Please don’t double dip
Putting out a bowl of vegetable or chip dip at a party invites a certain kind of antisocial mischief known as “double-dipping”. This etiquette faux pas[1]was highlighted back in the 1980s when Seinfeld’s George Costanza was berated at a party for being a ‘double-dipper’. Today, in the COVID-era of heightened awareness about communicable viruses and other diseases, everyone should realize that double-dipping is not only bad social etiquette, but it is also dangerously poor hygiene putting others at risk. Yet, there is no law against chip double-dipping. If there was a law against chip double-dipping, the argument between George and “Timmy” would just have been about ignorance, not choices.
Dual compensation and conflicts of interest
Speaking of choices, for as long as I have been a mortgage compliance attorney, I have been asked about whether realtors can act in a dual capacity as (licensed) mortgage originators on the same transaction (or get the benefit of multiple sources of compensation).[2] Double-dipping on loans isn’t a social etiquette or health and hygiene issue, but in addition to legal and regulatory issues, multiple sources of income on the same transaction pose the potential for conflicts of interest. In addition to regulatory issues, in the mortgage business, such conflicts can encourage and/or enable fraud, consumer abuse, and result in significant liability to a mortgage business[3]. Long time readers will recall that I wrote a Musing back in October 2021[4]on legal liability arising from conflicts of interest (See, Ed. #36: Yoga injuries, dog bites and cross selling liability (mortgagemusings.com). Yet, other than with respect to FHA loans, that kind of double-dipping on a transaction is generally not directly legally prohibited.[5]
FHA now permits double dipping
With all of that as background, the following headline in National Mortgage Professional[6]caught my eye: “FHA Now Allows ‘Double-Dipping’ On Loans”. HUD, in an unexpected year-end announcement made changes to its Handbook governing FHA lending, determining that it will no longer prohibit all mortgage related employees in a transaction from making money off another aspect of the transaction (directly or indirectly) provided that employee does not have a direct impact on loan approval. FHA’s 2022-22 Announcement identified underwriters, appraisers, inspectors and engineers[7]as roles which are directly involved in loan approval and thus unable to have multiple sources of direct or indirect compensation on an FHA financed transaction. HUD removed its prior conflict of interest language prohibiting all employees from having multiple roles or receiving multiple sources of compensation on the same FHA transaction.
Questions abound
As might have been anticipated had HUD sought public input before issuing these changes, the Announcement is generating a lot of questions in the mortgage industry among both compliance and businesspeople[8]about its implications. For example, some are asking whether this eliminates all conflicts of interest when realtors get paid as mortgage originators on their own transactions,[9]while others are lost in the weeds about how to figure out if an underwriter might be a domestic partner of an appraiser or home inspector.[10]
Not a game changer
Ultimately, despite the announcement seeming to make double dipping on FHA loans “legal”, there are multiple reasons why this FHA change only provides a marginal degree of flexibility. Fannie, Freddie and other mortgage loan investors that comprise the vast majority of mortgage lending in the US do not specifically prohibit double-dipping despite general prohibitions against conflict of interest, and nothing has changed there. To be clear, however, as noted in footnote #9, this change did not eliminate conflicts of interest for all employees (except those listed) whether it’s an FHA or any other transaction. Likewise, as noted in an earlier footnote, RESPA, the LO Comp Rule[11], state licensing and various state real estate and mortgage regulations and employment obligations may make double dipping compensation highly impractical, so this entire exercise may have extremely limited impact. You will still need to police the conflict issue in each instance and make sure you have complied with RESPA, LO Comp and other laws and regulations just as before the announcement on all other loans. The difference now is that a conflict is just not automatically presumed by FHA unless the employee is in a role deemed part of the approval process.
Conflicts of interest in any business are bad, but especially for businesses where professionals are in a position of trust[12]such doctors and lawyers.[13]Mortgage originators and realtors, however, are also in a position of trust for both their customers and their employers. So, double dipping (multiple sources of compensation) by these professionals on the same transaction is always a potential conflict of interest in a mortgage transaction, because you have to trust that the conflict will not result in the employee placing one role over another.
Laws, morals and etiquette
Now, I’m going to take my view of this topic up a few hundred thousand feet to close by briefly offering some philosophy on the role of law, morals and etiquette in society. Chip double dipping and conflicts of interest illustrate why laws alone are insufficient to operate in a healthy society: you also need morality and etiquette to discourage or encourage behaviors without having to spell it all out with the details of exceptions and exclusions.
As noted earlier, to my knowledge, there is no law prohibiting double dipping your chip at a party. The same can be said of innumerable potential offenses that put others at risk. Laws need to be supplemented with moral and compassionate behavior. As John Adams said about the Constitution in his October 1798 Letter to the Massachusetts militia,
“We have no Government armed with Power capable of contending with human Passions unbridled by morality and Religion. Avarice, Ambition and Revenge or Galantry, would break the strongest Cords of our Constitution as a Whale goes through a Net. Our Constitution was made only for a moral and religious People. It is wholly inadequate to the government of any other.”
I don’t think Adams had chip-dipping or dual compensation in mind at all, but most people would agree double dipping a chip is bad etiquette and a professional with a conflict of interest is less than ideal. Whether such behavior is immoral, however, probably depends on the answers to many other factual questions about intent, motives, knowledge and relationships. So, there’s no law against double dipping, but that doesn’t mean its ok to do. Likewise, it can be ridiculously petty and restrictive to live in a society that makes etiquette a matter of law.[14]
Compliance professionals struggle to explain
In fact, the questions I am getting about this remind me of my obsession with Dr. Rick from the Progressive Insurance commercials revealed in a previous Musing. There, I noted that mortgage compliance professionals are often asked by salespeople to show them where it is written in the law or rules that something is prohibited (or required) to justify their position. If it’s the law, then the issue is decided-there is no choice to be made. So, compliance professionals find it easier to point to a law that says you must or cannot do something. To have to explain why something is permitted but imprudent is a much more challenging discussion[15]. Rather than explaining all about the risks of conflicts and the various other laws it could implicate, when it came to whether a real estate agent could get hired as a mortgage originator, it was just a heck of a lot easier to say that FHA flat-out prohibits dual compensation to end the discussion. Now that crutch has been taken away from compliance and risk managers.
Please allow this Musing to help re-articulate those concerns.
[1] A French (double) dip (and entendre)!
[2] Likewise for mortgage originators who also want to be insurance salesmen, realtors, financial advisors etc.
[3] Conflicts can lead to conscious or subconscious bias that interfere with any role of trust.
[4] Also published in American Business Media’s Mortgage Banker Magazine in October 2021.
[5] There are, however, some individual state laws against transactional double-dipping applicable to realtors and other settlement service professionals and most standard employment agreements prohibit such conflicts which reinforces ordinary duties of loyalty. Indirectly, RESPA, TILA (through the LO Comp Rule), state licensing and other laws also make it very difficult to impossible do legally or prudently.
[6] American Business Media’s publication focused on mortgage loan officers and mortgage brokers.
[7] I know what underwriters, appraisers and inspectors do in connection with a loan approval, but I am not familiar with the role of engineers. Maybe that relates to HUD financed commercial projects.
[8] I also have questions as to why HUD/FHA felt it necessary to issue this change without seeking public input before making the changes effective immediately.
[9] This changes nothing about conflicts of interest risks.The FHA prohibition was a “Chesterton’s fence“. See also, this Musing from December 2021.
[10] Nothing has changed in that regard, so you had that sort of problem previously.
[11] Under TILA/Reg Z § 1026.36 (a) (1) (i) (c) a realtor would normally be excluded from the LO Comp Rule, but if they get compensated as an originator on a transaction that exemption doesn’t apply.
[12] Back in the 1990s, there was some discussion in Washington DC of amending RESPA’s anti-kickback provisions to apply only to “people in a position of trust”. Unfortunately, that went nowhere, and RESPA still remains the same consumer protection statute it has been since the 1970s.
[13] Doctors, lawyers and other professions have ethical guidelines enforceable by the rules of the profession.
[14] For example, language policing or word elimination.
[15]Kind of like this scene from Dumb and Dumber: “So, you’re telling me there’s a chance.”