For years your Corporate Escrow Administrators have warned you about the ramifications of closing a wrap of an existing FHA loan. The story of Allen Clussive demonstrates how the office of Housing and Urban Development takes this offense seriously. If that was not enough, the letter from HUD makes it crystal clear. But it makes you wonder what the debarment process is and how FHA knows if a settlement agent has been barred?

When the U.S. Federal Government discovers an individual or Company has acted inappropriately there is policy and procedure for suspending or debarring. The U.S. Federal Government halts the individual and/or Company from doing further business with or providing services in relation to a contract or transaction.

Companies or individuals who have been suspended or debarred are listed on the Excluded Parties List System (EPLS). This system is in place to protect the public interest so the Government does business only with responsible parties.

Settlement agents, title and escrow companies are subject to suspension or debarment if it has been determined they acted inappropriately on a transaction involving the U.S. Government; for example, wrapping a new loan around an existing FHA loan. Additionally, any affiliate or division of a company which has been barred is subject to the same fate.

The lender is responsible for ensuring all service providers in a real estate transaction (including the settlement agent and title officers and their companies) do not appear on this list for any new FHA or VA loans. The lender must log on to https://www.epls.gov and enter the name of the individual and company.

In most cases the search will result in no matches. If there is a potential match, the lender will need additional information to determine whether or not the provider is the individual or entity shown on the EPLS.

Each lender has their own requirement of what information they will accept in order to clear the potential match. In the case of an individual, this information could be their social security number, middle name, previous name or driver's license. Settlement agents may choose whether they will provide their personal, non–public information to the lender or not.

The Company does not require the settlement agent to provide such information if they are uncomfortable complying with the request. If they choose not to, the file should be transferred to another settlement agent who is not a potential match or is willing to provide their personal, non–public information to the lender.

It is important to note HUD does not simply suspend or ban someone without going through a notification period. Once notified they have 30 days to respond with information opposing the action and request a hearing.

Access to EPLS is free and the system only contains the names of individuals or companies who have been suspended or debarred by the Federal Government. Some of the investors in the lending industry are including requirements for the originating lender to ensure participants in the loan do not appear on this list. Here is an excerpt from Fannie Mae's Single Family Selling Guide:

A Limited Denial of Participation (LDP List) is an action taken for failure to comply with the specific standards for a HUD program. A LDP Listing excludes a party from further participation in a specific HUD program area. A LDP Listing generally expires in one year. For access to the LDP List log on to: http://portal.hud.gov/hudportal/HUD?src=/topics/limited_denials_of_participation It is up to each lender to determine their compliance with FHA, VA and Fannie Mae requirements. As a result, some lenders have decided to contract with third party vendors to assist them. Some of these third party vendors charge for their services and lenders might try to pass this charge on to the escrow or title company.

Settlement agents who receive a request to sign up with a third party company should decline such request, especially if the third party charges a fee. Remember access to the EPLS and LDP List is free. Settlement agents may log on, enter their own information and send it to the lender in order to prove they are not an exact match.

Keep in mind all individuals and companies must be cleared for any contract or transaction involving the U.S. Government. FHA and VA loans are the most common instances where the settlement agent might receive a request for additional information but is not limited to these types of transactions. Transactions involving HUD REOs, USDA financing and VA REOs also require clearance of the EPLS.