In Mortgagee Letter 2022-22 dated December 15, 2022, the FHA announced updates to its Single Family Housing Policy Handbook (HUD Handbook 4000.1) that modifies its policies governing conflicts of interest and dual employment. The modifications both narrow the employees who are subject to the conflicts of interest policies, and subjects those employees to what appear to be more significant restrictions. Further, the modifications removed the dual employment policy language from HUD Handbook 4000.1. The modifications became effective upon issuance and may present difficulties for some FHA mortgage lenders.
With regard to conflicts of interest, the Mortgagee Letter removes the following language from HUD Handbook 4000.1:
“Employees are prohibited from having multiple roles in a single FHA-insured transaction. Employees are prohibited from having multiple sources of compensation, either directly or indirectly, from a single FHA-insured transaction.”
The section of the Handbook that contained the conflicts of interest language now provides that an FHA lender’s “employees will be subject to FHA’s Conflict of Interest policy.” The new Conflicts of Interest policy includes the following provisions:
“Participants that have a direct impact on the mortgage approval decision are prohibited from having multiple roles or sources of compensation, either directly or indirectly, from a single FHA-insured transaction. These participants are:
- underwriters
- appraisers
- inspectors
- engineers
Indirect compensation includes any compensation resulting from the same FHA-insured transaction, other than for services performed in a direct role. Examples include, but are not limited to:
- Compensation resulting from an ownership interest in any other business that is a party to the same FHA-insured transaction; or
- Compensation earned by a spouse, domestic partner, or other Family Member that has a direct role in the same FHA-insured transaction.”
Under the modified policies, only underwriters, appraisers, inspectors and engineers are subject to the Conflicts of Interest Policy. However, those parties are subject to what appear to be significant restrictions on compensation, even with regard to compensation of a spouse, domestic partner, or family member with a direct role in the same transaction.
The HUD glossary of terms for HUD Handbook 4000.1 includes the following definition of “family member,” which applies for purposes of the Conflict of Interest policy:
“Family Member is defined as follows, regardless of actual or perceived sexual orientation, gender identity, or legal marital status:
- child, parent, or grandparent;
- a child is defined as a son, stepson, daughter, or stepdaughter;
- a parent or grandparent includes a stepparent/grandparent or foster parent/grandparent;
- spouse or domestic partner;
- legally adopted son or daughter, including a child who is placed with the Borrower by an authorized agency for legal adoption;
- foster child;
- brother, stepbrother;
- sister, stepsister;
- uncle;
- aunt; or
- son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the Borrower.”
The Mortgagee Letter also deleted the HUD Handbook 4000.1 dual employment provisions, which had read as follows:
“The Mortgagee must require its employees to be its employees exclusively, unless the Mortgagee has determined that” the employee’s other outside employment, including any self-employment, does not create a prohibited conflict of interest.”
The existing policies addressing compensation for underwriting and quality control staff, the reporting structure for underwriters, and conflicts of interest for home equity conversion mortgage (HECM) originators remain unchanged.
FHA lenders should take a careful look at the parties subject to the new policies to assess if any changes in operations are necessary or appropriate.
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