WASHINGTON — A long-running dispute between the Department of Housing and Urban Development and the agency's Office of Inspector General over down payment assistance programs is beginning to have an impact on lenders.

Some institutions, including Wells Fargo, are exiting the program, while others are hoping the disagreement will be resolved soon.

"Lenders are carefully weighing the risks regarding whether to make loans involving down payment assistance," said Krista Cooley, a partner at the law firm Mayer Brown in Washington, D.C. "This is another example in the [Federal Housing Administration] program that is creating uncertainty for lenders, which could negatively impact access to credit for those borrowers who rely on these FHA down payment assistance programs to obtain a loan."

At issue is a battle over whether the down payment assistance programs run by state and local housing finance agencies are consistent with the National Housing Act. HUD maintains they are, but its inspector general, David Montoya, claims the programs are harming borrowers. He argues that borrowers who sign up for such loans pay higher interest fees that could ultimately impact their ability to repay the loan.

Lenders are effectively caught in the middle — and getting "gun shy," according to one source who spoke on condition of anonymity.

Wells Fargo suspended its down payment assistance program, while other lenders are cutting back.

"Wells Fargo stopped offering premium priced CAP gift programs in conjunction with FHA loans in July of this year," a Wells Fargo spokeswoman said.

Scott Olson, the executive director of the Community Mortgage Lenders Association, said usually HUD and IG officials can work out disagreements.

"We would hope these issues can be resolved between HUD and the IG," he said.

The dispute over the way the down payment assistance is financed erupted last summer when HUD IG David Montoya alleged that NOVA Financial & Investment, a Tucson, Ariz., based mortgage lender, violated HUD rules by charging borrowers nominally higher mortgage rates on FHA-insured loans.

FHA's position is that the "down payment assistance provided by housing finance agencies through premium pricing is consistent with established law, guidance, and practice. OIG disagrees," according to an Inspector General semi-annual report to Congress dated July 14.

OIG finds its "objectionable" that the down payment assistance is "indirectly derived from a premium-priced" mortgage that are "not true gifts" but repaid by the borrower through higher interest rates and fees.

The NOVA case has not been resolved yet. And House Financial Services Committee Chairman Jeb Hensarling, R-Texas, recently sided with Montoya.

"The illegal financing arrangement 'places the borrower and FHA at undue risk of loan failure,'" Rep. Hensarling said in a July press release, citing an IG report on the issue.

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