HUD Takes Aim at Warehouse Lending Arrangements

On Thanksgiving eve, HUD published in the Federal Register a notice seeking lending industry, consumer advocacy group and other input and guidance under the Real Estate Settlement Procedures Act (RESPA) on warehouse lending and other funding arrangements. The focus of HUD’s inquiry appears to be on whether changes or additional guidance are needed to Regulation X’s “secondary market” exemption, which excludes secondary market transactions from RESPA’s disclosure requirements and Section 8 anti-kickback provisions.

Warehouse arrangements and a similar but more recent financing device known as a repurchase (REPO) agreement, enable originators to sell loans into the secondary market without using their own resources to fund the loans. As loan sales, the transactions do not require that the secondary market gains earned by the lender be disclosed under RESPA, nor are the transactions subject to Section 8, unlike table funded transactions.

In its notice, HUD asks specifically for advice on what evidences a true warehouse lending arrangement, ostensibly to determine what sorts of arrangements are bona fide commercial financing devices versus those that HUD may consider to be little more than disguised table funding arrangements. For example, the agency seeks information on “what characteristics indicate a bona fide warehouse line of credit?”

Digging deeper, HUD queries the criteria warehouse lenders use to determine whether or not to fund a warehouse line. One would presume the answer is the credit quality of the originator/warehouse borrower. However, HUD is also concerned with captive warehouse arrangements which effectively tie the availability of the line to the ultimate sale of the funded loans to the warehouse lender or one of its affiliates.

This is further demonstrated by HUD’s queries on REPO agreements. REPO arrangements are another form of loan funding where the REPO seller (the originator), in exchange for the funds to originate the loan, temporarily sells the loan to a REPO buyer (the party traditionally in the role of a warehouse lender), while simultaneously agreeing to repurchase the loan (usually upon identification of a suitable secondary market investor). HUD asks under what circumstances are the REPO seller’s repurchase obligations absolute and when might they be conditional. If conditional, what factors trigger or alleviate an REPO seller from its repurchase obligations?

Other questions include whether a true warehouse line agreement should contain certain standard contract provisions; what if any loan level review, underwriting or due diligence should be conducted by the warehouse lender; and whether warehouse lenders have the ability to deny funding to individual loans. HUD also poses questions about the “basic mechanics for the sale of a loan by a warehouse lender into the secondary market” and how bankruptcy law affects such arrangements.

Certain of HUD’s questions may indicate where some agency personnel are focusing their thinking. For instance, in asking whether warehouse lenders have or should have disclosure obligations, one presumes such is under consideration.

HUD’s ultimate treatment of such transactions could also impact loan originator compensation schemes. Specifically, under the Fed’s “loan originator” compensation amendments to Regulation Z, effective April 1, 2011, a creditor is only considered a loan originator if the creditor uses table funding, rather than providing the loan funds from its own resources or from a bona fide warehouse line of credit. It will be interesting to see what effect any action by HUD under RESPA has on the Fed’s interpretation of what constitutes a “bona fide” warehouse line for purposes of the loan originator compensation rules.

Comments responding to HUD’s notice are due by December 27, 2010. It behooves lenders and originators to provide input to HUD and monitor the progress of this development.

For More Information

Stevens & Lee has been asked to respond on behalf of certain of its clients and if you would like to participate in this response, please contact Paul H. Schieber at 610.205.6040.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.