The U.S. Department of Housing and Urban Development (HUD) issued a proposal to revise the Federal Housing Administration’s (FHA) Defect Taxonomy for servicing loan reviews to provide clearer guidance to mortgage servicers about the agency’s review process, assessment of the severity of errors or noncompliance with its mortgage servicing polices, and the actions it may take in instances of servicer error or noncompliance.

FHA’s Defect Taxonomy, housed in the Single Family Housing Policy handbook, is the agency’s quality assurance framework for Title II loan reviews. It is intended to provide a consistent method for identifying defects at the loan level, useful data and feedback through the structured categorization of defects, and the balance between FHA’s statutory obligation to mitigate risk to the Mutual Mortgage Insurance Fund and quality assurance business processes, according to the mortgagee letter issued in conjunction with the proposed changes.

“HUD’s programs rely on the work of private partners, including mortgage servicers,” HUD acting Secretary Adrianne Todman said in a release. “We aim to provide clarity and transparency to these important business partners so that they can effectively use our programs to expand opportunities for sustainable homeownership.”

The mortgagee letters stated the changes would impact the taxonomy’s section on fraud or material misrepresentation involving a sponsored third-party originator (TPO), designating it as one of the “knew or should have known” conditions used by the FHA to determine whether a Tier 1 severity classification if appropriate.

“Posting this newly updated draft Servicing Defect Taxonomy is an important step in our ongoing work to increase transparency and certainty for FHA’s Single Family programs,” Deputy Assistant Secretary for Single Family Housing Sarah Edelman said. “FHA and lenders have had a positive experience using our origination defect taxonomy, and we expect this new tool will provide similar benefits for our mortgage servicing partners.”

Stakeholders interested in providing input on the change have until Aug. 26 to submit comments.