December 19th, 2022
RE: HUD Mortgage Letter 2022-22
Regarding Conflict of Interest and Dual Employment
Here are my comments about this mortgagee letter. Bear in mind, I certainly don’t see it as clearly written and it leaves several issues open to potentially multiple interpretations. I do believe that with careful reading and application of common sense, we are all using our best good faith efforts to comply. That could be an important mitigating factor if a mortgagee errs while trying to apply this mortgagee letter.
I lifted this information directly from 2022-22. My thoughts are captioned as “Comment”. Remember, this is just my interpretation. It might be different from yours.
(b) Standard [Text was deleted in this section.]
(i) Eligibility of Employees
HUD: The Mortgagee must not employ any individual who will participate in FHA transactions if the individual is suspended, debarred, under a Limited Denial of Participation (LDP), or otherwise excluded from participation in FHA programs (see Restricted Participation (V.A.2.b.i(B)))
Comment: This is nothing new. You need to be checking status once a year for all employees, with or without licenses.
HUD: The Mortgagee must not compensate employees who perform underwriting or Quality Control (QC) activities on a commission basis.
Comment: This is nothing new. You can never incentivize an underwriter or QC person; it can compromise the quality of their decisions.
HUD: The Mortgagee must report all employee compensation in accordance with IRS requirements.
Comment: IRS requirements means you apply the control test. To me this means employment tax returns. Thus, all staff should be W-2. This is federal guidance, trumps state guidance.
(iv) Conflicts of Interest
HUD: The Mortgagee’s employees will be subject to FHA’s Conflict of Interest policy.
Comment: This will be addressed below, item f.
HUD: The Mortgagee must ensure that its underwriters are not managed by and do not report to any individual who performs mortgage origination activities.
Comment: This means no one who originates should supervise underwriters. Senior executives supervise, so they are likely OK.
HUD: The Mortgagee must ensure that its underwriters:
- meet basic eligibility requirements (I.B.3.b); and
- perform the underwriting function in a manner consistent with FHA guidelines.
Comment: No changes here.
(vi) HECM Originators
HUD: The Mortgagee and any other party that participates in the origination of a HECM transaction must not participate in, be associated with, or employ any party that participates in or is associated with any other financial or insurance activity, unless the Mortgagee demonstrates that it or any other party maintains firewalls and other safeguards designed to ensure that:
- individuals participating in the origination of the HECM must have no involvement with, or incentive to provide the Borrower with, any other financial or insurance product; and have firewalls in place to prevent this conduct.
- the Borrower must not be required, directly or indirectly, as a condition of obtaining a HECM, to purchase any other financial or insurance product. This is nothing new.
Comment: This is pretty clear. This is not a prohibition to dual licensing, but rather a prohibition to doing both the loan and an insurance sale simultaneously. I continue to believe a sufficient cooling off period would be evidence of a “firewall”. I define that as 90 days minimum, with the insurance sale NOT CONTEMPLATED when the mortgage loan is originated.
f. Conflicts of Interest
HUD: This policy applies to all FHA-insured transactions unless otherwise specified in program requirements.
Participants that have a direct impact on the mortgage approval decision are prohibited from having multiple roles or sources of compensation, either directly or indirectly, from a single FHA-insured transaction. These participants are:
Comment: This means participants who DO NOT HAVE a direct impact on the mortgage approval decision are NOT prohibited. This guidance uses the word “are”. It does not say “includes” or “might include” or is not limited to”. To me, this means this is an all-inclusive list of prohibited parties. It does not mention realtors. This may mean realtors can now have two roles. Then there is the issue of a senior executive? This means the executive CANNOT have direct impact on an approval decision, meaning no CEO etc. can over-rule an underwriter.
HUD: Indirect compensation includes any compensation resulting from the same FHA-insured transaction, other than for services performed in a direct role. Examples include, but are not limited to:
- Compensation resulting from an ownership interest in any other business that is a party to the same FHA-insured transaction; or
- Compensation earned by a spouse, domestic partner, or other Family Member that has a direct role in the same FHA-insured transaction.
Comment: Here I think we must look to the use of the phrase “in a direct role”. This means not passive. If services are performed in a direct role, indirect comp would be allowed. Also, the prohibition is directed at the mortgage approval decision. That seems to open the door to a realtor with an MLO license.
HUD: The Mortgagee must ensure that participants with a direct impact on the mortgage approval decision do not have multiple roles or sources of compensation from the same FHA-insured transaction.
Comment: HUD specifies MORTGAGE APPROVAL DECISION.
HUD: Participants that do not have a direct impact on the mortgage approval decision may have multiple roles and/or sources of compensation for services actually performed and permitted by HUD, provided that the FHA-insured transaction complies with all applicable federal, state, and local laws, rules, and requirements.
Comment: Opens the door to the realtor issue.
If any of my comments seem questionable, please seek a second opinion from an attorney with proper mortgage industry experience. As I stated right up front, I certainly don’t see it as clearly written and 2022-22 leaves several issues open to potentially multiple interpretations. Use these comments at your own risk.
Nelson A. Locke, Esq.
Office (800) 656-4584