FHA clarifies dual role restrictions for single-family transactions

The Federal Housing Administration (FHA) issued clarification on Thursday regarding the extent in which employees in single-family housing transactions are allowed to play dual roles — and how much they are allowed to be compensated from a single FHA-insured transaction.

The clarification, issued in a Mortgagee Letter by FHA Commissioner Julia Gordon, notes that participants who 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.”

In particular, the restrictions pertain to four types of employees: underwriters, appraisers, inspectors and engineers.

According to the letter, most of the questions regarding dual roles and compensation have been related to indirect compensation, which are payments that are not directly made to the employee in an FHA-insured transaction.

Per the FHA, examples of restricted indirect compensation include payments that “result from an ownership interest in any other business that is a party to the same FHA-insured transaction” or transactions in which an employee’s spouse, domestic partner, or family member who had a direct role in the same transaction received payment.

The goal of these restrictions is to keep the employees who are directly involved in loan approval decisions from playing dual roles or earning multiple sources of payment from one FHA-insured transaction.

These restrictions may be especially important at a time when higher-than-average mortgage rates, which hovered above 6.3% on December 16, as well as inflated home prices and dwindling mortgage demand, are causing turmoil in the housing market. Without these restrictions, it could be challenging for the agency to tamper risk from employees in single-family housing transactions who have a vested interest in approving unqualified borrowers.

The restrictions are effective immediately, according to the FHA. However, the agency will be accepting feedback from industry professionals for a period of 30 days from the date of the letter.

Those industry professionals who do not have a direct impact on mortgage approval decisions are allowed to play dual roles and/or have multiple sources of compensation in the same transaction, according to the letter.