Bulletin: SLS2008018

Dear Associates:

This Bulletin supplements our Bulletins SLS2007008 and SLS2007011.

A previously adopted regulation found at 24 C.F.R. § 203.19(c) prohibiting certain sources of down payment funds (See Bulletin SLS2007008), which was challenged in court and enjoined from enforcement (See Bulletin SLS2007011), has now become law as part of the Housing and Economic Recovery Act of 2008 (Public Law 110-289).

12 USCS §1709(b)(9)(C) applies to those transactions in which the mortgage is insured by the Federal Housing Authority (FHA), and as revised by the Housing and Economic Recovery Act of 2008, states:

"(C) Prohibited sources. In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:

(i) The seller or any other person or entity that financially benefits from the transaction.

(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).

This subparagraph shall apply only to mortgages for which the mortgagee has issued credit approval for the borrower on or after October 1, 2008.

The referenced subparagraph (A) refers to the cash investment (down payment) requirement for FHA insured loans. The Housing and Economic Recovery Act of 2008 also amended the required amount of the down payment which now must be an amount equal to, but not less than, 3.5% of the appraised value of the property. Previously the amount was not less that 3% of the Secretary's estimate of the cost of the acquisition. The required amount of 3.5% can be increased by the Secretary of HUD.

If you have questions as to a particular closing when the down payment is being funded by someone other than the purchaser, you should seek written instructions from the lender.

We will keep you advised of any new or modified regulations concerning this issue.

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