HUD Dumps Limits On FHA Origination Fees

by Peter G. Miller
November 28th, 2008

As a parting gift to the lending industry, HUD has published its final rule to “Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs.”

“Millions of families go to the settlement table each year without clearly understanding what they are paying for,” says HUD Secretary Steve Preston. “In many respects, it’s clear that the current way people buy and refinance their homes isn’t serving us very well at all and has contributed to the current housing crisis.”

But, oh my, buried on page 68227 what do we find but a decision to dump limits on loan origination fees.

Previously FHA mortgage borrowers were protected because HUD limited origination fees to 1 percent of the mortgage amount for most FHA loans. However, with the new final rule, the limitations are out and borrower beware is in.

Why? Because HUD says that its new good faith estimate (GFE) forms should protect borrowers.

What’s remarkable about HUD’s explanation of the matter is that its proposed ruling was opposed by the National Community Reinvestment Coalition. No one, apparently, agreed with HUD’s position otherwise another comment would surely have been cited.

No matter. HUD did what it was going to do in a last-minute ruling that the new Administration will have to undo. Meanwhile, borrowers have still-another complexity with which to deal.

HUD’s ruling and comment are below.

3. FHA Limitation on Origination Fees of Mortgagees

Under its codified regulations, HUD places specific limits on the amount a mortgagee may collect from a mortgagor to compensate the mortgagee for expenses incurred in originating and closing a FHA-insured mortgage loan (see 24 CFR 203.27).1 The March 2008 proposed rule would have removed the current specific limitations on the amounts mortgagees are presently allowed to charge borrowers directly for originating and closing an FHA loan. Under HUD’s proposal, the FHA Commissioner would have retained authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan. In addition, the proposed rule would have also permitted other government program charges to be disclosed on the blank lines in Section 800 of the HUD1/1A.


There was little comment on this issue. NCRC (the National Community Reinvestment Coalition) disagreed with the proposal to remove the specific limitations on the amount mortgagees are allowed to charge for originating and closing an FHA loan. NCRC stated that a government-guaranteed loan product should shield borrowers from excessive charges by establishing reasonable limits on fees. According to NCRC, while it may be acceptable to carefully raise origination fee limits, this should be done only in conjunction with establishing reasonable limits on YSPs. This commenter stated that by establishing standard limits on origination fees and YSPs, the FHA loan product can keep the nongovernment guaranteed products competing by constraining direct fee and YSP costs.

HUD Determination

HUD believes that its RESPA policy statements on lender payments to mortgage brokers restrict the total origination charges for mortgages, including FHA mortgages, to reasonable compensation for goods, facilities, or services. (See Statement of Policy 1999-1, 64 FR 10080, March 1, 1999, and Statement of Policy 2001-1, 66 FR 53052, October 18, 2001.) Moreover, the improvements to the disclosure requirements for all loans sought to be achieved as a result of this rulemaking should make total loan charges more transparent and allow market forces to lower these charges for all borrowers, including FHA borrowers. Therefore, HUD has determined to finalize the proposed rule to remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan. The FHA Commissioner retains authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan.


Note 1: Under 24 CFR 203.27(a)(2)(i), origination fees are limited to one percent of the mortgage amount. For new construction involving construction advances, that charge may be increased to a maximum of 2.5 percent of the original principal amount of the mortgage to compensate the mortgagee for necessary inspections and administrative costs connected with making construction advances. For mortgages on properties requiring repair or rehabilitation, mortgagor charges may be assessed at a maximum of 2.5 percent of the mortgage attributable to the repair or rehabilitation, plus one percent on the balance of the mortgage. (See 24 CFR 203.27(a)(2)(ii), and (iii).)

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6 Responses to “HUD Dumps Limits On FHA Origination Fees”

  1. Bruno Skopinich Says:

    The free market should determine what someone would pay for a service. Why must fees be regulated?

    Peter, I can understand why you write about real estate issues.

    “Those who can do… those who can’t WRITE”

    It is easy for you to criticize the mortgage fees… because your living is made writing about it.

    Maybe we should regulate the earnings of authors!

  2. Tom Lawler Says:

    The latest actuarial review of the FHA MMI suggested that the “non-profit” DPA loan progranm has been a disaster. Thank god it is now gone!

  3. Andrea McGhee Says:

    The cap on FHA origination fees MUST be done away with due to the CREDIT of all yield spread premium to the borrower. The broker would otherwise be limited to earnings at 1% max, gross fee income and cannot survive in business at that rate. Service release premiums used to be paid by wholesale lenders on government loans which went along with the cap on origination. Now that it is gone and any payment made by the lender to the broker must be credited to the borrower it only makes sense that the borrower would need to be charged a higher cost up front for the offset to take place. Remember, Brokers are working with wholesale rate sheets just as lenders are working with secondary market pricing. We both retail to the public but with this new rule the broker will be forced to offer wholesale rates to the borrower while the banks will be able to continue to earn 2.00 -4.00 on the same mortgage.

  4. Frank Pyle Says:

    Mortgage Brokers are being blamed for an undue amount of of our current financial mess! Retailers like Walmart, Sears, Lowes… should be blamed for the bad decisions of the companies who manufacturer products on their shelves if Brokers should be blamed for providing the mortgages that Wall Street created. Wall Street created the BAD mortgage products and Brokers sold them. Like any other business there are bad brokers, but Wall Street created the products. Banks doing retail mortgages lost the majority of their market share over the past 10 years because they did not provide the service level that Brokers did. Bank lobby groups are doing a great job getting the lost market share back by getting regulation passed to enable banks gain a competitive advantage over Brokers. Why doesn’t a retail bank loan officer have to compete with the same set of rules as a Broker when he provides the exact service/product as a Broker?

  5. Angie Says:

    It looks like our government has targeted our earning power once again. Why in the hell would I stay in this business for 1%!!! This is lunacy!!! My fees have NEVER put anyone in foreclosure or delinguency! Their NON PAYMENT of their mortgage put them in foreclosure! Sorry chaps, Uncle Sam can kiss my *ss! I don’t work for free!

  6. Lee W. Says:

    If only it were that simple. To believe that the percentage of the origination fee has anything to do with determining that a borrower received the best loan terms is idiotic.

    In fact the 1% limitation on origination for brokers almost insures that the terms will not be the best available.

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