Dual-employment can result in legal problems, attorneys say

A real estate agent can wear two hats in a transaction involving a Federal Housing Administration loan, providing both real estate and loan origination services to a client, thanks to revised guidelines published by the administration in December.

While this can be an opportunity for lenders to pull in more purchase business, the multi-tasking of employees can also spell legal trouble for mortgage companies, especially if the dual-employment arrangement is not set up correctly, attorneys say.

Accidentally running afoul of Real Estate Settlement Procedures Act (RESPA) section 8, which prohibits kickback schemes, and state regulations prohibiting dual employment are both issues that are top of mind for mortgage shops.

Since the FHA moved to revise its guidelines, law firms in the financial services industry have been inundated with questions from lenders about whether or not they can set up such arrangements at their companies and what potential legal problems can emerge from doing so.

"There's questions about RESPA, section 8, so I think that's a major hurdle…this may be perceived as a loophole," said Richard Horn, partner at law firm Garris Horn, LLP. "And then there's also the issue with state law. A lot of the lenders that want to do this might be subject to state licensing laws or other state substantive restrictions on this activity."

An example of such a state would be Utah, which prohibits dual employment on a mortgage transaction.

On the surface, allowing a real estate agent to also originate an FHA loan is a no-brainer. But attorneys urge caution. 

"The issue now is that even if lenders hire real estate agents as loan officers, they need to worry about RESPA because they can't hire them and have them be employees as a disguise for paying them for referrals that they bring from the real estate company," said Daniella Casseres, partner at Mitchell Sandler.

An instance like this would be a violation of RESPA, which the Consumer Financial Protection Bureau monitors. 

The last case against a lender accused of alleged kickbacks by the CFPB was in 2014, though Horn believes that RESPA violations may be under the microscope again.

"I think a lot of lenders have this false sense of security that the CFPB is not going to enforce RESPA," Horn said. "But the CFPB hasn't ignored RESPA. They've put out new FAQ's on [marketing service agreements] and they just put out an advisory opinion on mortgage comparison websites. I think that's a sign that the CFPB is looking at RESPA again, so I would really urge lenders to confer with counsel before this type of arrangement to make sure that they're not low-hanging fruit." 

Despite potential legal hurdles, lenders are interested in rolling out this type of arrangement because if you hire a real estate agent, they're most likely going to capture most of their loans, industry stakeholders say.

"We were getting calls about this before the FHA made changes and now I have lenders calling almost every day for advice on how to do this because they want to start rolling out the program," said Casseres. "It's happening nationally at large lenders and small lenders and everybody's competing with each other and no one wants to get left behind."

In order to stay in the green, real estate agents that work for lenders have to do the work that loan officers do. "They actually have to take the application, negotiate terms, and all of the other normal things that loan officers have to do," Casseres added.

Concerns around allowing real estate agents to hold a dual role as a loan officers have been a long-contested issue, around since the 70s, said Brian Chappelle, founder of Potomac Partners. 

"I think many in the mortgage industry [have always been] concerned about the risk if a real estate agent can have dual roles in the transaction," he added in a written statement. "I think there are [some lenders] that are considering it, but it will take some time before we know if it will have any real impact."

From the Department of Housing and Urban Development's perspective, dual-employment has now been ruled a non-issue. 

The administration "implemented the policy clarifications after its independent research confirmed the assertion made by industry participants that FHA conflict of interest policies were more restrictive than those of other agencies and regulators," FHA's spokeswoman said in a written comment. 

In the past decade, the FHA has revised their conflict of interest prohibitions twice. Once in 2015, which allowed loan officers to hold a real estate license, without performing both functions. And the second time was in December 2022, wherein the FHA moved to allow dual employment. Appraisers, underwriters, inspectors and engineers cannot have multiple roles or sources of compensation, per the administration.

Other housing agencies including Fannie Mae and Freddie Mac allow dual-employment arrangements. Meanwhile, the United States Department of Agriculture, which also guarantees loans, does not.