FHA Updates Defect Taxonomy to Include Servicing Loan Reviews

FHA released a mortgagee letter updating its Defect Taxonomy to further explain its purpose and to add guidance on servicing loan reviews.

The existing Defect Taxonomy recognizes nine defect areas (i.e., deviations from HUD policy requirements) related to areas such as loan origination, underwriting, closing, and endorsement for FHA insurance.  Defects are grouped into four tiers based on their severity.  Tiers 1 and 2 represent material findings that require a response from the mortgagee, while Tiers 3 and 4 represent deficiencies to which the mortgagee can respond but is not required to do so.

The new Defect Taxonomy adds six possible defect areas covering servicing and loss mitigation activities throughout the potential lifecycle of an FHA loan (which are grouped into the same four tiers of severity):

• Servicer Operations: standards and procedures that apply to servicing, such as records management, required actions, and processing functions.
• Account Administration: standards and procedures that apply to accounting and administrative functions, such as reporting, disclosure, and documentation requirements.
• Delinquent and Default Servicing: standards and procedures that apply to servicing of non-performing loans, such as record management, accounting, and administrative functions.
• Loss Mitigation Processing: standards and procedures that apply to loss mitigation processing, review activities, required reporting, communications, and financial evaluation of loss mitigation alternatives to foreclosure.
• Home Retention: compliance with standards and requirements for home retention options and minimum property acceptability and eligibility standards for FHA insurance.
• Home Disposition: compliance with standards and requirements for home disposition options, such as foreclosure processing through property conveyance, claims, and related matters.