Sham Employment

QUESTION
We are the CEO and General Counsel of a regional mortgage banker. We decided to write you about an administrative action that has been taken against us by our state banking department.

The issue involves employer-employee compensation. The banking department claims that we are engaged in “sham employment” in violation of RESPA. We do not want to describe the alleged violation here. 

However, we would like to know some history and context related to “sham employment.” We have already contacted your firm to conduct a risk assessment of our employment practices. 

What is “sham employment?”

ANSWER
To say this area of the Real Estate Settlement Procedures Act (RESPA) is complicated would be an understatement. Thank you for contacting us to assist you. If you or anyone else would like to discuss this subject, please feel free to contact me HERE.

Right from the start, issues involving employer-employee compensation have proved to be one of the more controversial areas covered by RESPA. 

You can go back to HUD’s decision in 1996 to withdraw the employer-employee exemption the Department had promulgated only four years earlier,[i] followed by HUD’s Congressionally mandated postponement of the effective date of the withdrawal.[ii] 

As a result, the 1992 exemption, which states that Section 8 of RESPA does not prohibit an employer’s payment to its own employees for any referral services, remains in effect. That section of the RESPA statute specifically lists several practices that do not violate the statute. 

The statute provides: 

Nothing in this section shall be construed as prohibiting (1) the payment of a fee … (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed … 

The foregoing subsections support the payment of fees by employers to their employees.

In December 2011, when the CFPB republished Regulation X as its own regulation, it removed the unimplemented provisions of the 1996 rule that had remained part of HUD’s Regulation X. Accordingly, Regulation X, RESPA’s implementing regulation, currently allows an employer to pay its own employees for any referral activity. For the most part, this is all most mortgage professionals usually need to know about employer-employee compensation in the context of “sham employment.” 

In place of the 1992 exemption, HUD adopted but then postponed the effective date, and then the CFPB permanently eliminated it, providing two additional limited exemptions for payments: 

1. One for employer payments to managerial employees.[iii] 

2. Another for payments to employees who do not perform settlement services.[iv] 

The proposed 1996 revision also would have added a third exemption to clarify that payments made to an employer’s own bona fide employee for generating business for that employer are permissible.[v] 

HUD’s May 9, 1997, proposal,[vi] which the Department withdrew on February 13, 2001,[vii] would have added a new “like-provider” exemption to RESPA’s Section 8 prohibition against kickbacks and unearned fees. (I will not treat the 1996 amendments and the proposed “like-provider” exemption in this response.)

HUD proposed amending Regulation X[viii] to add an exemption that would allow payments by an employer to its own bona fide employees for the referral of settlement service business to an affiliated settlement service provider, provided that the referred settlement service business is the same category of settlement service as provided by the employer of the employee making the referral, the employee makes the affiliated business arrangement disclosure[ix], and the employee making the referral does not perform any other category of settlement service in the same transaction.

Thus, here is the current situation with respect to your question about “sham employment,” specifically, the variety of developments regarding payments by an employer to its employees. Under RESPA, an employer may pay its own employees for any settlement service, including referrals to affiliates. A company may pay the employees of another company only reasonable compensation for settlement services actually rendered.

HUD has made clear, both in its regulatory guidance and its enforcement actions,[x] that it regards “sham employment” or “bogus employee” arrangements as RESPA violations. There is no reason to believe the CFPB takes a different position on this issue.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

________________________

[i] 12 CFR 1024.14(g)(1)(vii), originally adopted by 57 Fed. Reg. 49600 (November 2, 1996) and republished by the CFPB, 76 Fed. Reg. 78978 (December 20, 2011)
[ii] Section 2103(b) of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Title II of the Omnibus Consolidated Appropriations Act, 1997, Pub. L. 104-208), signed by President Clinton on September 30, 1996; 61 Fed. Reg. 58,472 (11/15/96)
[iii] Withdrawn Regulation X Section 3500.14(g)(1)(viii)
[iv] Withdrawn Regulation X Section 3500.14(g)(1)(ix)
[v] Withdrawn Regulation X Section 3500.14(g)(1)(vii)
[vi] 62 Fed. Reg. 25,740 (May 9, 1997)
[vii] 66 Fed. Reg. 25,478, at 25,497 (5/14/01). HUD withdrew the proposal following the January 20, 2001, issuance of a “Regulatory Review Plan” by the new Bush administration’s White House Chief of Staff, Andrew H. Card, Jr. HUD pointed out in its semiannual regulatory agenda that “Withdrawal of a rule does not necessarily mean that HUD will not proceed with the rulemaking. Withdrawal allows the new HUD Administration to further assess the subject matter and determine whether rulemaking for this subject matter is appropriate.”
[viii] Section 3500.14(g)(1)
[ix] As provided in 12 CFR 1024.15
[x] For instance, see the Znet Financial settlement (September 17, 2003). HUD found that Znet paid ReMax of Atlanta real estate agents as "employees" even though the agents performed little or no work for the lender. These agents were, therefore, sham “employees" who did little or no work for referral fees. Investigators found the agents performed little or no origination work other than filling out loan application forms.

Housing Counseling Agency: RESPA Section 8

QUESTION
We ran into a problem with our banking department. They claimed that we violated RESPA when we paid a fee, equal to the borrower’s fee, to a Housing Counseling Agency. The HCA refers borrowers to us. We are being cited for a violation of RESPA Section 8. This seems unfair to the borrower, since the money is being paid to the agency on behalf of the borrower.

Is it permissible to pay a Housing Counseling Agency a fee that is commensurate with the HCA fee it charges the borrower?

ANSWER
There are myriad convoluted ways that Section 8 of RESPA may get triggered. Referrals are one of the booby traps of relationships between the parties to a loan transaction.

I suppose there is a workaround for your scenario, such as directly reimbursing the borrower (rather than the Housing Counseling Agency, or “HCA”) for payments the borrower makes to the HCA. But I would venture that you have already thought of that possibility. However, my hunch is that you want to continue the current relationship with the HCA, which is probably why you’re asking the question in the first place.

Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) prohibits the transfer of a thing of value pursuant to an understanding that business will be referred to any person:

“No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

Thus, as a general proposition, no participant in a loan transaction covered by RESPA may pay anyone else for referring business to them. That said, the CFPB has provided some guidance that could – emphasis on the word “could” – possibly support a way to tiptoe past the booby trap, based on a similar scenario on which it opined recently. 

Keep in mind, however, that a “similarity” does not mean the “same” – it just means that there are overt facts that show similarity, though each scenario has to be understood not only within its context but also, on its own, to ensure it is entirely in compliance with RESPA.

On September 10, 2019, the CFPB issued a No-Action Letter Template in response to HUD’s request for a No-Action Letter regarding lender participation in its Housing Counseling Program.[i] The CFPB stated that it intended to grant applications from mortgage lenders for No-Action Letters based on its No-Action Letter Template, which specified the certifications applications should contain.

Then, on January 10, 2020, the CFPB issued a No-Action Letter (“Letter”) in response to an application filed by Bank of America using the No-Action Letter Template.[ii] The bank's request stated that it operated a “Connect to Own” program in which it entered into arrangements with HCAs that participated in HUD’s Housing Counseling Program for funding housing counseling services to consumers subject to specified conditions.

The request confirmed that the terms of the bank’s existing Housing Counseling Funding Agreements were formalized in memoranda of understanding (“MOUs”) between the bank and the participating counseling agencies, that (a) these MOUs and the bank’s related practices were compliant with applicable HUD requirements, and (b) any future housing counseling funding agreements would be formalized in MOUs between the bank and the participating housing counseling agencies, and (c) that those MOUs and the bank’s related practices would comply with the applicable HUD requirements.

The CFPB’s Letter to the Bank of America approved the bank’s request. The Letter stated that, unless or until terminated by the CFPB, the CFPB would not make supervisory findings, or bring a supervisory action against the bank under RESPA § 8 or Regulation X § 1024.14, or its authority to prevent unfair, deceptive, or abusive acts or practices, for including and adhering to a provision in the MOUs for conditioning the bank’s payment for the housing counseling services on the consumer applying for a loan with the bank – and here’s the “tiptoe past the booby trap!” – with respect to which the bank received proof of completion of housing counseling services from the participating counseling agency, even if that provision or the parties’ adherence to it could be construed as a referral under RESPA. Importantly (and dispositively), the Letter provided that the housing counseling services' payment level must not exceed a level commensurate with the services provided, and was reasonable and customary for the area.

My recommendation is to have the subject scenario further evaluated for compliance by a competent compliance professional. You can send them my answer. The specific facts and circumstances in this scenario must be scrutinized for compliance with applicable law. Several procedural, policy, and disclosure requirements need to be reviewed to avoid an allegation of violating RESPA Section 8. 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

___________________________________
[i] No-Action Letter to HUD, CFPB (Sept. 10, 2019), https://files.consumerfinance.gov/f/documents/cfpb_HUD-no-action-letter-template.pdf.
[ii] No-Action Letter to Bank of America, CFPB (Jan. 10, 2020), https://files.consumerfinance.gov/f/documents/cfpb_bank-of-america_no-action-letter.pdf.

Navigating the COVID-19 Loss Mitigation Options

QUESTION

We originate and service a lot of FHA loans, both refinance and purchase money. Recently, FHA put out a Mortgagee Letter that involves loss mitigation options during the COVID-19 pandemic.

Our compliance department is just two people, and we are getting bombarded with loss mitigation issues on our FHA loans. The Mortgagee Letter is so filled with legalese that we can’t make sense of some of the requirements.

Hopefully, you can enlighten us without the legalistic mumbo-jumbo.

So, in normal lingo, what are some of the main features of these COVID-19 loss mitigation requirements?

ANSWER

I know how you feel. Some issuances from federal agencies are so overly-lawyered that only the lawyers seem to be able to interpret them. Maybe it's their way of keeping job security!

But, to keep it real, the financial services industry is highly litigious, which is a reflection of its many accrued regulations as well as the mandates to implement federal and state banking laws. It is often not that we have too many rules and laws. Most existing laws simply need to be enforced. Lack of enforcement is a much bigger problem than too many laws. So, sometimes we just need to be patient with the legalese. After all, a day may come when you need a good lawyer to defend actions you have taken in good faith. And I am more than happy to provide the straight-out plain talk, and hopefully, a better understanding to be able to subdue some of your bewilderment.

The HUD issuance you are referring to is Mortgagee Letter 2020-22, which is dated July 8, 2020. It pivots from the previous Mortgagee Letter 2020-06 of April 1, 2020. The earlier ML was issued as a response to the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act, which was signed into law on March 27, 2020. ML 2020-06 provided guidance in establishing (1) the Forbearance for Borrowers Affected by the COVID-19 National Emergency (COVID-19 Forbearance), (2) the COVID-19 National Emergency Standalone Partial Claim (COVID-19 Standalone Partial Claim), and (3) the extension period for Home Equity Conversion Mortgages (HECM) affected by COVID-19.

We discuss these guidelines to some extent in our free Checklist and Workbook on the Business Continuity plan and Pandemic Response (which, by the way, will soon be published in Update # 8.) Download it HERE.

ML 2020-22 deals with additional Loss Mitigation Home Retention Options due to the COVID-19 National Emergency. The ML pertains to forward mortgages. Note the word “options.” The options are available to borrowers affected by the COVID-19 national emergency who were current or less than 30 days past due as of March 1, 2020. With respect to mortgage servicing, the servicers must offer eligible borrowers the COVID-19 Loss Mitigation Options no later than 90 days from the date of the ML (viz., July 8^th), but servicers may begin offering the new options immediately.

So, the ML 2020-22 updates the guidance in ML 2020-06, and the requirements are going to be incorporated into HUD Handbook 4000.1. ML  2020-06 dealt with the COVID-19 forbearance based on the CARES Act and the COVID-19 Standalone Partial Claim. Now, HUD is issuing the ML 2020-22 to fortify on such measures by establishing the following six COVID-19 Home Retention and Disposition Options:

1. COVID-19 Owner-Occupant Loan Modification
2. COVID-19 Combination Partial Claim and Loan Modification
3. COVID-19 FHA-Home Affordable Mortgage Program (FHA-HAMP) Combination Loan Modification and Partial Claim with Reduced Documentation (which may include principal deferment and requires income documentation)
4. COVID-19 Non-Occupant Loan Modification
5. COVID-19 Pre-Foreclosure Sale (PFS)
6. COVID-19 Deed-in-Lieu (DIL) of Foreclosure

I’m going to explain these options in cursory detail. The options require systemic implementation. Make sure you discuss these options with a compliance professional. If you need assistance, we’re here to help. Let me know. Click HERE.

The options are meant to provide methods to reinstate a mortgage after the expiration of the COVID-19 forbearance period. The COVID-19 Standalone Partial Claim – indeed, the first three options listed above – are available for eligible owner-occupant borrowers who are able to resume their monthly mortgage payment (or, if applicable, a modified payment).

The COVID-19 Non-Occupant Loan Modification is available for eligible non-occupant borrowers who are able to resume the monthly mortgage payment (or, if applicable, a modified payment).

The use of a COVID-19 Home Retention Option does not count against a borrower’s limit of one FHA-HAMP agreement within 24 months. The last two options – specifically, the Home Disposition Options – are available for eligible owner-occupant and non-occupant borrowers who are unable to reinstate the mortgage.

For eligible borrowers, servicers must complete a Loss Mitigation Option no later than 90 days from the earlier of the completion or expiration of the COVID-19 forbearance. For the Home Disposition Options, a signed Agreement to Participate (ATP) Agreement or signed DIL Agreement will meet this requirement.

For borrowers who are participating in a COVID-19 forbearance, servicers are granted an automatic 90-day extension of the first legal deadline date, from the earlier of the completion or expiration of the COVID-19 forbearance, to complete a Loss Mitigation Option or to commence or re-commence foreclosure.

By the way, a trial payment plan is not required for a borrower to be eligible for a COVID-19 Loss Mitigation Option.

Now I am going to get into some detail, but I hope to keep it measured, succinct, and brief. Where possible, I will provide a bulleted outline. I will discuss the -

• COVID-19 Standalone Partial Claim,
• COVID-19 Owner-Occupant Loan Modification,
• COVID-19 Combination Partial Claim and Loan Modification,
• COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation, and 
• COVID-19 Non-Occupant Loan Modification.

COVID-19 Standalone Partial Claim

The borrowers who receive a COVID-19 forbearance must be evaluated for the COVID-19 Standalone Partial Claim no later than the end of the forbearance period.

There are three criteria that the servicer must confirm, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to resume making on-time mortgage payments, and
(3) the property is owner-occupied.

The terms of the COVID-19 Standalone Partial Claim are the following: 

• The borrower’s accumulated late charges, fees and penalties are waived;
• The COVID-19 Standalone Partial Claim amount includes only arrearages that consist of principal, interest, taxes and insurance;
• The COVID-19 Standalone Partial Claim does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage; and
• The borrower may receive only one permanent COVID-19 Home Retention Option.

COVID-19 Owner-Occupant Loan Modification

For borrowers who do not qualify for a COVID-19 Standalone Partial Claim, the servicer must review the borrower for a COVID-19 Owner-Occupant Loan Modification, which modifies the rate and term of the mortgage at the end of a COVID-19 forbearance period.

The servicer must confirm three criteria, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to make the modified mortgage payment, and
(3) the property is owner-occupied.

Redlining – Exam Preparation

QUESTION

We are a bank in California with 35 branches. I am the bank's Compliance Officer and General Counsel. Recently, we were notified by our regulator that we’ll be having a fair lending examination. I believe we are prepared. However, the fact is we have a lot of branches, and I am particularly concerned that we do not receive any allegations about redlining. We have a perfect examination history in such examinations; however, we were a much smaller back at the time of the last fair lending audit. So, I want to concentrate on redlining issues. What actions can we expect the examiners to take with respect to redlining?

ANSWER

Interestingly, you state your bank is located in California. In late July, the Department of Housing and Urban Development settled a complaint filed by the California Reinvestment Coalition against CIT Bank dba OneWest Bank, which resolved an allegation that OneWest Bank engaged in redlining.

The settlement called for investing a stated sum in a loan subsidy fund to increase credit opportunities for residents of majority-minority neighborhoods; devoting money toward advertising and community outreach; and providing a sum in grants for homebuyer education, credit counseling, community revitalization, and homeless programs. OneWest Bank committed to originating $100,000,000 in home purchase, home improvement, and home refinance loans to borrowers in majority-minority areas and to open a full-service branch serving the banking and credit needs of residents in a majority-minority and low- and moderate-income neighborhood. Of course, redlining allegations can adversely affect a bank’s reputation.

Let’s consider a viable definition of “redlining.” It is little known minutiae of history that the term “redlining” began years ago, way before map apps were available, when some lenders looked at paper maps, used a red marker to draw a circle around a neighborhood, and then avoided doing business in that circumscribed zone.

Here's a very good definition of “redlining”:

“Redlining is a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Redlining may violate both the FHAct and the ECOA.”

This is how redlining is defined by the federal banking agencies and the National Credit Union Administration, and if that definition is good enough for them, it’s good enough for me!

As a compliance officer, you must be aware of the actions that can be considered redlining – and that goes too for the senior lending management and the Board of Directors.

If you want to prepare for a redlining examination, I suggest the following six steps that examiners use. They have been developed over the years by the Interagency Fair Lending Examination Procedures and used in conducting a comparative analysis for redlining.

Step 1: Identify and delineate any areas within the institution’s Community Reinvestment Act (CRA) assessment area and reasonably expected market area for residential products that are of a racial or national origin minority character. (By the way, credit unions will not have a CRA assessment, but for community credit unions that have a specific geographic area designated as their field of membership, NCUA examiners will likely start with that.)

Step 2: Determine whether any minority area identified in Step 1 is excluded, underserved, selectively excluded from marketing efforts, or otherwise treated less favorably in any way by the institution. Examiners begin with the risk factors identified during the scoping process. This step will verify and measure the extent to which Home Mortgage Disclosure Act (HMDA) data show the minority areas identified in Step 1 to be underserved and/or how the institution’s explicit policies treat them less favorably.

Step 3: Identify and delineate any areas within the institution’s CRA assessment area and reasonably expected market area for residential products that are nonminority in character and that the institution appears to treat more favorably.

Step 4: Identify the location of any minority areas located just outside of the institution’s CRA assessment area, market area, or lending areas as stated in its policies for residential products, such that the institution may be purposely avoiding such areas. If there are minority areas that the institution excluded from the assessment area improperly, consider whether they ought to be included in the redlining analysis. Analyze the institution’s reasonably expected market area in the same manner.

Step 5: Obtain the institution’s explanation for the apparent difference in treatment between the areas and evaluate whether it is credible and reasonable. According to the examination procedures, this step completes the comparative analysis by soliciting from the institution any additional information not yet considered by the examiners that might show that there is a non-discriminatory explanation for the apparent disparate treatment based on race or ethnicity.

HUD: Suspensions, Debarments, LDPs

QUESTION

We were asked to complete a form by one of our investors. One of the questions asks us if our company and/or principals were ever denied, suspended, or debarred by HUD. What do these HUD actions imply?

ANSWER

Although some people believe the Department of Housing and Urban Development (HUD) can only force mortgagees and lenders to indemnify or reimburse FHA for insurance claims paid on mortgages that are found not to meet HUD guidelines, HUD has vastly more authorities to ensure enforcement. To be sure, in October 2010 HUD proposed regulations to strengthen and expand its ability to compel indemnification and reimbursement. [75 FR 62335] But HUD has many more enforcement authorities.

With respect to your specific inquiry, HUD can suspend, debar, or issue a Limited Denial of Participation (LDP) to participants in HUD programs. [24 CFR, Part 2424] These sanctions are typically meted out for fraud or other serious misconduct.

Suspensions and debarments operate throughout the government; that is, if one agency suspends or debars, the person or entity is debarred from doing business with the entire federal government. HUD does provide an appeal opportunity. [See 24 CFR, Part 24; 24 CFR, Part 26] In my view, one should not navigate this process without the assistance of legal counsel, supported by a firm such as ours to handle the due diligence.

The nomenclature of the terms “suspend” and “debar” mean precisely what they imply. If a person or entity is suspended, they are barred from doing business with the government for a specified period of time, ranging upwards of one year, sometimes longer. If a person or entity is debarred, they are prohibited from doing business with the government for what is a normally a set period, usually in effect much longer than a suspension.

Unlike suspensions and debarments, LDPs are unique to HUD. There are specific rules governing LDPs. [See 24 CFR, Part 2424, Subpart J] LDPs are issued for the same types of misconduct as suspensions and debarments, but, as implied in the term itself, these are more limited in impact. An LDP does not bar participation in the programs of other federal agencies. Furthermore, LDPs are usually limited to specific HUD programs and/or specific HUD field offices. Most of the time, LDPs are issued for one year or less.

Persons or entities receiving an LDP, suspension or debarment can appeal within HUD and have an on-the-record hearing before a HUD Administrative Law Judge. [24 CFR, Part 2424.1130] It is also possible to appeal to the federal courts. The appeal process, though, should be conducted with support of legal counsel in conjunction with a firm like Lenders Compliance Group to handle the due diligence.

Jonathan Foxx

Managing Director

Lenders Compliance Group

Deductions from Loan Officer Compensation

QUESTION

Can we deduct from our loan officers’ compensation the cost of marketing materials, such as the per- account fees of an outside customer relationship manager (CRM) to stay in touch with past clients and referral partners?

ANSWER

While it is theoretically possible to deduct marketing expenses from loan officer compensation in certain limited circumstances, attempting to do that in practice is fraught with legal and compliance risk.  

As a starting point, because loan officer compensation rules consist primarily of various prohibitions, determination of whether any loan officer compensation plan is "compliant" is a fact-specific and “situationally dependent” exercise that requires evaluation of the plan as a whole.

Secondly, there are many federal and state labor law requirements that must be considered. For example, the federal Fair Labor Standards Act (FLSA), and most state labor laws, prohibit any deduction from the pay of non-exempt employees (most mortgage loan officers) that is not specifically authorized by statute or regulation and that reduces the employee’s compensation below the applicable statutory minimum wage[i] or reduces the non-exempt employee’s overtime compensation in any amount. An employee must always receive at least the minimum wage and must be paid any earned overtime. Whether and how the deduction arrangement is documented in the LO's compensation agreement is also critical. Under most state laws, if the employee’s consent to the deduction is not specifically documented in advance in a written agreement, the deduction normally cannot occur. And if not structured properly, even authorization for such deductions in a written employment agreement can be problematic because employee compensation, once paid, normally cannot be reduced.

Thirdly, any such deduction would have to "pass muster" under both the Loan Officer Compensation Rules of Regulation Z of the Truth in Lending Act (TILA), and the Fair Lending laws. In that regard, Regulation Z prohibits basing a loan originator's compensation on "any of the transaction's terms or conditions" or the “terms of multiple transactions,” or on a “proxy” for such terms. The Dodd-Frank Act codifies that prohibition. Under Reg. Z, a "term of a transaction" is defined as "any right or obligation of the parties to a credit transaction." This means, for example, that a mortgage loan originator employee (LO) cannot receive compensation based on the interest rate of the loan or on the fact that the LO "steered" the customer to use a particular vendor in the transaction. 

The key language is found in Section 1026.36(d) of Reg. Z, as follows:

              (d) Prohibited payments to loan originators.

(1) Payments based on a term of a transaction.

(i) Except as provided in paragraph (d)(1)(iii) or (iv) of this section, in connection with a consumer credit transaction secured by a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual loan originator, or the terms of multiple transactions by multiple individual loan originators. If a loan originator's compensation is based in whole or in part on a factor that is a proxy for a term of a transaction, the loan originator's compensation is based on a term of a transaction. A factor that is not itself a term of a transaction is a proxy for a term of the transaction if the factor consistently varies with that term over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. (Emphasis added.)

Based on the emboldened definition above, a “proxy analysis” is required to evaluate whether deductions for marketing expenses (or other expenses) amount to a “factor” that “consistently varies with [a] term of the transaction (or series of transactions) over a “significant number of transactions” where the originator “has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction.” This, in turn, could necessitate evaluation of whether the marketing expenses deducted are the same for every transaction and every loan type and interest rate, or vary statistically depending on the terms of the loan. If the deduction in any way incentivizes the loan officer (qualitatively or statistically) to “steer” consumers into or away from loans with certain terms, there is a potential TILA LO Comp issue.  And, in the same manner, there could also be a Fair Lending” issue if application of the deduction results in a pattern of loan origination that has a disparate impact on a protected class of borrowers.[ii]

Finally, if your company originates FHA loans, the proposed deduction might constitute a violation of HUD rules requiring that all operating expenses be paid by the mortgagee. 

HUD Handbook 4001.1(I)(A)(6)(g)(ii) provides that: “The Mortgagee must pay all of its own operating expenses, including the expenses of its home office and any branch offices where it conducts FHA business. The Mortgagee must maintain all accounts for operating expenses in its name.” (Emphasis added.)  Section 4001.1(I)(A)(4)(d)(i) of the HUD Handbook also provides: “The Mortgagee must not engage an existing, legally separate mortgage company or broker to function as the Mortgagee’s branch office or DBA name or to conduct FHA activities using the Mortgagee’s FHA approval.” 

While there appears to be no HUD prohibition on employees voluntarily reducing their basic rate of compensation across the board because management’s expenses have increased, that would need to be documented in the LO’s employment agreement and, again, could not result in the compensation dropping below applicable minimum wage and overtime pay requirements.

Michael Pfeifer 

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

---

[i] The federal minimum wage is currently $7.25 per hour. Some state minimum wage requirements are higher.

[ii] Under the 2018 revisions to the Official Staff Interpretations of Reg. Z §1026.36(d)(1), a loan originator is permitted to decrease its compensation under very limited circumstances involving unforeseen increases in settlement costs. But those circumstances do not apply here. The applicable commentary reads: “Permitted decreases in loan originator compensation. Notwithstanding comment 36(d)(1)-5, §1026.36(d)(1) does not prohibit a loan originator from decreasing its compensation to defray the cost, in whole or part, of an unforeseen increase in an actual settlement cost over an estimated settlement cost disclosed to the consumer pursuant to section 5(c) of RESPA or an unforeseen actual settlement cost not disclosed to the consumer pursuant to section 5(c) of RESPA. For purposes of comment 36(d)(1)-7, an increase in an actual settlement cost over an estimated settlement cost or a cost not disclosed is unforeseen if the increase occurs even though the estimate provided to the consumer is consistent with the best information reasonably available to the disclosing person at the time of the estimate.”

Mortgagee Review Board: Suspension of Mortgagee

QUESTION

We are an FHA lender who recently got a notice from the Mortgagee Review Board. This is the first time we ever received such a notice and frankly our attorney has no experience in knowing how to respond. We were referred to you, since we are preparing a response and you have handled this kind of engagement. We have a lot of questions and could use some immediate guidance. Here are just a few of the questions we need to know. What is this Mortgagee Review Board? What can it do to us? If we get suspended, can we still originate FHA loans? 

ANSWER

Given the complexity of the answers to your questions, I will provide only cursory responses here, with the suggestion that you seek appropriate risk management guidance and legal counsel to assist in a matter involving the Mortgagee Review Board (“MRB” or “Board”). I am going to provide brief answers to your stated questions; however, I urge you to immediately seek competent compliance support, since the MRB process is very extensive and time sensitive.

Generally, I recommend what I call “triune triage” to urgent matters such as this one, consisting of a three-part collaboration with the financial institution, the risk management firm, and the legal counsel experienced in matters concerning HUD-FHA. This three-way effort is important because we, as the risk management firm, have all the people and due diligence tools to handle deep dive preparation, and counsel has the means and familiarity with the legal process and procedures for interacting with the MRB. You must get a risk management firm such as ours, which has the widest range of hands-on, compliance support services in the country, because there are many features to preparation that will make demands on your readiness. I caution against trying to go it alone in matters involving the MRB.

The Board is the sole organization within the Department of Housing and Urban Development (“HUD” or “Department”) that is authorized to take administrative action against HUD-FHA Mortgagees and Title I Lenders that violate HUD-FHA requirements, or the non-discrimination requirements of the Equal Credit Opportunity Act, The Fair Housing Act, and certain other statutes. The Board is authorized to impose civil monetary penalties on Mortgagees and Title I Lenders that violate the Department's requirements, and it also may approve the initiation of a suspension or debarment actions.

The Board’s Chairman is the Assistant Secretary for Housing-Federal Housing Commissioner, and consists also of the General Counsel, the President of the Government National Mortgage Association, the Chief Financial Officer of HUD, the Assistant Secretary for Administration, the Assistant Secretary for Fair Housing and Equal Opportunity (in cases involving violations of the Department's nondiscrimination requirements), as voting members, and the Inspector General, the Director of Office of Lender Activities and Land Sales Registration, or their designees, as non-voting advisors.

Your inquiry does not indicate if your firm is a Title I Lender, which is an entity that processes or services loans for property improvements and the purchase of manufactured housing; or a Title II Mortgagee, which is an entity that processes or services loans for single family homes. A lender may be approved by HUD for both Title I and Title II. But I think some salient details can be somewhat responsive to your questions.

You ask what the MRB can do. It calls for documentation that may form a basis for administrative action, particularly when that documentation results from any report, audit, monitoring review, investigation or other information. After such review, the Board may determine if administrative sanctions and/or the imposition of civil money penalties may be warranted, and it would then seek to impose certain administrative sanctions, including civil money penalties for substantive and material violations of HUD-FHA requirements.

Depending on the nature and the extent of the violations, the Board may impose administrative sanctions, such as a reprimand, probation, suspension, and withdrawal of approval. Each of these carries adverse implications for the Mortgagee with respect to its relationship with HUD and other regulatory bodies, its relationship with investors, its financial stability, and its reputation with consumers and employees, among other things.

With respect to your question about suspension of a Mortgagee – Title I Lenders also have specific suspension features – while the sanction is in effect the insurance on mortgages accepted for insurance is not affected, except for cases involving fraud or proven misrepresentation by the holding Mortgagee. However, insured mortgages may not be originated or purchased by a Mortgagee whose approval has been suspended or withdrawn. So, suspension is a harsh curtailment of the very basis of the Mortgagee’s economic activity. Generally, the Mortgagee may service HUD-FHA insured mortgages.

Furthermore, a suspended Mortgagee may not submit new applications to HUD-FHA for insurance and should assign outstanding conditional commitments to a HUD-FHA approved Mortgagee in good standing. The Department will not endorse any mortgage unless, prior to the date of suspension or withdrawal, a firm commitment has been issued or unless a Direct Endorsement underwriter has approved the mortgagor for the mortgage.

The suspension nevertheless does not relieve the Mortgagee from any obligation to pay all amounts due HUD. In fact, any action taken by HUD to impose or rescind suspension or withdrawal of approval does not settle or resolve any criminal or civil liability of the Mortgagee. 

I urge you to contact us to discuss this matter immediately.

You can reach us by completing the information HERE or emailing us at compliance@lenderscompliancegroup.com, which we monitor 24 hours a day.

Jonathan Foxx

Managing Director

Lenders Compliance Group

FHA and VA Loans – Charging Notary Fees

QUESTION

We need some assistance regarding our ability as a lender to charge the borrower notary fees on FHA and VA loans when it is an employee of the lender who is acting as the notary. Can you please provide some guidance?

ANSWER

With respect to a VA loan, the lender may not charge the borrower a separate itemized notary fee, regardless if the notary is an employee or not. All such fees are intended to be covered by the 1% flat fee charge. 

[VA Lender’s Handbook Ch. 8.2-d]

With respect to an FHA loan, the current handbook provides that the lender may charge the borrower “reasonable and customary fees that do not exceed the actual cost of the service provided”. 

[HUD Handbook 4000.1.II.A.6.a.x(A)] 

The italicized section of the previous sentence implies that a lender may not charge for services provided by its employees as the lender did not incur any costs, as the employee’s salary is part of the lender’s overhead.

A prior version of the HUD handbook specifically delineated allowable fees which included a notary fee if notarization is required by the state and the notarization is performed by a notary who is not employed by the lender.  

[HUD 4000.2 Rev-3 Ch. 5-2(O)]  

HUD Handbook 4000.2 Rev-3 was superseded by Handbook 4155.2 which did away with the specific categories but stated that the cost for any item charged must not exceed the cost paid by the lender or charged to the lender by the service provider, thus making it impermissible to charge for services provided by the lender’s employees. Handbook 4155.2 has been superseded by Handbook 4000.1 discussed above.

Pertinent sections of the Handbooks cited above are set forth below.  

HUD Handbook 4000.1.II.A.6.a.x(A)

x. Closing Costs and Fees

The Mortgagee must ensure that all fees charged to the Borrower comply with all applicable federal, state and local laws and disclosure requirements.

The Mortgagee is not permitted to use closing costs to help the Borrower meet the Minimum Required Investment (MRI).

(A) Collecting Customary and Reasonable Fees. The Mortgagee may charge the Borrower reasonable and customary fees that do not exceed the actual cost of the service provided. The Mortgagee must ensure that the aggregate charges do not violate FHA’s Tiered Pricing rules.

HUD Handbook 4155.2 6.A.3.a Collecting Customary and Reasonable Fees

The lender may only collect fair, reasonable, and customary fees and charges from the borrower for all origination services. FHA will monitor to ensure that borrowers are not overcharged. Furthermore, the FHA Commissioner retains the authority to set limits on the amount of any fees that a lender may charge a borrower(s) for obtaining an FHA loan.

Aggregate charges may not violate FHA’s tiered pricing rules, per ML 94-16.

Additionally, FHA does not allow “mark-ups.” The cost for any item charged to the borrower must not exceed the cost paid by the lender, or charged to the lender by the service provider.

Only the actual cost for the service may be charged to the borrower.

HUD Handbook 4000.2 Rev-3 Ch. 5-2(O)

CLOSING COSTS AND OTHER FEES (05/04)

Listed below are the customary and reasonable fees and charges that may be collected from the borrower by the lender and used to meet the minimum investment requirement for purchases and added to the existing indebtedness for refinances. The cost for any item charged to the borrower must not exceed the cost paid by the lender or charged to the lender by the service provider.

* * *

O. Courier/Wire/Notary Fees. Courier fees and wire fees may be charged only on refinances and only for delivery of the mortgage payoff statement to the lien holder and for closing documents to the settlement agent. The borrower must agree in writing to pay for the courier and wire fees, prior to loan closing. Notary fees may be charged if notarization is required by state law and is performed by a notary who is not employed by the lender.

VA Lender’s Handbook Ch. 8, 2-d: Lender's One Percent Flat Charge (11/08/12)

In addition to the “itemized fees and charges,” the lender may charge the veteran a flat charge not to exceed one percent of the loan amount.

Calculate the one percent on the principal amount after adding the funding fee to the loan, if the funding fee is paid from loan proceeds (except Interest Rate Reduction Refinancing Loans (IRRRLs).

Note: For IRRRLs, use VA Form 26-8923, IRRRL Worksheet, for the calculation.

The lender’s flat charge is intended to cover all of the lender’s costs and services which are not reimbursable as “itemized fees and charges.”

The following list provides examples of items that cannot be charged to the veteran as “itemized fees and charges.” Instead, the lender must cover any cost of these items out of its flat fee:

• notary fees

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

New HUD Handbook: Pre-closing Quality Control

Question

Is it true that the new FHA Guidelines require Pre-Closing Quality Control reviews?

Answer

Yes.  The U.S. Department of Housing and Urban Development issued a new handbook, FHA Single Family Housing Policy Handbook 4000.1, which is effective as of September 14, 2015 (“Handbook”). Under the Handbook, mortgagees must select FHA-insured mortgages for pre-closing quality control reviews on a monthly basis.  

Mortgages selected must be reviewed after the mortgage is approved by an FHA Directed Endorsement Underwriter and prior to closing. [4000.1 - V.A.3.a.i.(A)]   

As with post-closing reviews, loans selected for pre-closing reviews must consist of both random and discretionary samplings. [4000.1 - V.A.3.a.iv] 

However, unlike post-closing reviews, pre-closing reviews do not require mortgagees to obtain a new credit report or re-verify income, employment, assets and housing expense information. Rather, for pre-closing reviews mortgagees must evaluate all documents supporting employment, income, assets and housing expense information to ensure original documents comply with FHA’s policy requirements and to resolve any discrepancies in the documentation prior to closing. [4000.1 - V.A.3.c]

Mortgagees must also conduct a review of the property appraisal for all FHA-insured mortgages chosen for pre-closing quality control reviews.

At a minimum, the following areas must be reviewed:

1. appraisal data,
2. validity of the comparables,
3. value conclusion (as required by FHA guidance),
4. any changes made by the underwriter, and
5. the overall quality of the appraisal. Field reviews are not required for pre-closing reviews. [4000.1 - V.A.3.c]  

Michael Barone

Director/Legal & Regulator Compliance

Lenders Compliance Group

Homeownership Counseling and High Cost Mortgages

QUESTION: 

Are the homeownership counseling list requirements set forth in the High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act and RESPA (“HOEPA Final Rule) only applicable to high-cost loans? 

ANSWER: 

No. As of January 10, 2014 all lenders are required to provide consumers who apply for a federally-related mortgage with a list of HUD-approved housing counseling agencies.  This list must be in writing. The CFPB has provided two ways for a lender to fulfill its obligations as set forth in the HOEPA Final Rule. 

1) A lender may obtain the lists of HUD-approved housing counseling agencies through the CFPB’s website;[1] or

2) A lender may generate the lists of the HUD-approved housing counseling agencies by independently using the same HUD data that the CFPB uses on HUD-approved counseling agencies in accordance with the CFPB’s list instructions.[2] The CFPB published the list instructions and clarified how lenders can provide their own lists on November 8, 2014.[3]

In addition, in Bulletin 2013-13 (the “Bulletin”) the CFPB acknowledged that the second option referenced above will require lenders to “undertake significant development of their compliance systems” to ensure that lists of the HUD-approved housing counseling agencies are compliant. The CFPB also advised that lenders will not be able to provide approved agency lists under the second option for up to six month’s following the January 10, 2014 effective date.

As such, the Bulletin provides that lenders may direct borrowers to the CFPB’s housing counseling website to obtain a list of housing counselors.[4] The CFPB suggests the following text to be provided by lenders.  If followed, the CFPB suggests that the goals of the regulation would be achieved and would not raise supervisory or enforcement concerns. 

“Housing counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD) can offer independent advice about whether a particular set of mortgage loan terms is a good fit based on your objectives and circumstances, often at little or no cost.

If you are interested in contacting a HUD-approved housing counseling agency in your area, you can visit the Consumer Financial Protection Bureau’s (CFPB) website, www.consumerfinance.gov/find-a-housing-counselor  and enter your zip code.

You can also access HUD’s housing counseling agency website via www.consumerfinance.gov/mortgagehelp.

For additional assistance with locating a housing counseling agency, call the CFPB at 1-855-411-CFPB (2372).”

Michael Barone
Director / Legal and Regulatory Compliance
Lenders Compliance Group

---

[1] See: www.consumerfinance.gov/find-a-housing-counselor
[2] See: Section 1024.20(a)
[3] See: http://files.consumerfinance.gov/f/201311_cfpb_interpretive-rule_homeownership-counseling-organizations-lists.pdf
[4] See: www.consumerfinance.gov/find-a-housing-counselor