costs that this
proposal would require, should
consider providing comments as
soon as possible.
1 Docket No. FR-5742-P-01 at: http://www.gpo.gov/fdsys/pkg/FR-2015-07-06/pdf/2015-16479.pdf

2. Key provisions and potential impacts2
Failure to file a timely FHA claim would terminate FHA insurance contracts
Key change Operational impact Financial impact
a. Insurance contract termination – Insurance contract may be terminated if
claims are not filed within the maximum claim filing deadlines (see #2). FHA
is not required to provide a notice for termination
• REO – Increased inventory of REO properties
• Quality assurance (QA)/Quality control (QC) – Pre-claim
controls to mitigate the risk of false claims on loans where
insurance has been terminated
• Loss analysis – Improved loss analysis to identify the root
causes for terminated insurance
• P&L – Insurance termination will result in increased losses on principal,
interest and servicing advances, as well as, increased operational costs for
servicing and REO. This increases credit risk in the servicing business
• Allowance for loan losses (ALL) – ALL assumptions will need to be
recalibrated to consider the risk of UPB loss from terminated insurance
• MSR – MSR valuation models will need to factor changes in expected losses
• Loan classification – Processes will need to be introduced to reclassify
loans that exceed claim timeframes into the lender-owned portfolio
• Servicing advance reserve – The basis for the servicing advance reserve
will need to be modified to account for contract termination
• P&L/Cash forecast – Adjustments to forecasts to reflect potential increases
in losses for FHA loans
b. Overall claim deadline – Claims must be filed within 12 months of the date
of default and the reasonable diligence time frame established to complete
foreclosure proceedings (varies by state)
If redemption period exceeds this timeline, then overall claim deadline may
be extended by the redemption period
• Reporting – Additional monitoring will be necessary to ensure
compliance with more complex claim timelines
• Claims operations – Further operational pressure to manage
to claim timelines
• Vendor management – Contract adjustments and vendor
oversight to manage to stricter Service Level Agreements
(SLAs)
• Training and P&Ps – Updates to staff knowledge, policies
and procedures to reflect new claim filing timelines and
requirements
• See above
c. Foreclosure claim deadline – Claims must be filed no later than 3 months
from the later of the following events:
i. Foreclosure sale date
ii. Expiration of the redemption period
iii. Eviction or property vacant
iv. Special approval from the HUD secretary, but cannot be later than the
overall claim timeline, unless an extension is granted
d. Pre-foreclosure sale and CWCOT claim deadline – Claims must be
filed no later than 3 months from the pre-foreclosure sale closing date or
12 months after expiration of reasonable diligence time frame for CWCOT
e. Deed in lieu claim deadline – Claims must be filed no later than 3
months from conveyance to servicer or HUD
f. Claim resubmission – Claim deadlines are not suspended if a claim
needs to be re-filed following a denial/withdrawal of initial claim
Expenses may be disallowed for claim filing delays but interest curtailment rules are more favorable
Key change Operational impact Financial impact
a. Interest claim curtailment – Debenture interest claims will only be curtailed
for the time period that the mortgagee has missed a specific time period/
condition as opposed to curtailment for the remaining life of mortgage.
Interest on disallowed expenses will not be paid
• Default servicing operations – Further operational pressure to
manage to foreclosure and conveyance timelines. There may
also be unintended consequences, as servicers may not be
incentivized to continue to attempt all loss mitigation efforts
• Loss analysis – Improved loss analysis to identify the root
causes for missed timelines
• Curtailment calculation – Improved models to calculate
curtailments on interest and expenses
• Training and P&Ps – Updates to staff knowledge, policies and
procedures to reflect curtailment requirements
• Interest – More favorable interest claim rules will improve collection of
debenture interest. Contra-interest accrual/interest advance reserves will
require adjustment
• Servicing advances – Increased reserves for disallowed servicing expenses
(i.e., advances) due to missed timelines
b. Disallowed expenses – Expenses must be curtailed if incurred as a result
of a delay to the following established timelines:
i. First legal action date
ii. Reasonable diligence timeframe
iii. Conveyance timeframe
iv. Timeframe for marketing property
v. Any other delay impacting established FHA claim timelines
The expense curtailment will be calculated based on the time period/
condition that the mortgagee has missed
2 Docket No. FR-5742-P-01 at: http://www.gpo.gov/fdsys/pkg/FR-2015-07-06/pdf/2015-16479.pdf

3. Operations/People
Default servicing operations would need further enhancements to foreclosure,
property preservation, claims and loss analyses processes.
• Upstream servicing teams will experience additional pressure to enable
foreclosure proceedings and conveyance complies with claim deadlines.
In addition, processes will need to be monitored and modified to avoid any
unintended consequences such as limiting loss mitigation opportunities in order
to reduce losses. Such unintended consequences may be treated as a violation
of UDAAP rules by agencies such as CFPB.
• Management will need to maintain continued focus on the foreclosure timelines
(e.g., first legal) to limit losses on servicing expenses and debenture interest.
• Given the manual nature of many processes, staff training, updated policies,
procedures and control environmental improvements to stem potential loss
will be required.
• Quality control and loss analysis function will need to operationalize a clear
view into claim defects and issues resulting in losses in order to expedite root
cause remediation.
Technology
Servicing systems and workflow tools, critical for default servicing to comply
with foreclosure and claims requirements, will need updating to reflect new
triggers and timelines.
Reporting
Management, operational and exception reporting will need to keep pace
with changes affecting foreclosure and claims.
• Foreclosure, conveyance and claims pipeline reports that identify
loans approaching timelines and claim triggers will require adjustments
to avoid delays.
• Finance/accounting reports will need to identify out-of-timeline loans
to enable potential adjustments to reserves and possible write-offs.
Financial
• Expect further complications around allowance and reserving
measurements, and an impact to P&L. Even under current FHA rules,
finance teams have struggled to get the visibility into operational processes
to evaluate the risk of loss due to missed foreclosure and claims timelines.
These proposed rules may be perceived by lenders as a transfer of credit risk
by the FHA to lenders, bringing into question the value of FHA servicing.
• Finance/accounting teams will need to make enhancements to allowance,
reserving and MSR valuation methodologies to reflect increased risk of
losses due to contract termination and disallowed expenses.
• Lenders will need to factor in new risks–both operational and financial–
when pricing new loans.
• Termination of insurance contract will affect balance sheet classification
of loan or REO property.
Potential impacts to mortgage servicers
Learn more
PwC’s white paper, “Servicing fees and
advances–Show me the money” offers
even more details on operational and
financial risks around servicing advances–
and related risk mitigation strategies.
Weigh in
Submit comments to the FHA at
www.regulations.gov before
September 4, 2015.
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PwC Consumer Finance Group
Richard Altham
Partner
richard.d.altham@us.pwc.com
207 502 2347
Thomas Stenger
Managing Director
thomas.p.stenger@us.pwc.com
267 330 1482
Maureen Magrann
Senior Manager
maureen.c.magrann@us.pwc.com
267 330 2620
Yoshi Nomura
Senior Manager
yoshito.nomura@us.pwc.com
952 250 4908
Anish Menon
Manager
anish.menon@us.pwc.com
206 384 8388
PwC Financial Services Regulatory Practice
Anthony Ricko
Principal
anthony.ricko@us.pwc.com
617 530 7536
Nicole Anderson
Director
nicole.m.anderson@us.pwc.com
216 875 3451
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