FHA Begins Allowing PEOs – Mortgagee Letter 2016-18



The Federal Housing Administration (FHA) program long purported to prohibit approved mortgagees/lenders from using professional employer organizations (PEOs). In Mortgagee Letter 2016-18, FHA amended HUD Handbook 4000.1 to now allow use of PEOs with certain limitations.

As stated in this excerpt from ML 2016-18:

Certain requirements in HUD Handbook 4000.1 prevent FHA approved Mortgagees from engaging in contractual arrangements with professional employer organizations or similar entities for human resources-related services such as payroll processing, payment of employment taxes, and/or the provision of employee benefits. Based on an analysis of relevant policies and potential risks, HUD believes that Mortgagees should be allowed to engage in contractual arrangements of this type, but only in cases where the Mortgagee retains full responsibility and legal liability for the actions of covered employees with respect to HUD regulations and requirements.

In this regard, ML 2016-18 provides in part:

Compensation (I.A.3.c.iv(B)(3)(b)(ii))

The Mortgagee must not compensate employees who perform underwriting, Quality Control (QC), or mortgage servicing activities on a commission basis. The Mortgagee or its permissible contractor must report all employee compensation on IRS Form W-2.

Use of Contractors (I.A.6.j)

i. Permissible Use

The Mortgagee may use contract support for administrative, human resources, and clerical functions that include:
• clerical assistance;
• mortgage processing (typing of mortgage documents, mailing and collecting verification forms, ordering credit reports, and/or preparing for endorsement and shipping Mortgages to the Purchasing Mortgagee);
• ministerial tasks in mortgage servicing (processing of a foreclosure action, preservation and protection, and/or tax services);
• legal functions;
• quality control; and
• human resources services (payroll processing, payment of employment taxes and the provision of employee benefits) provided by a professional employer organization or a similar entity.

ii. Impermissible Use

The Mortgagee may not contract with any Entity or person that is suspended, debarred, under a Limited Denial of Participation (LDP), or who is otherwise excluded from participation in FHA transactions. A Mortgagee must not contract out management or underwriting functions.

iii. Standard

The Mortgagee must ensure that the contracting out of certain functions does not and will not materially affect underwriting or servicing decisions or otherwise increase financial risk to FHA. The Mortgagee remains responsible for the quality of its FHA-insured Mortgages and must ensure that its contractors fully comply with all applicable laws and FHA requirements. The Mortgagee may own or have an ownership interest in a separate business Entity that offers such contract services. Employees covered by a contract for human resources services described above must remain under the direct supervision and control of the Mortgagee. FHA considers the Mortgagee, the employer with respect to all activities related to FHA business, and the Mortgagee retains full responsibility and legal liability for the actions of employees covered by a contract for human resources services with regard to all HUD regulations and requirements.

iv. Required Documentation

The Mortgagee and its contractor must have a valid contractual agreement in place that specifies the roles and responsibilities of each party.

A copy of the full Mortgagee Letter can be found here: https://portal.hud.gov/hudportal/documents/huddoc?id=16-18ml.pdf

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