The U.S. Department of Housing and Urban Development has said no to seller funded downpayment assistance on federally insured loans.

The agency issued a final rule Friday prohibiting DPA on loans insured by the Federal Housing Administration if the funds are provided by either the seller or anyone else that stands to financially benefit from the transaction, the Mortgage Bankers Association announced Friday.

"MBA expressed concerns with the final rule," the statement said.

A statement from an executive for the Washington, D.C.-based trade association suggested HUD's decision will significantly impact FHA volume.

"Indeed, seller-funded downpayment assistance programs comprise approximately 30 percent of FHA's total volume, providing important assistance to cash-strapped borrowers," said MBA Senior Vice President of Public Policy Steve O'Connor in the statement. "While there is a need for stronger quality control measures, we shouldn't throw the baby out with the bathwater and end the program."

MBA had previously recommended that additional risks from seller-paid DPA could be mitigated by reducing the combined maximum of seller paid fees, which was at 6 percent, and seller-assisted downpayments, which was limited to 3 percent, from a total of 9 percent to a total of 6 percent.

"This will significantly mitigate the risk that total seller contributions will not exceed market norms and result in an inducement to purchase that has the propensity to inflate value in order to cover the seller's costs," a letter from the group said at the time.