Nicolas Retsinas, assistant secretary for housing at HUD, has slammed the door on the practice of overages on FHA mortgages.
Saying he was striking a blow for fair lending, he has sent a letter to lenders saying that discriminatory charges would not be tolerated on loans insured by the Federal Housing Administration, which is part of the Department of Housing and Urban Development.
Overages occur when lenders charge above-market rates or fees to some customers. They are believed by regulators to be more common in low-income and minority areas.
The practice has long been tolerated and even encouraged by some lenders, who often pay extra commissions to loan officers who originate such loans.
More recently, however, the practice has come under fire. Both the Federal Reserve Board and the Office of the Comptroller of the Currency have warned lenders about abuses, especially involving bias. Huntington Mortgage Co., Columbus, Ohio, dropped overages this summer, and sources said the move was in response to a strong warning from the Comptroller's office.
Since then, a number of other institutions have discontinued overages, the most prominent being Banc One Mortgage, Indianapolis, and BancBoston Mortgage Corp., Jacksonville, Fla.
The issue was also the subject of extensive debate at the annual conference of the Mortgage Bankers Association in Boston last week.
Until the recent policy changes, some 43% of all lenders allowed overcharges, according to Carl D. Jacobs Associates, a consulting firm based in Woodland Hills, Calif.
Mr. Retsinas, who is also the federal housing commissioner, acknowledged in his letter that lenders were beginning to grapple with "the potentially discriminatory impact of certain widely accepted business practices" and added that "FHA has a special responsibility to lead in these efforts," according to Dow Jones.
While Mr. Retsinas did not go as far as to mandate an end to overages on FHA loans, his strong stance will make it very risky for lenders to continue the practice. FHA loans account for about 12% of the mortgage market
A Fannie Mae spokesman said the secondary-market giant does not regulate pricing by lenders on the conventional loans it buys.
In his letter to mortgage lenders, Mr. Retsinas said the Fair Housing Act and Equal Credit Opportunity Act may be applied to overages. He took the hard-line that anytime a loan officer is permitted discretion in setting prices, disparate treatment that violates the law may occur.
"For example, a lender may charge overages to borrowers of a particular race more often or in larger amounts than borrowers of another race in similar circumstances," Mr. Retsinas said. He added that a violation "will be found if there is no legitimate, nondiscriminatory reason for more frequent and/or higher overages charged to borrowers of a particular race."
