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FHA Originators Must Be W-2

FHA Originators Must Be W-2HUD handbook updated

August 28, 2006

WASHINGTON correspondent for

FHA loan originators cannot be paid as contractors.The Department of Housing and Urban Development is requiring FHA-approved lenders to pay their loan officers and underwriting and servicing employees via W-2s.

The requirement is part of a recently released update of the Federal Housing Administration handbook. The updated handbook — the first revision of the book since 1993 — provides specific guidance about the requirement.

The latest version of the handbook says that all compensation including salary, commissions and bonuses must be reported on the W-2 form.

HUD decided to update the handbook after it’s Office of Inspector General issued an audit report, “Use of Independent Contract Loan Officers to Originate FHA-Insured Loans,” HUD spokesman Lemar C. Wooley told in an e-mail statement As a result of a recommendation in that audit report, FHA agreed to revise its Mortgagee Approval Handbook that clarified the use of employees and the requirement of reporting income for employees on a W-2.

The new policy means that loan officers for FHA-approved lenders cannot be independent contractors paid under 1099s.

The agency expects the change to have minimal impact on lenders, because HUD has always required FHA-approved lenders to use employees rather than contract staff to perform critical loan functions,.

Wooley explained that underwriting and servicing staff have been included in the requirement because, as a “critical component” of mortgage lending, it is important that such staffers be compensated based on the quality of the work performed and not upon the volume of work completed as might be the case with commissioned-based compensation.

He said that if an FHA-approved lender is paying its loan officers and other staffers as 1099 contractors, FHA will make a determination if the violation creates a material risk to the FHA Insurance Fund and then take appropriate corrective action.

“We are very pleased that FHA is participating in the process of cleaning up the mortgage business,” said Don DeRespinis, a certified public accountant and partner in Connecticut-based Danbury Mortgage, a subsidiary of Charter Oak Lending Group, LLC. “As a small mortgage company who has always complied with this law, and competed against many businesses that do not comply, we are very much in favor of this. Our hope is that FHA will enforce these rules in cooperation with the IRS.”

But not everybody is happy with the clarification.

“I am, frankly, not sure why FHA is now requiring that FHA-approved lenders pay their loan officers and underwriting and servicing employees with W-2s” rather than 1099s,” said Christopher Cruise, a former loan officer and an industry trainer. “It seems to me an intrusion into a private business’ concern, and is reflective of a mentality on the part of FHA that makes the industry shy away from dealing with the product.”

As of July 31, 2006, over 9,300 lenders were FHA-approved.

Lisa D. Burden is a legal analyst for and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at:

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