FHA clarifies rules around dual roles and compensation

The Federal Housing Administration has clarified restrictions it puts on the extent to which employees in single-family mortgage transactions can play dual roles and how they are compensated.

Applying to four specific types of professionals, the clarification is effective immediately but the administration will also be accepting industry feedback on it for 30 days.

Prohibitions on dual roles can complicate lenders' ongoing downsizing of personnel as originations and profitability wane, but they also help head off conflicts of interest for people with a role in loan approval, and potentially prevent collusion that can lead to costly fraud incidents.

The clarification issued by FHA Commissioner Julia Gordon specifically restricts underwriters, appraisers, inspectors and engineers from "having multiple roles or sources of compensation, either directly or indirectly, from a single FHA-insured transaction."

Sources of indirect compensation could include an ownership interest in any business that might be involved in a FHA mortgage transaction. A domestic partner or family member's involvement could also fall into this category.

Conflicts of interest in loan approvals could compromise the FHA's ability to manage the risk that industry professionals charged with sizing up the borrower's ability to repay will approve loans they shouldn't, something that hurt mortgage performance badly in the Great Recession.

This type of risk tends to be higher under market conditions like those present today, when high interest rates strain affordability and curtail originations. While credit availability indices indicate the industry's been cautious to date, one did recently loosen for the first time in nine months.

The FHA, an arm of the Department of Housing and Urban Development, is particularly concerned about credit risk because its loan program tends to be the go-to for consumers with limited financial resources. As such, the FHA insures loans with higher delinquencies.

Currently, delinquencies are low across the board, and the FHA's insurance fund is in good shape, but with forecasts predicting a recession, which could increase arrears in the coming year, the administration may be becoming more cautious.

While the FHA clearly wants to prevent anyone directly involved in deciding whether a loan should get funded or not from having multiple roles or sources of compensation from single transactions, other participants don't have the same restrictions.

People who "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" so long as the transaction is in compliance with any other applicable rules, the administration said.