The Broker Crisis

Written By: Bonnie Wilt-Hild, Op-Ed Writer

Well, 2009 has been an interesting year thus far for the mortgage lending industry particularly where broker business is concerned. It began with the appraisal and the subsequent prohibition on broker ordered appraisals and is heading directly to being unable to do business as a result of many national investors doing away with third party originations all together. I have also seen very many smaller wholesale lenders eliminate their TPO contracts as well due to their inability to sell the business on the secondary market so it has to make you wonder the fate of the mortgage broker.

With this in mind, I thought this week would be a good week to discuss “net branching” requirements where FHA is concerned because I have a feeling that this concept is going to take off pretty quickly in the near future. FHA does allow net branching where the origination of FHA insured mortgages are concerned but there are several guidelines that must be followed in order to create an acceptable net branch situation where FHA is concerned.

To sum up the principal in it self, FHA does allow for an approved lender to maintain and support branch offices for the purpose of originating and processing FHA insured mortgages. These branches however must meet certain criteria in order to be considered an acceptable net branch under FHA guidelines which can be found in HUD handbook 4060.1.

Per this handbook and reiterated further in ML 2000-15, guidance where net branching activities are concerned are as follows:

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 revenues, 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.

Keep in mind that this is just some basic information for those brokers out there who are considering becoming a net branch operation of an existing lender. I suggest lenders or brokers who are considering this option do further research by referring to the appropriate housing handbooks. Best of Luck.

About The Author

Bonnie Wilt-Hild - As an op-ed writer, Bonnie has held many mortgage underwriting positions, including Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".


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