HUD plows ahead with effort to restrict down payment assistance

WASHINGTON — Although the Department of Housing and Urban Development was forced to withdraw guidance restricting nonprofit housing funds from offering down payment assistance under a court order, the Trump administration is not backing down entirely.

HUD officially pulled a letter last month sent to mortgage lenders that had imposed jurisdictional limits on housing funds, but the industry and housing advocacy groups are anticipating the department may attempt the same restrictions through a formal rulemaking.

The letter by Federal Housing Administration chief Brian Montgomery had stated that funds must operate only within their geographic area or get permission from each local authority where they operate. A judge blocked the letter in July, suggesting that the court could find that HUD needed to propose a more formal rulemaking.

Many observers expect HUD to follow through with a formal proposal focusing on the funds' geographic reach, while a rulemaking could also require government entities operating housing funds to register in a national database.

"It would not surprise us if jurisdictional criteria for governmental entities were part of [the rulemaking], but we certainly don’t have any particular insight into whether they will and if they are, how they’ll be treated in the advance notice of proposed rulemaking,” said Stockton Williams, the executive director of the National Council of State Housing Agencies.

The Utah-based Chenoa Fund, run by the Cedar Band of Paiutes, and the National Homebuyers Fund had said that the limits proposed in Montgomery's April letter would put them both out of business. Both offer down payment assistance on the national level. The Cedar Band of Paiutes sued to get the guidance thrown out.

In July, a judge in the U.S. District Court in Utah agreed with the Native American tribe that Montgomery's letter ran afoul of the Administrative Procedure Act, and granted an injunction delaying the implementation of the guidance.

In response, HUD rescinded its guidance and sought to get the case thrown out. In a court filing signed Aug. 21, Julie Shaffer, the acting associate deputy assistant secretary for single-family housing at HUD, said she had issued a staff memo the same day instructing that “HUD does not have a basis to enforce jurisdictional limitations on governmental entities providing down payment assistance.”

“They have come out publicly and stated and declared that there is no geographical limitation on governmental entities’ ability to provide down payment assistance, which for us, was the entire meat of the litigation,” said Michael Whipple, the vice president of the Chenoa Fund.

In the same court filing, Shaffer stated that HUD plans to go through the formal rulemaking process to address down payment assistance provided by governmental entities. (State housing finance agencies, as well as the Chenoa Fund and the National Homebuyers Fund, are considered governmental entities.)

HUD declined to comment for this story.

It is still unclear what exact route HUD will take. If a formal proposal is released, it would likely subject the policy to more scrutiny, public comment letters both for and against, and a longer implementation timeline.

“Now the ball, I guess, is in HUD’s court,” Whipple said. “Are they going to do a proper rulemaking process? Are they going to continue to push for jurisdictional limitations when we’ve advanced clearly superior options?”

HUD has long had concerns about third parties being involved in providing down payment assistance to borrowers of FHA loans, particularly third parties that can profit from the transaction.

Seller-funded down payment assistance was prohibited years ago, but HUD noted in an Office of Management and Budget document this past spring that the “FHA continues to receive questions regarding the prohibition on persons or entities that may financially benefit from the transaction.”

HUD went on to say in the document that a rule could define “the circumstances in which governmental entities are deriving a prohibited financial benefit.”

HUD will be looking to ensure that down payment assistance programs are providing “a true financial benefit to the borrower” rather than the provider of the down payment assistance, said Greg Zagorski, the senior legislative and policy associate at the state housing agencies council.

“We’d argue that our members’ programs certainly provide a financial benefit, helping some folks who can afford to purchase a home and pay off a mortgage and maybe can’t save up for down payment to purchase a home,” he said.

The Chenoa Fund also serves a large number of minority borrowers who often don’t have generational wealth that they can rely on for help with a down payment, said Whipple.

“It’s no accident that over 50% of the people we help are minorities. There is a racial wealth gap,” he said. “We help a lot of Hispanics and a lot of African-Americans because we’re their only source.”

HUD is also seeking to “establish requirements for placement of government entity down payment assistance programs on a roster,” the agency said in the OMB spring report.

“It sounds like HUD is considering whether they should have a registry just to help keep track of what government entities are offering it,” said Zagorski. “Government entities are allowed by statute to provide down payment assistance in connection with FHA-insured loans, so it’s more or less an informal process and making clear that this is something that you’re going to do.”

Whipple will also be looking for HUD to collect data on governmental entity-funded down payment assistance, especially if the agency proposes limiting down payment assistance programs to specific jurisdictions.

The FHA has cited data in defense of the original mortgagee letter that “generally" shows higher serious delinquency rates "are associated with mortgages where down payment assistance came from governmental entities. But that data was not broken up into a comparison of nationwide programs — like the Chenoa Fund — versus state programs.

“We’re saying if you properly monitor governmental entities, we think not only will their programs improve and they’ll be less of a threat to the Mutual Mortgage Insurance Fund, because when you measure something, it improves, and if you report it and report it publicly, it will improve quicker,” said Whipple.

If that data is not collected, Whipple says, a proposed rule limiting where a down payment assistance program can operate would not have any basis.

“We believe if they don’t gather the data then really this notion of limiting by jurisdiction is really just an arbitrary and capricious limitation on the ability of governmental entities to provide down payment assistance, and we don’t believe that they have the authority to make such a limitation,” he said.

While it remains to be seen when HUD might issue a proposed rule on down payment assistance, “it’s an incredibly important rulemaking effort by FHA,” said Williams.

“Down payment assistance is the biggest barrier or impediment to homeownership for many would-be first-time borrowers of color and others who are trying to become homeowners, and those groups are who FHA primarily serves, so it’s critical that FHA’s policies remain supportive of proven and credible down payment programs,” he said.

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