HUD REMOVES 1% ORIGINATION FEE CAP

The U.S. Department of Housing and Urban Development ("HUD") released Mortgagee Letter 2009-53, which removes the 1% origination fee cap on FHA-insured loans originated under FHA's standard mortgage insurance programs. HUD made this change to be consistent with recent revisions to regulations under the Real Estate Settlement Procedures Act ("RESPA"), which, as of January 1, 2010, will require mortgage lenders to disclose a single, bundled origination fee on the Good Faith Estimate and HUD-1 Settlement Statement. As this single origination charge must include all administrative and processing fees related to the origination of the loan, as well as both the mortgage lender's and mortgage broker's compensation, HUD recognized that this aggregate charge will often exceed the 1% origination fee cap. Accordingly, to match changes made to Section 203.27 of FHA regulations, HUD will no longer limit the amount of the origination fee charged to FHA borrowers. (Limits remain on the amount of origination fees charged in connection with Home Equity Conversion Mortgages and Section 203(k) Rehabilitation loans.)
Before FHA lenders get excited about unlimited origination charges, HUD reminds lenders that their fees must continue to be "fair and reasonable" for the origination services performed in connection with FHA loans. Moreover, HUD makes clear that it intends to issue additional guidance on the amount of fees that FHA lenders may charge their borrowers. Don’t be surprised if this additional guidance is released in early 2010 and results in a percentage cap on the overall amount of fees that can be charged to the FHA borrower. For now, however, HUD's deregulation of the 1% origination fee cap is welcomed news for FHA lenders ready to comply with RESPA's new disclosure requirements.