U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D.C. 20410-8000
May 1, 2000
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 00-15
To: ALL APPROVED MORTGAGEES
Subject: Prohibited Branch Arrangements
It has come to the Department's attention that some HUD/FHA approved
mortgagees are engaging in prohibited types of "branch office" arrangements.
There have been growing numbers of arrangements referred to as "net
branches." Some of these are allowable and some are not. This reflects the
fact that the industry does not have a universal definition for the term
"net branch." Accordingly, this letter provides further guidance and
clarification regarding the Department's requirements for branch offices of
HUD/FHA approved mortgagees.
The Department has learned that some HUD/FHA approved mortgagees are engaged
in the practice of taking on an existing, separate mortgage company or
broker as a branch and allowing that separate entity to originate insured
mortgages under the approved mortgagee's HUD Mortgagee Number. Some
mortgagees refer to this arrangement as a "net branch." This, however,
constitutes a prohibited net branch arrangement. The Department has also
noted advertisements in trade publications touting such prohibited "net
branching" arrangements as a way for independent brokers to originate FHA
mortgages without meeting HUD's application and asset requirements.
Paragraph 1-2 of the Mortgagee Approval Handbook 4060.1 Rev-1 specifies that
HUD/FHA insured mortgages may only be originated, serviced, purchased, held,
or sold by mortgagees that have been approved by HUD/FHA. Approved
mortgagees are permitted to conduct such activities from branch offices.
However, separate entities may not operate as "branches" of a HUD/FHA
approved mortgagee and if the separate entity lacks HUD/FHA approval, its
mortgages constitute third party originations which violate Departmental
requirements. If the separate entity was purchased and merged into the
approved mortgagee in compliance with applicable state law(s), the approved
mortgagee must provide a copy of the merger documents and state license(s)
to HUD's Lender Approval and Recertification Division, 451 Seventh Street
SW, Room B133-P3214, Washington, DC 20410.
In contrast to the arrangements described above, another common example of a
net branch arrangement is one wherein the branch manager's compensation is
based upon the "net" profit of the branch. The HUD/FHA approved mortgagee
collects the revenue from the branch, pays the branch expenses, and then
pays the branch manager the remaining revenues, if any, as a commission.
Such an arrangement is, essentially, an alternative compensation program for
the branch manager and is an acceptable branch arrangement if all other
branch requirements are met.
Paragraph 2-17 of the Mortgagee Approval Handbook 4060.1 Rev-1 requires a
HUD/FHA approved mortgagee to pay all of its operating expenses including
the compensation of all employees of its main and branch offices. Other
operating expenses that must be paid by the HUD/FHA approved mortgagee
include, but are not limited to, equipment, furniture, office rent, and
other similar expenses incurred in operating a mortgage lending business.
Thus, the distinction between an acceptable and unacceptable alternative
branch compensation plan is not whether the manager's or any other
employee's compensation is related to the profits generated by the branch.
Rather, it is whether the operating expenses are paid by the HUD/FHA
approved mortgagee. If the expenses are paid by the HUD/FHA approved
mortgagee, the arrangement is acceptable. If, however, the expenses are paid
by the branch manager from a personal or non-mortgagee account (or by some
third party), the arrangement is prohibited and a true branch does not
As part of on-site mortgagee monitoring reviews, the Department has obtained
“employment" agreements executed by HUD/FHA approved mortgagees and their
"net branches." A number of the provisions in these agreements violate
Departmental branch requirements. For example, there are provisions that:
These provisions violate Paragraphs 1-2, 2-13, 2-17, and 3-2B of the
Mortgagee Approval Handbook 4060.1 Rev-1. Taken as a whole, such provisions
seem designed to maintain a clear separation between the HUD/FHA approved
mortgagees and their so-called "branches," which is inconsistent with the
close supervisory control over all employees mandated by the handbook.
require all contractual relationships with vendors such as leases,
telephones, utilities, and advertising to be in the name of the "employee"
(branch) and not in the name of the HUD/FHA approved mortgagee.
require the "employee" (branch) to indemnify the HUD/FHA approved
mortgagee if it incurs damages from any apparent, express, or implied agency
representation by or through the “employee's" (branch's) actions.
require the "employee" (branch) to issue a personal check to cover
operating expenses if funds are not available from an operating account.
The Department believes that the origination of insured mortgages by lenders
that have not received HUD/FHA approval increases the risk to the FHA
insurance funds and to the public. Accordingly, mortgagees found to be in
violation may be subject to the full range of HUD sanctions.
William C. Apgar
Assistant Secretary for Housing-
Federal Housing Commissioner
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