On Friday, June 20, 2008 HUD issued an official Mortgagee Letter 08-17 which further clarifies the policy. Once again HUD has made it clear that a non-approved mortgage broker cannot receive any fee for the processing and origination of an FHA insured mortgage. Quoting from the Mortgagee Letter, HUD outlines the services which a non-approved mortgage broker cannot be paid and which must be performed by the FHA approved mortgagee as:

• taking information from the borrower and filling out the loan application;
• determining whether the property is in a flood zone or ordering such service.
• ordering legal documents; and
• collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
• initiating/ordering Verifications of Employment and Deposit;
• initiating/ordering request for mortgage and other loan verifications;
• initiating/ordering appraisals;
• initiating/ordering inspections or engineering reports;
• providing disclosures (truth in lending, good faith estimate and others) to the borrower(s);
• maintaining regular contact with the borrower, real estate professional, and lender between loan application and closing to apprise them of the status of the application and gather any additional information needed;

HUD does allow non-approved mortgage brokers to receive fees for counseling the borrower under certain circumstances as long as that counseling is meaningful and does not constitute “steering”. Also from the Mortgagee Letter, HUD lists some of the services which might fall under the category of counseling. These are: educating prospective borrowers in the home buying and financing process, advising the borrower about different types of loan products available, and demonstrating how closing costs and monthly payment could vary under each product.

HUD is also very specific about some of the important attributes that must exist in order for HUD to consider the non-approved mortgage broker’s counseling services as authentic. Those attributes are: (1) counseling gave the borrower the opportunity to consider products from at least three different lenders; (2) the entity performing the counseling would receive the same compensation regardless of which lender’s product were ultimately selected; and (3) any payment made for the “counseling type” services is reasonably related to the services performed.

Further, HUD requires that the fee for such services be paid from the borrower’s own available assets and the fee must be reasonably related to the actual services performed. Given that the services outlined are widely available in the marketplace for free, I will leave it up to the reader to determine what they might feel is reasonable. In my opinion, though, a non-approved mortgage broker receiving 2% of the loan amount while the borrower is referred to only one lender which charges them an interest rate paying 3.5% to 4% in yield spread premium from the wholesale lenders is probably not what HUD has in mind.

It is also my suspicion that finally “reminding” us of this in an official Mortgagee Letter is most likely official notice that HUD is preparing to crack some heads over the issue. In the Mortgage Letter HUD is very specific in stating that “If the payment bears no reasonable relationship to the market value of the services provided, the excess over the market rate may be used as evidence of a compensated referral or unearned fee in violation of section 8(a) or (b) of RESPA and 24 CFR 3500.14(g).”

On Friday, March 28th there is going to be a free teleconference conducted by mortgage trainer Chip Cummings and compliance attorney Howard Lax to discuss the new RESPA proposal and how it may affect your mortgage business. The conference will be held on a streaming internet system so you won’t have any long distance charges.

You can find out more at:

http://fhatrainingsource.com/respacall.html

First, as a preface for my next update I would like to point you to Peter Miller’s blog FHA Mortgage Guide where he points out reports that HUD itself has been violating RESPA for some time! You can find the post entitled “Fake Morality” by clicking on the links in this paragraph.

Second, I would like to point out that HUD has released new RESPA guidelines for public comment. We have been waiting for quite some time to see these guidelines and you can download them here. Make sure you are on a high speed connection or have a little time to spare, it is 96 pages long. Keep in mind that this is just a release for public comment and is not necessarily the final version.

I will have more comments on these guidelines in the next few days and would love to hear yours.