FHA Issues ML to Clarify Conflict of Interest Requirements

FHA recently issued Mortgagee Letter 2022-22 (the ML), which aimed to consolidate and clarify when individuals may perform multiple roles in a single FHA-insured transaction.  Under the prior Handbook 4000.1 requirements, a Mortgagee’s employees were prohibited from having multiple roles in, or sources of compensation, either directly or indirectly, from a single FHA-insured transaction.  Through issuance of the ML, however, FHA’s requirements now provide that only underwriters, appraisers, inspectors, and engineers are prohibited from having multiple roles or sources of compensation, either directly or indirectly, from a single FHA-insured transaction.  In FHA’s view, those four participants are the individuals who “have a direct impact on the mortgage approval decision.”

The ML also clarifies the meaning of “indirect compensation,” stating that the term refers to compensation resulting from the same FHA-insured transaction, other than for services performed in a direct role.  For example, compensation earned by a spouse, domestic partner, or other family member (as that term is defined in HUD Handbook 4000.1) who has a direct role in the same FHA-insured transaction is considered “indirect compensation.”  Another example is compensation resulting from an ownership interest in another business entity that is a party to the same FHA-insured transaction.  

Participants in an FHA-insured transaction who are not underwriters, appraisers, inspectors, or engineers are permitted to have multiple roles and/or sources of compensation for services actually performed and permitted by HUD, provided that the transaction complies with applicable law.  Applicable legal restrictions may include, among others, those generally prohibiting referral fees under RESPA and Regulation X, those limiting loan origination fees under TILA and Regulation Z, and those requiring the licensing of mortgage loan officers.

The ML was effective immediately for case numbers assigned on or after December 15, 2022.  Please note, however, that the ML was not incorporated into, or superseded by, the most recent update to HUD Handbook 4000.1 published on January 18, 2023.