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Are FHA Mortgage Borrowers Being Overcharged?

by Peter G. Miller
October 30th, 2007

It’s just a thought, but with the subprime market fairly comatose and a lot of loan officers looking for a few extra dollars, do you think it may be possible that some folks are trying to sell FHA loans without proper authorization or for too much money?

I wonder about this because the FHA has just sent out a “policy alert” telling lenders not to mess with the FHA program.

In particular, note this statement:

“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).”

Does this mean that points and fees are limited? What about interest rates and yield spread premiums?

Intelligent borrowers want to know….

Below is the FHA notice to lenders.

POLICY ALERT – RESPA/FHA EXISTING POLICY REGARDING NON FHA APPROVED 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.

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This entry was posted on Tuesday, October 30th, 2007 at 2:38 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

8 Responses to “Are FHA Mortgage Borrowers Being Overcharged?”

  1. Krista Railey Says:

    The alert does not address when a mortgage broker is functioning as an AGENT of the borrower. In AGENCY states where the mortgage broker is an AGENT of the borrower AND the mortgage broker owes the borrower a FIDUCIARY DUTY under State Law, exclusive representation is a compensable service that is separate and distinct from “loan origination”. Because the HUD approved mortgage broker is the AGENT of the lender, they cannot provide the borrower exclusive representation.

    I was specifically waiting for a ML to address this issue. Mortgage Brokers in California owe borrowers a FIDUCIARY DUTY as per California State Supreme Court. Under the California Business and Professions code, the brokers function as agents and owe borrowers fiduciary duty.

  2. Peter G. Miller Says:

    Krista –

    Thanks for your post, you raise an important issue.

    Lenders regulated by the federal government are not bound by state rules. States are impotent when they have rules which conflict or are contrary to federal guidelines under the concept of preemption.

    Please continue to post with us.

  3. fha loans Says:

    fha loans have been saving a lot of subprime borrowers. subprime rates are like 8-9%….and FHA is 7% or lower!

  4. Peter G. Miller Says:

    Putting someone in a subprime loan when they plainly qualify for an FHA mortgage should be a crime. You’re essentially asking someone to pay additional thousands of dollars per year, a huge burden for most borrowers.

  5. victor Says:

    so what is the federal rule on non fha-approved mortgage brokers getting paid for their services. How is it stated how they are paid.

  6. Cleve Says:

    The ruling from FHA is @ http://www.hud.gov/offices/hsg/sfh/lender/notaprbr.pdf

  7. Krista Railey Says:

    Peter, if a state law offers greater protection to the consumer, can HUD make a determination that the state law is inconsistent with RESPA?

    Consider that RESPA specifically exempts the payments to the LENDER’s AGENT or contractor.

    I do not believe that RESPA can preempt state law or even determine that the state law is inconsistent with RESPA when there is already an exclusion for one party (the lender). Clearly, disallowing fair compensation of a borrower’s exclusive agent would put consumers at a disadvantage and would conflict with 24 CFR 203.37 (5) (e).

    This section of the Code of Federal Regulations pertains to allowable costs on FHA transactions and specifically preserves the right of the borrower to deal with a mortgage broker who does not REPRESENT the mortgagee and pay compensation that is acceptable to the borrower in order to obtain financing. Clearly, Congress intended that the borrower be able to procure their own representation as the FHA approved broker is always the AGENT of the Mortgagee (lender).

    While banks may be exempted from certain state laws, mortgage brokers are governed by the laws of their individual states which are not preempted (for the broker) even if the transaction involves a federally insured loan. Furthermore, Federally regulated lenders must still comply with Federal laws.

    This issue is not so much about federal regulations or inconsistencies between state laws and RESPA so much as is about HUD recognizing agency representation for the borrower as a compensable service, fair and equal application of RESPA to all costs (including borrower’s broker), and a formal acknowledgment that some brokers are intermediaries that sell access to money while others are fiduciaries.

    However, as long mortgage broker fiduciary duty is curtailed, there is no hope of reform for the mortgage industry.

  8. Elizabeth Says:

    I recently had a conversation with a HUD employee, I am being told: “In Texas they are taking mortgage broker fees very seriously” and they will not allow any mortgage broker fee to be charged unless it is to a non approved 3rd party. I was also told that lenders who continue to allow this will be reported to the Mortgage Review Board. That is straight from HUD’s mouth.

    We are a wholesale lender but have been allowing brokers to charge a mortgage broker fee. HUD has hit us with paying back mortgage broker fees on loans that have gone through QC in Texas. This appears to be a very slippery slope!

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