FHA Mortgage Co-brokering: Watch Out!

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One of the most frequent solicitations being received by mortgage brokers these days is an offer from FHA approved lenders for the non-FHA approved mortgage broker to be paid “up to 3 points” for referring an FHA loan to the lender. There IS a provision for non-approved mortgage brokers to be paid, but these ridiculous plans for mortgage brokers to be paid exorbitant fees will be cracked down on. Here’s an announcement from HUD on this issue which was sent out this afternoon (10/30/2007):

All-

THE SUBJECT MESSAGE IS APPLICABLE ON FORWARD MORTGAGES ONLY

POLICY ALERT – RESPA/FHA EXISTING POLICY REGARDING NON FHAAPPROVED MORTGAGE BROKER FEES IN FHA MORTGAGE TRANSACTIONS

The subject alert reconfirms existing FHA policy regarding the use of non FHA-approved mortgage brokers. FHA loan origination services must be performed by a FHA-approved lender or FHA approved mortgage broker (loan correspondent). A loan correspondent may be compensated for the actual loan origination services it performs either directly by the consumer or indirectly by the FHA approved lender without being in violation of either the RESPA statute and regulations or FHA regulations.

In transactions where the mortgage broker is not an FHA-approved broker, the loan origination services cannot be performed. Under these circumstances, RESPA would prohibit the payment to the non FHA-approved mortgage broker because those services, under FHA regulations, would have to be performed again by either an FHA-approved lender or loan correspondent. The payment to the unapproved broker for duplicated services amounts to an unearned fee in violation of section 8(b) of RESPA. Further, this payment also acts as a disguised referral fee for steering the borrower to the FHA-approved lender or loan correspondent which is in violation of section 8(a) of RESPA. While a broker who is not FHA-approved may assist a prospective FHA borrower in obtaining an FHA loan, the non-approved broker cannot perform required FHA loan origination services. In these instances, the fee charged must be paid from the mortgagor’s own available assets, must be disclosed on the HUD-1 at closing and a copy of the contract included in the loan file submitted for insurance endorsement.

Under no circumstances, may a borrower pay a fee that is not commensurate with the amount normally charged for the similar services, goods or facilities. If the payment or a portion thereof bears no reasonable relationship to the market value of the goods, facilities or 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).

RESPA provided further guidance to industry regarding payments by lenders to mortgage brokers in Policy Statement 1999-1. While the policy statement specifically speaks of lender payments to mortgage brokers, those payments are indirectly paid by the consumer and the policy statement would apply equally to payments made directly by the consumer.

Please read this notice online at FHA’s website at: http://www.hud.gov/offices/hsg/sfh/lender/notaprbr.pdf “

I think it is clear that although payment to non-approved brokers is allowed, they intend for those payments to be be small and tightly regulated.