please help me understand: according to the FAQ'S (the latest updated version) from HUD, a written list of providers is to be given out "when the loan originator permits a borrower to shop for thir party settlement services". If the services are a requirement for the loan, do we have to give out a list of providers, even if we do not give them a choice to choose, but because it is a requirement or condition for the loan we must?

You only give a list for items you allow the borrower to shop for. If you don't give them a choice, you don't give them a list.

Do we need an engagement letter with the provider before listing them?

What's an engagement letter?

An agreement about the fee.

If that's how you get the provider to agree to the fee that you're relying on being charged so your GFEs are right, then I would guess you do want to get them. I've no experience with this type of letter (obviously) but maybe someone else will chime in who has.

I would look to your normal process. Engagement letters are used by some banks for title companies (letter contains some legal protection language) and confirms the engagement and the price. Engagement letters are usually used for appraisers.

In the situation where you are allowing the customer to shop (not for appraisers obviously), an engagement letter wouldn't really work since you don't know who the customer will select. You do of course need some basis for putting a fee on the GFE and discussions with those service providers are in order or you would risk being out of tolerance.

A blanket engagement letter, with specific jobs to be assigned, would be more appropriate.