If you’re an underwriter, originator, closer, attorney or other professional who specializes in HUD-insured loans, fair housing principles probably aren’t top of mind as you navigate your workday.  Still, it pays to have a working knowledge of HUD’s protected classes.  Dinsmore was recently involved in a 223(f) closing that provides an instructive case in point.

The hurdle

As Lender’s counsel on a routine 223(f) transaction, Dinsmore conducted a title/survey review and coordinated with Borrower’s counsel to obtain a HUD-compliant pro forma title policy.  A 1981 recorded agreement between the Borrower’s predecessor and the city contained the following provision:

"The market-rate housing is to be limited to usage by single-family residents.  The term 'family' . . . is defined as follows:  an individual or two or more persons related by blood, marriage, or legal adoption, living together as a single housekeeping unit in a dwelling unit, including foster children . . . and not more than one roomer.  A roomer is a person living in a dwelling unit and is other than part of the family."

This does not comply with Section 5.105(a)(2) of Title 24 of the Code of Federal Regulations, which provides the following:

“A determination of eligibility for housing that is assisted by HUD or subject to a mortgage insured by HUD shall be made . . . without regard to actual or perceived sexual orientation, gender identity, or marital status.”  (Emphasis added). 

By not allowing more than one “roomer” in a unit, the 1981 recorded document discriminated on the basis of marital status, in conflict with the above-referenced 2012 federal regulation.

HUD’s response

To address this issue, HUD asked the parties to obtain a formal amendment to the document and record the amendment prior to closing. This had the potential to derail our closing, as obtaining and recording an amendment would have likely taken several weeks, if not months.

The resolution

The parties were able to obtain an email from a city attorney assuring us that the city would not enforce the provision requiring discrimination against roomers.  The attorney’s email further bolstered our cause by 1) citing a state law that prohibits discrimination based on marital status and 2) noting that the city would not object to formally amending the recorded document on a post-closing basis.

The email from the city, in combination with the standalone Borrower certification and the title company’s assurances, was ultimately enough to convince HUD that a formal amendment to the recorded instrument was not necessary (at least not prior to closing).

The takeaway

Recorded documents that discriminate on the basis of marital status need to be identified early in the journey to closing (ideally before the loan application is submitted to HUD), so that the Lender can bring them to HUD’s attention and take the first stab at finding a solution.