HUD & FHA address Down Payment Assistance Programs

Well, it is about time we see some regulation and enforcement surrounding these DPA (Down Payment Assistance) programs!  The Chenoa program appears to finally be restricted to loans to individuals within the tribe and for loans the tribes land. “Their land” is interesting for those tribes that have a federal delegation, however, it the intention appears to be their actual reservation owned land.  

In addition, the FHA Mortgagee Letter appears to be requiring every DPA in the country to have an Attorney Opinion Letter for any programs. This will likely impact ALL closings with a Case # issued after Tuesday. It also talks about DPAs not meeting the guidelines if they have any “DIRECT OR INDIRECT FINANCIAL BENEFIT.” This would kill all housing agencies that are delivering the loans to Ginnie. In addition, it talks about DPAs must have the funds provided before closing, which knocks out a bunch more.

Please read the FHA Mortgagee Letter in detail and also the commentary below.

https://www.hud.gov/sites/dfiles/OCHCO/documents/19-06hsgml.pdf 

Chrisman’s Blog:

HUD & FHA address down payment programs

 In September Bloomberg published an expose titled, "American Indian Tribe Becomes a Player in the No-Money Mortgage Business." "Chenoa Fund, which is owned by American Indians, Utah's Cedar Band of Paiutes (257 members). "'Chenoa' is thought to be a native American word for peace, but operations like Ferguson's are raising concerns in the industry and in Washington. That's because he's running a company with a dual role, not only providing the down payments for borrowers across the country but also profiting from making the loans by charging above-market rates and fees. Some members of the tribe say they've seen little or no benefit from the business and question where the money is going."

Critics of Chenoa believe that it is merely a high-priced YSP funded DAP from a private company, and up until yesterday the industry wondered if HUD would address any ambiguity. The new FHA Mortgagee Letter 19-06, titled, "Down payment Assistance and Operating in a Governmental Capacity," certainly does. "It has come to FHA's attention that certain Governmental Entities may be acting beyond the scope of any inherent or granted governmental authority in providing funds towards the Borrower's MRI in circumstances that would violate Handbook 4000.1, the National Housing Act, and is contrary to established law."

One note I received observed, "HUD is really cracking down in two ways. It shuts down the YSP DAP since it can no longer come from 'any other person or Entity who financial benefits from the transaction (directly or indirectly).' But then it keeps the tribes on their own land with, "...the Governmental Entity is a federally recognized Indian Tribe operating on tribal land in which the Property is located or to enrolled members of the tribe."

"At first glance, this appears to say that Chenoa can only provide down payment assistance for properties on tribal land or for borrowers who are enrolled members of the tribe. Put another way, HUD's letter specifies that the Governmental Entity must be providing the funds 'in its governmental capacity.' In the case of an Indian tribe, the lender must obtain a legal opinion by attorneys for the Governmental Entity stating that, 'the Governmental Entity is a federally recognized Indian Tribe operating on tribal land in which the Property is located or to enrolled members of the tribe' and that funds must be, 'provided in the Governmental Entity's governmental capacity in the jurisdiction in which the Property is located or for the federally recognized Indian Tribe's enrolled member...'"

HUD's letter raises questions about whether or not the organization is a Federally recognized tribe, so therefore its "jurisdiction" is all of the United States? Because it is Federally recognized as a sovereign government, does that mean that the tribe has governmental authority outside of their tribal lands, or for non-tribal members? And what about financially benefitting from the down payment grant or second lien? Chenoa is a for profit enterprise, compared to a nonprofit HFA (Housing Finance Authority), and receives the interest and/or principal from scheduled payments or payoffs of these grants or second trust deeds, depending on the program and if the borrower meets certain requirements like zero delinquencies in 36 months. There is also a question about funding the second until the loan is sold to Chenoa, several days after origination. This may not comply with the requirement that the second is a liability or deduction from their bank account on or prior to loan closing.

Richard Ferguson, President of CBC Mortgage Agency which offers the Chenoa Fund, responded with, "FHA just published Mortgagee Letter 19-06, which creates a new policy on the provision of down payment assistance. The Mortgagee Letter appears to be an attempt by HUD to put Native American programs back on the reservation.

"We recognize that HUD's issuance of the Mortgagee Letter 19-06 has caused confusion and concern with how this mortgagee letter may affect the Chenoa Fund. HUD's attempt to implement new policy restricting governmental entities to operating within a specific jurisdiction violates federal law, including the Administrative Procedure Act, and restricts government DPA programs in an arbitrary and capricious manner. And HUD failed to comply with an Executive Order requiring tribal consultation. CBC Mortgage agency is reviewing all of its options, including litigation. 

"We are deeply concerned with the manner in which FHA is promulgating new policies without adequate notice or explanation given to regulated parties. These unconstitutional changes in agency policy have caused significant disruption to the ability of lenders to make commitments to borrowers. Hundreds, if not thousands, of buyers are being adversely impacted by sudden changes in rules, with no regard to existing pipelines. 

"This new Mortgagee Letter imposes unexplained new requirements. Effective immediately, HUD is requiring that all 1500+ government DPA programs have an attorney opinion in the file for new FHA loans. This will wreak havoc on the closings of thousands of borrowers while governmental agencies scramble to obtain these opinions. CBC Mortgage Agency is looking to industry participants for support in getting this unconstitutional and unlawful Mortgagee Letter withdrawn. Contact us for more information."