FHA EASES CONFLICT OF INTEREST RULES

FHA EASES CONFLICT RULES TO ALLOW CERTAIN “DOUBLE DIP” COMPENSATION IN FHA-INSURED MORTGAGE TRANSACTIONS

By J. Steven Lovejoy, Esq.

On December 15, 2022, the United States Department of Housing and Urban Development’s (“HUD”) Assistant Secretary for Housing (who is also designated as the “FHA Commissioner”), issued Mortgagee Letter 2022-22  (the “Mortgagee Letter”) significantly amending HUD’s prior interpretation of its conflict of interest rules. HUD regulations issued pursuant to the National Housing Act provide the following conflict of interest rule:

“Conflict of interest and responsibility. A mortgagee may not pay anything of value, directly or indirectly, in connection with any [FHA] insured mortgage transaction or transactions to any person or entity if such person or entity has received any other consideration from the mortgagor, seller, builder, or any other person for services related to such transactions or related to the purchase or sale of the mortgaged property, except that consideration, approved by the Secretary, may be paid for services actually performed. The mortgagee shall not pay a referral fee to any person or organization.”

24 C.F.R. § 202.5(1).

Heretofore, HUD had interpreted this rule as prohibiting any person who provided a service in an FHA-insured mortgage transaction from receiving compensation from more than one source. See, HUD/FHA Handbook 4000.1 § I.A.6.f.  This prompted us to reiterate that position to clients, specifically advising that a single person could not receive both a real estate sales commission and a mortgage loan officer (originator) (“MLO”) commission in the same FHA-insured mortgage transaction.

Apparently, the Secretary of HUD determined that the FHA Commissioner should issue a policy that indicated approval of certain compensation payments to an individual for multiple services from multiple sources in connection with a single FHA-insured mortgage transaction.  The Mortgagee Letter has the effect of limiting the above-cited conflict rule to persons in a bank or mortgage company (whether lender or broker) who participate in making the credit decision (i.e. loan application approval or denial) in an FHA-insured mortgage loan transaction.  Specifically, the prohibition on dual compensation now applies only to “underwriters, Appraisers, inspectors and engineers” and anyone else who participates in the credit decision process.

This now means that our prior advice to clients may be modified to permit an individual to receive both a real estate sales commission and an MLO commission in the same FHA-insured mortgage transaction, so long as that person has no role in making the credit decision and they are compensated only for actual performance of the work.  This change in FHA policy, while somewhat unexpected, comports with the policies of other government agencies insuring mortgage loans and government sponsored entity mortgage purchase and insurance programs.  The Veterans Administration, US Department of Agriculture, FNMA and FHLMC loan programs do not have the same conflict rule as did FHA prior to the issuance of the Mortgagee Letter.  That new HUD directive brings FHA more into line with the conflict rules of these other agencies and entities.

Should you have questions, please contact Steve Lovejoy at Shumaker Williams, P.C.  410-825-5223.

The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.