USDA Strikes Back at LO/RE Agent Dual Roles: Lenders Beware
The U.S. Department of Agriculture adopted, effective March 31, 2023, a new conflict of interest rule for its Rural Development Single-Family Housing Guaranteed Loan Program, creating headwinds for lenders allowing a person to act as both loan originator and real estate agent at the same time.
For decades, the Federal Housing Administration restricted the ability of companies from allowing a loan originator to also act as a real estate agent in a single FHA insured transaction. The rule was always difficult to interpret, and changed a number of times over the years, but prominent lenders generally imposed blanket bans on such a structure for loan originators. In a sharp reversal, FHA seemed to repeal the rule entirely – though some remain skeptical – in Mortgagee Letter 2022-22 found here: https://www.hud.gov/sites/dfiles/OCHCO/documents/2022-22hsgml.pdf.
The repeal lit a fire in the industry with companies trying to quickly determine whether they were now free to hire real estate agents as loan originators without restriction. Was the restriction really gone? There was much to explore in this regard, and many questions remain, including under a number of federal and state laws pertinent to the analysis. Most of these laws had been left unexplored over the years because there was no need. FHA did not allow the structure, so there was generally little or no interest in further analysis.
With the FHA rule repealed, however, it appears that the USDA decided to fill that void for its program. Accordingly, the USDA has added a new conflict of interest rule to its pertinent Handbook stating in part:
Avoid Conflicts of Interest. Employees that have an impact on the mortgage transaction (i.e. loan originators, processors, underwriters, appraisers, inspectors, etc.) are prohibited from having multiple roles or multiple sources of income, either directly or indirectly, in a single Rural Development transaction. Examples include but are not limited to: compensation resulting from an ownership interest in another business that is party to the same Rural Development transaction, or compensation earned by a spouse, domestic partner, or other family member that has a role in the same Rural Development transaction. Employees who are also the applicant may not participate in any part of the loan origination, approval, or closing process on behalf of the lender.
HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 4.2.
There is a lot to unpack in that short paragraph, much more than just the LO/Real Estate Agent restriction. The restriction became effective March 31, 2023.
For copies or more information, feel free to contact Troy W. Garris at troy@garrishorn.com, 301-461-8952.
