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WBK Industry News - Federal Regulatory Developments

HUD IG’s and FHA’s Conflicting Views Regarding Down Payment Assistance Programs

In a letter dated May 25, 2016 and addressed to all FHA-approved mortgagees and other stakeholders in FHA transactions, FHA Principal Deputy Assistant Secretary Ed Golding broadly indicated that “loans that include down payment assistance provided by state and local housing finance agencies continue to be eligible for FHA insurance.” Recognizing both the legality of such programs (the programs “are legal and consistent with the National Housing Act”) and the importance of such programs for providing important resources to access homeownership and related community benefits, FHA clearly stated that “[g]overnment entities may provide funds to borrowers to help make down payments on FHA loans” and that it is “glad to have this matter resolved.” In contrast, in a May 26, 2016 National Mortgage News article, HUD Inspector General David Montoya responded by continuing to express concerns about premium pricing associated with FHA down payment assistance programs, stating that “[w]hile we do not have a concern with the overall down payment assistance program, we believe this specific aspect, where external lenders are originating FHA loans with ineligible down payment assistance gifts and secondary financing and agree to inflate the interest rate on the borrowers’ FHA loans, violates the law and harms borrowers.”

The disagreement between the HUD IG and FHA officials over premium pricing in connection with these programs has persisted throughout the last year (starting with the IG’s audit of an Arizona FHA lender (audit report published in July 2015)), and the IG’s recent statements suggest that the matter is not settled as the industry had hoped. Rather, while the FHA letter indicates that lenders may continue to participate in these programs in FHA transactions provided that they do so in compliance with applicable rules and regulations, the IG will continue to audit for these practices, having expressed disapproval of use of these programs in connection with premium priced mortgage loans.

In response, the Mortgage Bankers Association acknowledged that while the FHA letter was intended to resolve a longstanding dispute between the FHA program office and the IG regarding the permissibility of state and local housing finance agency down payment programs that rely on premium pricing, as a result of the IG’s recent statements, the MBA is urging lenders “to evaluate their ongoing participation in these programs with extreme caution” until there is “official, authoritative guidance from the HUD Secretary—published in the Federal Register.”

The FHA letter can be found at: http://portal.hud.gov/hudportal/documents/huddoc?id=FTDO_DASP_052516.pdf.

The National Mortgage News article can be found at: http://www.nationalmortgagenews.com/news/compliance-regulation/huds-premium-pricing-for-first-time-buyers-still-a-problem-watchdog-1078883-1.html.