[Update 1: House committee approves bill] New restrictions from the US Department of Housing and Urban Development (HUD) would “wreak havoc” on small business trying to provide Federal Housing Administration (FHA) loans, according to the law firm K&L Gates. HUD finalized new regulations earlier in April that increase the net worth requirements of FHA-approved lenders and make these businesses liable for the oversight of mortgage brokers. Since, 1993, FHA required approved lenders to hold a net worth of at least $250,000. Effective immediately, all new lender applicants must hold at least $1m. The new regulations would also remove approval from new loan correspondents, representatives who negotiate or service a loan, beginning May 20, 2010. Current loan correspondents will maintain approval through December 31, 2010. Loan correspondents that do no seek FHA approval can continue to originate FHA-insured loans as third-party originators (TPOs) if they are sponsored by and work with an approved lender, according to K&L Gates. The law firm said the final regulation ignores the significant costs FHA participants will incur to meet the minimum net worth requirements. In the Preamble to the new regulation, the FHA said the changes are essential to strengthening the FHA Insurance Fund and to ensure that the participants have enough cash to cover any liabilities. HUD does give extensions to smaller businesses. “The changes HUD is implementing in the final regulation will have an enormous impact on the delivery of FHA-insured loans to the public,” according to K&L Gates. “As we said when HUD first proposed the changes last November, fasten your seatbelts. It is going to be a bumpy ride.” The House Financial Services Committee approved a new bill today enabling the FHA to reform its current mortgage insurance premium structure by shifting a portion of its upfront cost to the annual premium. The move will increase FHA capital reserves and reduce risks to the FHA Insurance Fund. It would also enable FHA to hold lenders accountable to the same standards for loans they originate or underwrite. “The FHA is playing a vital role in the current housing market. We must therefore remain vigilant in making sure that our reserves are strengthened and that our lenders meet the highest standards of conduct,” said HUD secretary Shaun Donovan. Write to Jon Prior.