FHA Deal Accelerators: Best Practices for Handling the Opinion of Borrower's Counsel
If you were to survey U.S. Department of Housing and Urban Development (HUD) closing attorneys about what causes them heartburn between firm commitment and closing, you’d get a lot of feedback about the Opinion of Borrower’s Counsel. The opinion may be a relatively minor document in the typical HUD-insured closing docket (I can think of at least a dozen documents that carry greater legal significance), but it packs a mighty punch in terms of its ability to derail a closing.
Of all HUD’s standardized documents, the opinion seems to be the one that’s least well-suited to standardization. After all, it’s an opinion – everyone’s entitled to their own, right? Unfortunately for the private bar, HUD’s answer is an unequivocal no! Federal Housing Administration (FHA) multifamily and healthcare programs are national programs that are premised on uniformity. If HUD attorneys open the door to negotiating the opinion from deal to deal, they chip away at uniformity and contradict their client’s instructions. That’s why HUD attorneys are trained to “just say no” to most requests to tweak the opinion.
Nevertheless, borrowers’ counsel persist in making their case to HUD counsel as to why they cannot abide by certain provisions in the opinion. The back-and-forth adds time to the closing process – time that would almost always be better spent on more consequential documents.
So what can lenders and borrowers do to reduce friction surrounding the opinion? Here are some tips:
1. Lenders Should Have a Referral List.
When a borrower’s attorney proves to be efficient on a deal, the lender should inquire about whether he or she is willing to work for future borrowers. If so, add that attorney to your referral list, making a note of where he or she is licensed to practice law. Grow your list over time so that you have candidates licensed in a broad range of states. When your borrowers aren’t sure who they want to work with, make a match.
2. Lenders Should Screen Borrowers’ Choice of Counsel.
Many borrowers have established relationships with attorneys. In those cases, find out whether the attorneys have HUD experience, and if so, which HUD offices they’ve worked with. If they’ve worked with, say, the Cleveland office, call the Cleveland chief counsel and get feedback. If the feedback isn’t positive, or if the attorney hasn’t worked on a HUD deal, steer the borrower toward someone on your referral list.
3. Borrowers Should Be Open to Working With a Specialist.
Borrowers need to appreciate the niche legal expertise that goes into HUD transactions. Your go-to real estate attorney can probably learn the ropes, but it won’t happen overnight. If time is of the essence (isn’t it always?), I’d recommend teaming up with an attorney who is not only familiar with the opinion, but the entire HUD closing process. You’ll feel more comfortable with the steady hand of a HUD specialist on the wheel. You’ll also speed up your journey to the closing table.
4. Make a Clean Opinion Your Litmus Test.
Borrowers and lenders should insist that the proposed borrower’s counsel review the opinion prior to engagement and decide whether they can live with it. With a few exceptions, the opinion really is a take-it-or-leave-it document. If the attorney can’t commit to working within the confines of HUD’s opinion rules, move on to the next candidate. In any case, the candidate should pass the litmus test of providing a clean opinion early in the due diligence period.
5. Understand the Pros and Cons of Working With a Large Firm.
Attorneys at larger firms need to get their opinions cleared by the firm’s opinion committee. If a borrower chooses a large firm that doesn’t have a HUD practice and has never vetted the opinion, the clearance process can cause the deal to fall asleep before closing. However, large firms typically have attorneys licensed in several states, which can come in handy depending on the project location and where the borrower is organized. For example, if the project is in Iowa and the borrower is an Indiana LLC, a large firm may have attorneys licensed in both states, allowing it to offer the full opinion, which requires Iowa and Indiana law expertise. Otherwise, the borrower may need to engage an Iowa attorney and a separate Indiana attorney, creating an extra expense and consuming more precious time.
Here’s the Key Takeaway…
To avoid the all-too-common pitfalls surrounding the Opinion of Borrower’s Counsel, team up with an attorney who appreciates HUD’s strict policy on that document.
In your quest to minimize the time between firm commitment and closing, your relationship with HUD counsel plays a critical role. This series offers practical tips from a former HUD attorney for managing that relationship, making the HUD attorney’s life easier and boosting the speed of review so you can quickly close the deal.
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