Monday, January 1, 2007 - FHA Requires W-2 Employees

FHA recently updated Handbook 4060.1 Rev-2 “FHA Title II Mortgagee’s Approval Handbook” to provide guidance regarding the employment status and compensation of employees who are involved in the origination and/or underwriting of FHA loans.

Below are excerpts from Section 2-9(A) of the handbook relevant to W-2 employees:

An approved mortgagee must employ trained personnel that are competent to perform their assigned responsibilities.

Employees are those individuals who are under the direct supervision and control of an FHA approved mortgagee and where the individuals are exclusively employed by the FHA approved mortgagee in the mortgage lending and real estate fields.  The mortgagee must demonstrate the essential characteristics of the employer-employee relationship upon inquiry by the department.

Compensation of employees may be on a salary, salary plus commission, or commission only basis and includes bonuses.  All compensation must be reported on Form W-2.

Employees who perform underwriting and loan servicing activities may not receive commissions.

Additionally, the following excerpt from Section 2-13 of the handbook is related to this topic and addresses outsourcing:

A mortgagee may contract out certain administrative and clerical functions that do not materially affect underwriting decisions or increase the risk for FHA.  However, the mortgagee is still responsible for the quality of the mortgages and must ensure compliance with program requirements and RESPA requirements.  The management, underwriting, and loan originator functions may not be contracted out.

The revised Handbook should be reviewed in its entirety and is available through hudclips found on HUD’s website.  You may find it by selecting “Handbooks and Notices,” then “Housing Handbooks,” and then run a search for “4060.1”

http://www.hudclips.org/sub_nonhud/cgi/hudclips.cgi