Direct payments to mortgage lenders represent the most effective — and perhaps the only — authority in the new housing law likely to measurably increase small-dollar FHA lending, according to the Community Home Lenders of America (CHLA).
CHLA reached that conclusion after several months of discussions with its member lenders about Section 105 of the recently enacted 21st Century ROAD to Housing Act. In a letter to Acting FHA Commissioner Joseph Gormley, the association urged FHA to address the unfavorable economics of originating mortgages below $100,000.
“Lenders generally lose money on small balance loans,” CHLA wrote. Although lenders often originate them to serve their customers, the association said the economics create “significant disincentives” for lenders and loan originators to pursue them.
Small-dollar FHA loans are particularly important in rural and underserved communities and for low- and moderate-income borrowers buying lower-priced homes, CHLA said. Independent mortgage banks also originate 90% of FHA loans, according to the association’s 2025 IMB Report.
Section 105 permits FHA to establish a pilot program intended to expand access to mortgages below $100,000. It authorizes direct payments to incentivize originations, adjustments to certain FHA loan terms and costs, and grants covering borrower expenses.
CHLA said the main impediment is not a lack of borrower demand or the size of the required down payment. It is that the revenue from a small loan generally does not cover the largely fixed costs of originating it.
“While it may seem self-serving to suggest direct payments to lenders that originate small dollar FHA loans, Section 105 explicitly authorizes this, and we have concluded it is the only option in Section 105 that is likely to measurably increase origination of small dollar FHA loans,” the group wrote.
Even with direct payments, CHLA said, the loans would likely be only marginally profitable for lenders.
Borrower Grants Would Help, But May Not Increase Volume
Section 105 gives FHA authority to provide grants covering borrower down payments, closing costs, appraisals and title insurance.
CHLA said such grants would “undeniably be helpful” to borrowers but would be unlikely to materially increase small-dollar FHA production. The association argued that down payments generally are not the central obstacle because of the combination of the lower loan amounts and FHA’s low down-payment requirement.
The law also permits FHA to adjust the terms and costs it imposes on small-dollar loans. CHLA said it could not identify any such changes that would materially improve production without potentially compromising loan safety and soundness.
CHLA calculated that FHA could provide combined lender and borrower payments of as much as 3% of the loan amount while maintaining a negative credit subsidy. That calculation is based on fiscal year 2027 HUD budget estimates projecting a 3.14% negative credit-subsidy rate for FHA Title II mortgages.
A negative credit-subsidy rate indicates that the government projects program receipts to exceed expected costs. The 3% payment level is CHLA’s analysis, not a policy adopted or endorsed by FHA.
CHLA also proposed a possible mechanism for administering smaller payments. FHA could withhold the 1.75% upfront mortgage insurance premium ordinarily collected from the borrower and transmitted to the agency, then use that amount for prescribed payments to the lender, borrower or both, the association said.
LO Comp Could Block Incentives From Reaching Originators
Even if FHA improves the economics for lenders, CHLA warned that federal loan originator compensation rules could prevent the incentive from reaching the LO working on the loan.
The association said the rules would prevent lenders from passing along “even a penny” of increased compensation to an originator for a small-dollar mortgage.
CHLA attributed that restriction to the requirement that an LO’s compensation percentage from a lender employer remain consistent across loans, leaving lenders unable to pay originators more for pursuing transactions that generate less revenue but require much of the same work as larger mortgages.
The group presented the issue as another example of LO compensation rules potentially working against a consumer-protection objective. CHLA has previously called on Congress or the CFPB to modify the rules to permit employee compensation tied to such objectives.
Qualified Mortgage points-and-fees requirements present another obstacle because fixed origination expenses consume a larger percentage of a smaller loan. Section 402 of the ROAD to Housing Act calls on the CFPB and FHA to address that issue, according to CHLA.
FHA’s implementation of Section 105 will ultimately determine whether the new law changes the economics of lending below $100,000. CHLA’s position is that helping borrowers with transaction costs will not be enough: If policymakers want lenders and originators to pursue more small-dollar mortgages, the financial incentive must reach those originating them.
