I am a broker helping buyers purchase their first home with FHA financing. The buyers knew that they needed to bring 3% of the purchase price to closing. They have had an unexpected setback and have asked me to loan them $500 to complete their 3% down payment. I know these kids are good for it, I would like to help them buy their first home and I’d hate to see them lose the home (and their earnest money) because they were short $500. What are the ramifications if I loan them the money?
FHA borrowers must invest at least 3% of their own money when purchasing a property. Acceptable sources for the 3% include an outright gift to the borrower from: a relative, the borrower’s employer or labor union, a charitable organization, a government agency, or a public entity with a program to provide home ownership assistance. The money may not come from the seller, a real estate broker, or lender. If a broker loans or gives the borrower $500, the broker is violating HUD rules. Through the issuing what HUD calls an “LDP” (explained below), HUD can severely punish a broker.
The Vth Amendment to the United States Constitution provides that the federal government may not deprive persons of life, liberty or property without due process of law. For the government to deprive you of a right, you must have notice and an opportunity to defend yourself. HUD, however, takes the position that doing business with the federal government is a privilege, and not a right. If HUD perceives that it does not want to do business with you, HUD can issue real estate brokers, title companies, and mortgage lenders a limited denial of participation (“LDP”).
An LDP is generally affective for one year and prohibits the sanctioned broker from benefitting from any HUD programs. This means that a real estate broker may not list property with an FHA loan nor may the broker sell a property or otherwise be involved in a transaction where a buyer wishes to purchase a property with an FHA loan. The only exemption from the LDP is that a broker who has received an LDP may sell his own personal residence.
HUD does give a broker who has received an LDP an opportunity to convince HUD that HUD has made a mistake or been too harsh. Among other things, the broker may request an informal conference for reconsideration of the LDP within 30 days of receipt of notice of the LDP. If an informal conference is requested, the broker has a right to have it held within 15 days of the department’s receipt of the request. If the broker is not satisfied with the results after the informal conference, the broker may request a formal hearing before a HUD hearing officer.
For some brokers, a substantial portion of their work comes from FHA transactions. Since the HUD LDP system is one in which the broker is essentially guilty until proven innocent, brokers should be especially vigilant about avoiding improprieties in HUD transactions.
Other examples of the type of schemes which will invite LDP sanctions are the straight forward and disguised kick backs discussed in last month’s column (“How to Commit Loan Fraud”) and transactions involving:
- A phony lease for loan qualification
- The bogus “Gift” Letter
- Bogus owner occupancy claims
- Change in financial circumstances post loan application, pre-closing
- Seller concessions not disclosed in the contract or settlement statements
- Agent concessions to a buyer which induce a buyer to inflate the purchase price.
Broker/owners need to be especially vigilant to avoid behavior by their licensees which could lead to the discipline of the entire company.
A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.