Following is the text of a letter sent by Nicholas Retsinas, assistant secretary for housing of the Department of Housing and Urban Development, to FHA lenders. His footnotes have been inserted into the text in brackets.
It is the policy of many FHA-approved lenders to permit overages to be charged in the origination of FHA-insured single-family mortgages. Overages occur when loan officers are allowed to charge a higher interest rate, origination fee, or discount points for a loan than the lender's market rate for FHA-insured loans during the same period of time. The loan officer may be permitted by the lender to retain all or some portion of the overage.
[Note that while higher fees are permitted for section 203(k) rehabilitation loans, loan origination fees for all other FHA-insured mortgages may not exceed 1% of the basic loan amount ]
Although not inherently discriminatory, in some instances the practice of charging overages may result in discrimination on a prohibited basis in violation of the Fair Housing Act (FHAct) or the Equal Credit Opportunity Act (ECOA). In addition, in some instances, the practice of permitting overages may result in a violation of FHA's tiered-pricing role.
Both the fair-housing and equal opportunity acts may be applied to overages in the same manner. Any time a loan officer is permitted discretion in setting the price of a loan, disparate treatment on a prohibited basis may occur.
[Under both laws, prohibited bases include race, color, religion, sex and national origin. The fair-housing act includes handicap and familial status as additional prohibited bases. ECOA includes marital status (if able to contract), receipt of income from a public assistance program, and the good-faith exercise of any right under the Consumer Credit Protection Act.],
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. In such cases, a violation of FHAct and ECOA will be found if there is no legitimate, nondiscriminatory reason for more frequent and/or higher overages charged to borrowers of a particular race.
A lender whose policy permits overages should also evaluate whether the policy has a disparate impact on applicants on a prohibited basis. For example, a lender may review its lending performance and find that, despite treating all applicants evenhandedly, a disproportionate number of minorities receiving loans pay overages.
To justify this policy, a lender would have to demonstrate that there was a business necessity for the practice. In addition, the practice would still be impermissible if the business objective could be achieved by other means without a discriminatory impact.
In addition to ECOA and FHAct, lenders should be careful that overages are not applied in a manner that would violate FHA's tiered-pricing rule.
Under the rule, a lender's customary lending practices may not provide for a variation in "mortgage charge rates" (discount points, origination fee, and other such fees under the control of the lender) exceeding two percentage points on its FHA-insured single-family mortgages within a geographic area. Any variation within two percentage points must be based on actual variations in fees or costs to the lender to make a loan.
Since overages do not increase -the cost of origination, there can be no justification for a lender to have customary lending practices that permit differential application of overages to different loan amounts for FHA-insured loans. Thus a lender who permits overages only on FHA loans under $100,000 violates FHA's tiered-pricing role. FHA-approved lenders that permit overages to be paid to loan officers should review the terms of the loans they make to ensure that their overage policy is applied fairly and without regard to a prohibited factor under the FHAct and ECOA. FHA-approved lenders also should determine that any permitted overage does not violate the tiered-pricing Rule. FHA-approved lenders should include in their quality control programs a system to monitor and supervise their overage activities to prevent illegal discrimination or violations of tiered-pricing prohibitions.
FHA/HUD has discussed the issue of overages with other financial regulatory agencies and the Department of Justice. If you have any questions concerning this mortgagee letter, please contact the Office of Lender Activities and Land Sales Registration at 202-708-1515.