MD Affordable Housing Trust and HUD Closing Contractors

Legal Opinion: GHM-0074

Index: 4.510

Subject: MD Affordable Housing Trust and HUD Closing Contractors

March 16, 1993

Ms. Margaret McFarland

Principal Counsel

Maryland Department of Housing

and Community Development

100 Community Place, Suite 2.300

Crownsville, MD 21032-2023

Dear Ms. McFarland:

The recently enacted law creating the Maryland Affordable

Housing Trust (MAHT) has been brought to our attention, and

June Auerbach of my staff has discussed it with David Rawle of your

office. According to the law, the creation of MAHT was for the

purpose of assisting in the provision of affordable housing in the

State. The law provides that a title insurer, or its agent or

approved attorney shall pool and commingle trust money received

from clients in connection with escrows and closings if a separate

deposit of the trust money would generate interest of \$50 or less.

As we advised Mr. Rawle, HUD acquires the titles to properties

through our mortgage insurance operations. We then sell the

properties and we have contracts with attorneys, escrow companies

or the title companies to close our sales transactions. These

contracts contain the following requirements:

\"The Contractor title company, escrow company or

attorney shall establish a separate non-interest bearing

escrow account for all proceeds in the name of the

Contractor with the restriction \'As Trustee for the U.S.

Department of Housing and Urban Development\'. Since it

is a matter of individual bank policy rather than a

standard operating procedure on the length of time a

check is held, most certified/cashier\'s checks will clear

in overnight processing. The escrow account, therefore,

shall be established in a bank that gives credit for the

deposited check immediately upon clearance, will issue

a receipt for the deposit and which has the capacity to

transmit all of the information contained in SAMS Form

1103, Wire Transfer Transmittal, in the exact format

shown. If at any time the Contractor is unable to

continue compliance with these requirements, the

Contractor shall immediately notify the GTR. Such

notification shall describe the efforts exerted by the

Contractor to comply and shall include proposed actions

to achieve compliance. . . . On the day of closing or the

next banking day, deposit the sales proceeds and using

the SAMS 1103, Wire Transfer Transmittal, provided by the

Field Office, initiate the request for the wire transfer

of the proceeds due HUD via FEDWIRE in accordance with

instructions provided by Treasury and are presently being

used by the private sector banking community in effecting

wire transfers of funds within the Federal Reserve

System.\"

Our instructions concerning closing contractors provide that

if the depository bank does not immediately wire the deposited sale

proceeds, the closing contractor must obtain an official dated

receipt for the deposit and wire transfer request. At the time of

the actual wire transfer, the closing contractor must obtain a

proper dated confirmation of the wire transfer, to verify proper

and timely transfer of funds.

These requirements were established in 1990 as a result of very

large losses to our insurance fund through closing contractors

who embezzled our funds. The absorption of million dollar losses,

plus the resulting adverse publicity, were very detrimental to the

accomplishment of the goals of the Department. Many hours were

spent by HUD Program, Administrative and Inspector General\'s

offices, as well as our office, to arrive at suitable requirements

to eliminate the risk of HUD\'s suffering any such losses in the

future. Since our new requirements have been established, we have

fortunately not had any more such losses.

There is no situation under which the Department would ever

again permit closing contractors to commingle funds from closings

of FHA-acquired properties with the contractor\'s other escrow

funds. We consider that our protection of our insurance fund

(Mutual Mortgage Insurance Fund) mandates that the proceeds from

the sale of our properties be deposited in a separate non-interest

bearing trust fund.

Ms. Auerbach advised Mr. Rawle that HUD closing contractors

would not be able to comply with the new Maryland law. In

Ms. Auerbach\'s discussion with Mr. Rawle, he asked whether HUD had

legislation or regulations which were specific on the point of the

requirement for the separate trust funds. As Ms. Auerbach

explained then, and as we have stated in this letter, the

requirement is contained in our contract with closing contractors.

Mr. Rawle called Ms. Auerbach subsequently and advised that the

position of his office was that HUD must comply with the Maryland

law. Since HUD cannot comply and in order that there be no

question with respect to the priority between any state\'s

requirements and those of HUD involving the handling of our sales

proceeds by our closing contractors, we are publishing a regulation

that contains our requirement with respect to the separate non-

interest bearing trust account. We plan to have the regulation

published in the Federal Register as an interim rule in April and,

then after the comment period, published as a final rule.

We are certainly in agreement with the proposed use of the

interest which is earned on the MAHT accounts and laud your efforts

to assist low-income home buyers. However, as much as we would

like to assist you, HUD must take the steps which are necessary to

protect its own funds from possible fraud or dishonesty on the part

of the contractors who handle the funds. In addition, considering

our requirement that the funds be wire transferred to a Treasury

account as soon after deposit as possible, we do not think that

there would be much interest, if any, generated on the funds

deposited in connection with the sales of our properties in the

State of Maryland.

We are going to advise our field offices which have

jurisdiction over Maryland properties that our closing contractors

in those areas must continue to adhere to the requirements of their

contracts with HUD and that they are not to place any HUD funds in

a MAHT account.

If you would care to discuss this matter further, feel free

to call me or Ms. Auerbach at 202-708-3070.

Very sincerely yours,

Bruce S. Albright

Assistant General Counsel

Home Mortgage Division