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.
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