FHA Affirms Participation of Non Approved Brokers as Consultants

Brian Montgomery officially acknowledged in Mortgagee Letter 08-17, dated June 20, 2008, that non FHA approved mortgage brokers can provide counseling type duties consistent with HUD's guidance in the 1999-1 RESPA Statement of Policy (SOP) and 24 CFR 203.27 (e). Click here to view ML 08-17:

According to Mortgagee Letter 08-17, non approved brokers cannot perform certain origination functions that FHA requires to be performed by FHA approved entities. These duties include: taking the application; collecting financial information and documentation from the borrower; initiating/ordering credit, appraisal, verifications, inspections, and disclosures along with maintaining communication with all parties involved with the transaction. Brian Montgomery asserts that non-approved brokers may not duplicate these duties without violating RESPA, and reaffirms that FHA approved entities may not compensate non approved brokers for performing these functions.

However, Brian Montgomery affirms 24 CFR 203.27 (e), and specifically states that it is acceptable for a borrower to engage a broker who is not FHA approved to assist them in obtaining a FHA mortgage. ML 08-17 cites that non FHA approved brokers may be compensated by the borrower to perform counseling, educational, and consulting type services:

Excerpt from ML 08-17:

Other services that are considered counseling in nature (e.g., 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), may be performed by a non FHA-approved broker so long as the services provided constitute meaningful counseling, and not steering.

Brian Montgomery also clarified and affirmed the guidance provided in HUD's 1999-1 RESPA Statement of Policy which requires brokers that perform only counseling type duties to provide alternatives from at least 3 other lenders for which the compensation must be the same for each. This is to ensure that meaningful counseling has been provided and not just "steering". FHA's failure to abide by HUD's SOP was previously discussed on this blog and the ML Implode Forum, and I am glad to see that they are finally in compliance on forward loans. Nonetheless, FHA is still not in compliance on reverse mortgages.

In regard to the amount of broker compensation, FHA side-stepped limit setting, and instead relied on their trusty old standby:
ML 08-17 excerpt:

Under no circumstances may a borrower be charged a fee that is not commensurate with the amount normally charged for similar services. 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).

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.

While FHA has taken a big step by acknowledging that counseling, consulting, and advising are separate and distinct from taking an application and processing a loan, Brian Montgomery has failed to recognize agency and fiduciary duty as a vital role for mortgage brokers. Commissioner Montgomery also failed to recognize that certain duties, such as taking the application and communicating with various parties on behalf of the borrower is not a duplication of duties, but moreover, duties that overlap with the lender's agent.

Example: for a mortgage broker to be able to properly advise and counsel a borrower, they must take an application and review the borrower's financial and other documentation. This duty would for the borrower. Whereas, an approved FHA broker who takes the application to originate the loan would be taking the application for the lender as part of facilitating the loan. Consider that RESPA does not prohibit duplicated or overlapping duties, but moreover, prohibits duplicate charges arising from said duplication. If neither the lender or borrower agent charges an application fee, it would not result in a duplicate charge for both to take their own application.

Although HUD recognizes in the 1999-1 RESPA policy statement that some services are for the borrower and some are for the lender, HUD states that "All services, goods and facilities inure to the benefit of both the borrower and the lender in the sense that they make the loan transaction possible".

Additionally, while Commissioner Montgomery cites that the 1999-1 RESPA Statement of Policy would apply equally to all payments whether made directly or indirectly by the borrower, he failed to address whether the borrower would be permitted to use loan proceeds, seller credits, or yield spread premiums (when credited directly to the borrower) to offset their mortgage broker costs. After all, if all fees are treated equally under RESPA, there should not be any prohibition for offset.

Perhaps that will be another Mortgagee Letter.

The reality remains that while some mortgage brokers are agents and fiduciaries and other mortgage brokers are intermediaries that only sell access to money, fiduciaries are largely ignored by the mortgage industry. As a result, HUD's 1999-1 and 2001-1 Statements of Policy and ML 08-17 are deficient as to the mortgage broker's role as a fiduciary.

The FHA Non Approved Broker Debate

FHA recently published Mortgagee Letter 08-14 regarding non approved broker participation in the HECM loan program (reverse mortgages).

Click here to view Mortgagee Letter 08-14

This letter clarified FHA policy regarding the role of non approved brokers and payment of their compensation. According to ML 08-14, non approved brokers may participate in the FHA HECM program by performing limited educational-type origination services known as “advisor” services. Brian Montgomery states in ML 08-14:

FHA permits the non-approved entity or third party to provide advisory and educational services to the HECM borrower; and under RESPA, the non-approved entity or third party may receive bona fide compensation for those services.

Brian Montgomery clearly states that under RESPA non-approved brokers may receive bona fide compensation for providing advisory and educational services on a FHA loan (HECM).

Brian Montgomery goes on to state in ML 08-14:

RESPA regulations permit a non-approved entity or third party to be compensated for educating prospective borrowers about the reverse mortgage lending process, advising the borrower about different types of loan products available, demonstrating how closing costs and payment options could vary under each product, and maintaining regular contact with the lender to keep the borrower apprised of the status of the loan application. Such services would be in addition to, and not as a substitution for, reverse mortgage counseling which is provided by a HUD-approved housing counseling agency.

So, duplication of duties is acceptable now under RESPA? Why is it then that FHA’s Policy Alert regarding payments to non approved brokers on FHA loans dated 10/30/07 states that duplication of duties is not allowable under RESPA? In fact the FHA Policy Alert specifically stated:

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.

Click here to view FHA Policy Alert

Well, is it or is it not a violation of RESPA for a broker to duplicate duties? What is the difference between duplicating counseling services and duplicating taking an application? HECM Counseling is required and could result in duplicate charges whereas applications are typically done at no expense. It appears that FHA views RESPA as applying differently to forward vs. reverse mortgages, yet RESPA is the same for loan types regardless of differences in the Code of Federal Regulations.

Going back to the FHA Policy Bulletin, FHA at least admits that mortgage brokers can assist borrowers in obtaining a FHA loan although they minimize the role to an assistant:

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.

FHA’s policy is that the borrower’s agent fee is limited to payment by the borrower and cannot be offset with YSP credits, seller credits, or loan proceeds. Nonetheless, according to ML 08-14, non-approved brokers can be paid from the proceeds of the financed origination fee:

The compensation is paid by the borrower directly from the borrower’s own available assets or from HECM loan proceeds. If the payment comes from the HECM proceeds, the amount would be added to the loan balance and disbursed to the broker by the closing agent. In all cases, the amount paid must be included in (subtracted from) the loan origination fee which is capped at the greater of $2,000 or 2% of the maximum claim amount.

On a reverse mortgage the non approved broker can be compensated from the proceeds of the borrowers FINANCED origination fee that is charged by the FHA approved lender or broker. In other words, fee splitting is also permissible on FHA reverse mortgages. Wow, fee splitting and duplication of duties. That's bold.

Now let’s take a look at compensable duties as per guidance issued in HUD’s 1999-1 Statement of Policy (SOP) and reaffirmed in their 2001-1 SOP. HUD’s 1999-1 SOP provides a list of compensable services in accordance with HUD’s letter to the Independent Bankers Association of America, dated February 14, 1995 (IBAA letter). In HUD’s letter to the IBAA, HUD stated that they would be satisfied that sufficient compensable origination services had been provided if the broker took the loan application and performed at least 5 duties from the IBAA list. Note: Both the 1999-1 Statement of Policy and ML 08-14 acknowledge that the IBAA list is not exhaustive.

HUD’s 1999-1 Statement of Policy HUD continues to further state that when services are of a counseling type nature, HUD would be satisfied that meaningful counseling, and not steering, occurred if the broker provided alternatives from at least 3 other lenders which the compensation was the same for each and not influenced by volume.

Yet neither ML 08-14 or the FHA Policy Alert state anything about providing alternatives to the borrower let alone the requirement that the compensation be the same for all alternatives.

Let's explore what the Code of Federal Regulations has to say about both programs.

Closing costs for forward mortgages are covered in Title 24 of Code of Federal Regulations Part 203, Section 203.27.

Click here to view

24 CFR, Part 203, Section 203.27, (e) states:

Nothing in this section will be construed as prohibiting the mortgagor from dealing through a broker who does not represent the mortgagee, if he prefers to do so, and paying such compensation as is satisfactory to the mortgagor in order to obtain mortgage financing.

Note: FHA approved mortgage brokers are the agent of the lender (mortgagee) and represent the lender (mortgagee) on FHA loans. However, the CFR specifically provides that that borrowers not be prohibited from dealing through a broker who does not represent the lender (mortgagee) and paying compensation that is satisfactory to the borrower (mortgagor). In other words, borrower exclusive agents.

Now lets look at the 4155.1 Rev 5, Chapter 1, Section 3, regarding allowable closing costs on forward mortgages:

I. Mortgage Broker Fees. If the borrower must pay a fee directly to a mortgage broker, that expense must be included in the total of the borrower's cash settlement requirements and appear on the HUD-1 Settlement Statement. (This requirement applies to instances in which the borrower independently engages a mortgage broker to seek financing and pays the broker directly. The payment may not come from the lending institution.)

Borrowers are allowed to independently engage their own mortgage broker to deal through that does not represent the lender (mortgagee) and pay the broker’s compensation on forward loans.

Now let’s look at reverse mortgages and Title 24 of the Code of Federal Regulations, Chapter II, Subchapter B, Part 206, Section 206.31 (A), (1):

(a) Fees at closing. The mortgagee may collect, either in cash at the time of closing or through an initial payment under the mortgage, the following charges and fees incurred in connection with the origination of the mortgage loan:

(1) A charge to compensate the mortgagee for expenses incurred in originating and closing the mortgage loan, which may be fully financed with the mortgage. The Secretary may establish limitations on the amount of any such charge. HUD will publish any such limit in the Federal Register at least 30 days before the limitation takes effect. The mortgagor is not permitted to pay any additional origination fee of any kind to a mortgage broker or loan correspondent. A mortgage broker's fee can be included as part of the origination fee only if the mortgage broker is engaged independently by the homeowner and if there is no financial interest between the mortgage broker and the mortgagee.

The Code of Federal Regulations also provides that borrowers may independently engage their own mortgagee broker on reverse mortgages and include their mortgage broker’s fee as part of the origination fee.

So, there you have it, both forward and reverse mortgages allow borrowers to deal through non approved brokers that do not represent the lender (mortgagee) and pay compensation that is acceptable to the borrower. Furthermore, RESPA does not differentiate between reverse and forward mortgages, and compensable services are outlined in HUD’s 1999-1 Statement of Policy which references HUD’s 1995 IBAA letter. According to the IBAA letter, HUD would be satisfied that compensable services had been provided if the broker took the application and completed 5 duties off the IBAA list (which HUD states is not an exhaustive list).

Additionally, for brokers that provide only counseling type services, that HUD would be satisfied that meaningful counseling had been provided, and not steering, if the broker provided alternatives from at least 3 other lenders and the compensation for all alternatives was the same and not based on volume of referrals.

Why FHA chooses not to abide by the 1999-1 SOP and why they apply RESPA differently on reverse and forward loans is beyond me. But, it is is an interesting topic.

Unfortunately, FHA continues to ignore the role of mortgage brokers as agents and fiduciaries or publish sound guidance on mortgage brokers that serve as exclusive borrower agents. As of this date, FHA's position is that the borrower's broker fee on forward mortgages must be paid exclusively by the borrower and cannot be offset via yield spread premiums (YSP), seller credits or loan proceeds despite the fact that FHA allows non approved brokers to be paid from the financed origination fee on FHA reverse mortgages. Yet FHA states on their Policy Alert that the 1999-1 Statement of Policy regarding lender payments to brokers would apply equally to payments made directly by the borrower. If the 1999-1 Statement of Policy applied equally to indirect and direct payments, borrowers would not be prohibited from offsetting the cost of their agent in the same manner that they offset payments to the lender's agent. There is nothing fair or equal in giving preference to the payment of the lender's agent while discouraging the borrower from seeking agency representation.

The inability to offset the costs of the borrower agent presents a cost barrier for borrowers obtaining agency representation and fiduciary duty.

FHA needs to clarify their policy regarding non-approved brokers that serve as borrowers agent, and define agency representation as a compensable duty if they are to set an example for the industry.