Lenders beware: Scrutinize down payment providers

Northwestern Financial Review, Oct 15-Oct 31, 2003 by Paul, Rusty

Among the most important housing finance innovations over the past decade is the emergence of non-profit down payment assistance (DPA) providers - groups that give down payment help to first-time home buyers. A major boon to housing, DPAs have helped thousands of savings-strapped families afford their first home.

To date, the concept has worked so well that President Bush has made DPA the centerpiece of his domestic housing agenda. In fact, recent studies by the Census Bureau and the Federal Reserve have shown down payment assistance can open home ownership to many more renters than other affordable housing programs.

As a result, DPAs have sprouted everywhere. However, like any emerging market, DPAs operating today have a varied level of knowledge, sophistication and ethics.

So, either through misunderstandings of HUD rules or sheer malevolence, some down payment providers are crossing the regulatory lines governing these programs.

This is causing HUD some understandable heartburn and could ultimately kill a very beneficial tool for transforming renters into homeowners. Worse for lenders, HUD rules also hold them responsible for the misdeeds of any down payment providers they use.

Kickbacks, improper commissions, failure to disclose their fees, and other violations of departmental regulations are a growing problem. Here are some activities to guard against when working with down payment programs:

* Kickbacks: Monetary remuneration in any form, whether cash, kickbacks, referral fees or commissions by down payment assistance providers to real estate agents and loan uance providers LO real etaaie aguiius ana loan officers is illegal. Just as HUD has always prohibited referral payments from lenders to agents, it is improper for DPAs to compensate any other party in a real estate transaction. Some DPAs are advertising their commission programs, which indicate they are unaware of this prohibition.

* Prizes for Referrals: Prizes constitute another form of compensation, so anyone offering transaction-related prizes to an individual involved or related to the process is prohibited. This does not prohibit all sales contests. However, sales contests should be properly structured so they do not violate federal guidelines.

* Training Masquerades: Some DPAs are providing compensation in the form of cruises, vacations and other trips disguised as "training." The Internal Revenue Service has very specific requirements and guidelines on when a trip involves training and when it is simply a reward. Make sure any accepted trips comply with federal guidelines.

* Lenders with DPAs: Just as lenders are prohibited from operating real estate companies, they are also prohibited from operating DPAs. This is a violation of long-standing HUD conflict of interest rules.

* Real Estate Company's with DPAs: Ditto for real estate firms that offer down payment assistance to prospective purchasers. This is a violation of HUD conflict of interest rules that prohibit real estate professionals from providing compensation to buyers, sellers, lenders and anyone else involved in a transaction. Make sure your DPA is independent and unaffiliated with a real estate company or lender.

* Failure to Disclose: HUD rules are very specific. Any cost or compensation involving the sale and transfer of real estate must be disclosed on the HUD 1 form. Not only are lenders and real estate professionals violating HUD regulations by taking compensation from DPAs, they are compounding the offense by not disclosing the improper payments.

These transgressions are violations of the Real Estate Settlement Procedures Act that carry substantial penalties. Further, HUD is concerned over a growing laxness about RESPA compliance and it has signaled a planned crackdown on RESPA infractions.

DPA programs are a major factor today in helping cashpoor first-time homebuyers enter the market. However, it is a "lenders beware" market. The popularity of these programs means many recent entrants may not know that their activities are improper or illegal - or worse, they don't care. Regardless of a DPA's understanding of the rules, HUD takes seriously any violations of RESPA and they will assume lenders know the rules of the highway.

So what should lenders do? First, check out any DPA programs you use very carefully. Are they members of the Homeownership Alliance of Non-Profit Down-Payment Providers ?

Question any DPAs you use to ensure they understand the rules and if you find they are violating any regulations or guidelines, shun them. Unless they are running a clean program, you should avoid teaming with them at all costs.

Rusty Paul is president of !Squared Communications, Inc. He is a former assistant secretary at the U.S. Department of Housing & Urban Development.