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William
C. Apgar, Assistant Secretary for Housing – Federal Housing
Commissioner issued Mortgage Letter 00-15 on May 1, 2000 stating
some approved mortgagees are engaging in prohibited types
of “branch office” arrangements. There have been growing numbers
of arrangements referred to as “net branches.” Some allowable
and some not. This is because the industry does not have a
universal definition for the term “net branch.” Accordingly,
this letter provides further guidance and clarification regarding
the Department’s requirements for branch offices of HUD/FHA
approved mortgagees. HUD now tells you what is and what is
not a branch office or net branch of HUD/FHA approved mortgagees.
The
Department has learned that some HUD/FHA approved mortgagees
are engaged in the practice of taking on an existing, separate
mortgage company or broker as a branch and allowing that separate
entity to originate insured mortgages under the approved mortgagee’s
HUD Mortgagee Number. Some mortgagees refer to this arrangement
as a “net branch.” This, however, constitutes a prohibited
net branch arrangement. The Department has also noted advertisements
in trade publications touting such prohibited “net branching”
arrangements as a way for independent brokers to originate
FHA mortgages without meeting HUD’s application and asset
requirements.
Paragraph
1-2 of the Mortgagee Approval Handbook 4060.1 Rev-1 specifies
that HUD/FHA insured mortgages may only be originated, serviced,
purchased, held, or sold by mortgagees that have been approved
by HUD/FHA. Approved mortgagees are permitted to conduct such
activities from branch offices. However, separate entities
may not operate as “branches” of a HUD/FHA approved mortgagee
and if the separate entity lacks HUD/FHA approval, its mortgages
constitute third party originations, which violate Departmental
requirements. If the separate entity was purchased and merged
into the approved mortgagee in compliance with applicable
state law(s), the approved mortgagee must provide a copy of
the merger documents and state license(s) to HUD’s Lender
Approval and Recertification Division, 451 Seventh Street
SW, Room B133-P3214, Washington, DC 20410.
In
contrast to the arrangements described above, another common
example of a net branch arrangement is one wherein the branch
manager’s compensation is based upon the “net” profit of the
branch. The HUD/FHA approved mortgagee collects the revenue
from the branch, pays the branch expenses, and then pays the
branch manager the remaining revenue, if any, as a commission.
Such an arrangement is, essentially, an alternative compensation
program for the branch manager and is an acceptable branch
arrangement if all other branch requirements are met.
Paragraph
2-17 of the Mortgagee Approval Handbook 4060.1 Rev-1 requires
a HUD/FHA approved mortgagee to pay all of its operating expenses
including the compensation of all employees of its main and
branch offices. Other operating expenses that must be paid
by the HUD/FHA approved mortgagee include, but are not limited
to, equipment, furniture, office rent, and other similar expenses
incurred in operating a mortgage lending business. Thus, the
distinction between an acceptable and unacceptable alternative
branch compensation plan is not whether the manager’s or any
other employee’s compensation is related to the profits generated
by the branch. Rather, it is whether the operating expenses
are paid by the HUD/FHA approved mortgagee. If the expenses
are paid by the HUD/FHA approved mortgagee, the arrangement
is acceptable. If, however, the expenses are paid by the branch
manager from a personal or non-mortgagee account (or by some
third party), the arrangement is prohibited and a true branch
does not exist.
As
part of on-site mortgagee monitoring reviews, the Department
has obtained “employment” agreements executed by HUD/FHA approved
mortgagees and their “net branches.” A number of the provisions
in these agreements violate Departmental branch requirements.
For example, there are provisions that:
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These
provisions violate Paragraphs 1-2, 2-13, 2-17, and 3-2B of
the Mortgagee Approval Handbook 4060.1 Rev-1. Taken as a whole,
such provisions seem designed to maintain a clear separation
between the HUD/FHA approved mortgagees and their so-called
“branches,” which is inconsistent with the close supervisory
control over all employees mandated by the handbook.
The
Department believes that the origination of insured mortgages
by lenders that have not received HUD/FHA approval increases
the risk to the FHA insurance funds and to the public. Accordingly,
mortgagees found to be in violation may be subject to the
full range of HUD sanctions. (ML-00-15, 5/1/00)
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