Over the past several years, lenders have complained of HUD’s inconsistent treatment of lender-paid mortgage broker fees in HECM for Purchase transactions. It appears now that HUD may be taking a more consistent and favorable position for lenders on this issue. However, like many things HUD-related, it may take more time to determine if the manner in which HUD will treat lender-paid mortgage broker fees in HECM for Purchase transactions becomes final, consistent and favorable to lenders.
As background, there are four HUD Homeownership Centers (HOCs). These HOCs engage in Post-Endorsement Technical Reviews (PETRs) and quality assurance reviews of FHA loans that lenders originate. When loan level issues are spotted by the HOCs, they issue deficiency letters to lenders, allowing them an opportunity to explain. If a lender does not respond, or the HOC does not accept the lender’s explanation, often the HOC will request that a lender indemnify HUD for any claim that HUD ultimately pays on that loan. If HUD pays a claim on the loan, the lender could end up owing HUD tens or even hundreds of thousands of dollars on the claim paid. This emphasizes the importance not only of lenders “getting it right” in the origination and underwriting of loans, but also of HUD understanding and applying origination rules in a correct and consistent manner.
So-called “seller concessions,” or interested-party contributions, currently are allowed on forward FHA-insured loans up to 6 percent of the loan amount. If that amount is exceeded, the loan ratios and loan amount must be adjusted downward, requiring the borrower’s down payment to increase.
With Mortgagee Letter 2009-11, however, HUD stated that seller concessions and interested-party contributions are not allowed with HECM for Purchase loans. So, the question becomes: What is an interested-party contribution? HECM lenders have argued for years, in the face of exceptions noted in PETR reviews, that lender-paid mortgage broker fees are not interested-party contributions because the lender is not paying such fees on behalf of the borrower, but is paying the mortgage broker on its (the lender’s) own behalf.
In 1999, HUD recognized through a Statement of Policy that a mortgage broker could be paid by a lender or a borrower. Now, under the LO Comp rules (as implemented by the Federal Reverse Board in April 2011 and assumed and updated by the CFPB), at least for fixed-rate loans (of which most HECM for Purchase are structured), a mortgage broker may be paid in connection with a loan by the lender or the borrower, but not both.
Perhaps confusing the matter more is HUD’s revised RESPA rules, effective in January 2010, wherein HUD required a lender-paid mortgage broker fee to be reflected on the HUD-1 as a borrower credit. This wacky RESPA math was never intended to change the true nature of the underlying payments being made. (The CFPB has inherited both the LO Comp rules and RESPA.) Thus, if a lender is paying a mortgage broker, it may be doing so for itself, not the borrower. Just because this payment is disclosed as a credit on the HUD-1 does not make it a true lender-paid borrower credit.
Another source of confusion is that some HOCs were writing up the issue of lender-paid mortgage broker fees in HECM for Purchase transactions, and other HOCs were not. There are even reports of one HOC writing up this issue, and then dismissing the finding for some lenders when they complained but not for others.
Lenders work very hard to comply with the myriad of rules that exist in lending today. Lenders should not be required to indemnify HUD for loans on which lenders made no mistake. HUD should be clear on both its understanding of its own rules, and consistent in how it applies those rules across multiple loans and multiple lenders. Hopefully, the issue of one HOC sometimes requesting lenders to indemnify HUD for paying lender-paid mortgage broker fees in connection with HECM for Purchase loans, and sometimes relenting (but sometimes not), is a thing of the past. However, like many things HUD-related, it may take more time to determine if the manner in which HUD will treat lender-paid mortgage broker fees in HECM for Purchase transactions becomes final, consistent and favorable to lenders.
Jim Milano is a partner in the law firm of Weiner Brodsky Kider PC, where he practices mortgage-banking law. The views expressed in this article are not intended as and do not represent legal advice.
