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HUD OIG: Mortgage Servicing Issues Cost FHA $2.23 Billion
On October 14, the HUD Office of Inspector General (HUD-OIG) published a report on HUD’s monitoring and payment of conveyance claims upon termination of FHA-insured mortgages. According to the report, mortgage servicers’ failure to foreclose on properties or meet conveyance deadlines may have cost the FHA an estimated $2.23 billion in unreasonable and unnecessary holding costs. HUD-OIG concluded that deficiencies in 24 CFR Part 203 did not “enable HUD to provide effective oversight and HUD monitored only a small percentage of servicers after the claim had been paid.” As a result of its findings, HUD-OIG recommended that HUD (i) amend 24 CFR Part 203 to include “a maximum period for filing insurance claims and disallowance of expenses incurred beyond established timelines”; (ii) develop an IT plan that that ensures significant operational changes to how HUD monitors single-family conveyance claims; and (iii) establish and implement controls to identify noncompliance with 24 CFR 203.402.
California Amends Finance Lenders Law and Residential Mortgage Lending Act
The California legislature amended the California Finance Lenders Law (CFLL) allowing persons to make one commercial loan in a 12-month period without obtaining a license. This change effectively reenacts a de minimis exemption that was repealed in 2014, and is effective January 1, 2017 through January 1, 2022.
Effective September 28, 2016, the implementing regulations to the CFLL and California Residential Mortgage Lending Act (CRMLA) were amended such that subsidiaries and affiliates of exempt institutions are no longer exempt, by nature of this association, from the licensing requirements with respect to consumer and residential mortgage loans. The Department of Business Oversight filed the action to reverse through regulation previous Commissioner opinions that interpreted licensing exemptions under the CFLL and CRMLA to apply broadly to include subsidiaries of exempt financial institutions.
The definition of a lender under the CRMLA was also amended and now includes a person, other than a natural person, and a natural person who is also an independent contractor, who engages in the activities of a loan processor or underwriter for residential mortgage loans, but does not solicit loan applicants, originate mortgage loans, or fund mortgage loans. Further, the Commissioner may require a licensee who is engaged in the processing or underwriting of residential mortgage loans to continuously maintain a minimum tangible net worth in an amount that is greater than $250,000, but that does not exceed the net worth required of an approved lender under the Federal Housing Administration.
DOJ Settles False Claims Act Lawsuit Over HUD and FHA Mortgages
On September 29, the DOJ announced a settlement with a large regional bank, whereby the bank agreed to pay $83 million to resolve allegations that it violated the False Claims Act by originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable FHA requirements. In addition to underwriting defects, the DOJ alleged deficiencies in the bank’s quality control function, especially during periods of increased loan volume, as well as failures to adequately self-report loans with material defects. The settlement is not an admission of liability by the bank. BuckleySandler represented the bank in this matter.
District Court Dismisses Disparate Impact Claim under the Fair Housing Act
In The Inclusive Cmtys. Project, Inc. v. The Tex. Dep’t of Hous. and Cmty., No. 3:08-cv-00546-D (N.D. Tex. Aug. 26, 2016), on remand from the Supreme Court and the Fifth Circuit, the district court dismissed claims of disparate impact under the Fair Housing Act (FHA) where the plaintiff alleged that the defendant allocated two different types of tax credits in a manner that perpetuated racial segregation. The district court applied the Supreme Court’s previously explained three-part burden-shifting framework to analyze the plaintiff’s claim, and determined that, among other things, the plaintiff’s claim failed to show a “specific, facially neutral policy” causing a racially disparate impact. The court reasoned that “[b]y relying simply on [the defendant’s] exercise of discretion in awarding tax credits, [the plaintiff] has not isolated and identified the specific practice that caused the disparity in the location of low-income housing…. [The plaintiff] cannot rely on this generalized policy of discretion to prove disparate impact.” The district court further reasoned that because the plaintiff had not “sufficiently identified a specific, facially-neutral policy that has caused a statistically disparity,” the court could not “fashion a remedy that removes that policy.” The district court concluded that the plaintiff “failed to prove a prima facie case of discrimination by showing that a challenged practice caused a discriminatory effect” and entered judgment in favor of the defendants.
Top 20 Bank Settles with DOJ Over Alleged Violations of the False Claims Act
On September 13, the DOJ announced a $52.4 million settlement with a top 20 bank to resolve allegations that it violated the False Claims Act by knowingly originating and accepting FHA-insured mortgage loans that did not comply with HUD origination, underwriting, and quality control requirements. It is the smallest settlement of a False Claims Act FHA-insured mortgage loans case against a bank to date as part of the government’s recent enforcement initiative in this area. According to the Statement of Facts issued as part of the settlement agreement, from January 1, 2006 through December 31, 2011 (relevant time period), the bank, while acting as a direct endorsement lender (DEL) in the FHA program, (i) certified certain mortgage loans for FHA insurance that failed to meet HUD underwriting requirements regarding borrower creditworthiness; (ii) failed to adhere to various HUD quality control requirements; and (iii) failed to adhere to HUD’s self-reporting requirements. The DOJ noted that the “claims asserted against [the bank] are allegations only, and there has been no determination of liability.” BuckleySandler represented the bank in this matter.
HUD OIG Sends Letter to House Committee on Financial Services Regarding Funding Arrangements in Certain Housing Finance Agency Down Payment Assistance Programs
On July 26, HUD OIG (OIG) Inspector General David A. Montoya sent a letter to Jeb Hensarling, chairman of the House Committee on Financial Services, regarding OIG’s continuing opposition to certain down payment assistance (DPA) programs. The letter reiterates OIG’s previously stated position that certain DPA programs used for loans sold on the secondary market violate the National Housing Act (NHA) and the Housing Economic and Recovery Act (HERA) by reimbursing prohibited parties for providing part of the required minimum investment funds. According to the letter, more than 60,000 FHA loans are originated per year using this borrower-reimbursed funding arrangement. HUD had previously investigated the OIG criticisms of these loans made in conjunction with local HFAs and had determined that these programs do not violate relevant HUD requirements. In the letter, Montoya critiques that determination and attempts to continue this disagreement between HUD program officials and the OIG.
FHA Updates Initial and Annual Lender Certification Language
On August 1, HUD announced that FHA updated its lender-level certification statements. Pursuant to the Single Family Housing Policy Handbook 4000.1, all lenders seeking FHA approval must complete the Initial Certification as part of the online application process, and all FHA-approved lenders must complete the Annual Certification at each fiscal year’s end thereafter. As outlined in FHA INFO 16-51, use of the revised certifications is mandatory beginning August 1, 2016. After that date, all new LEAP recertification packages will reflect the revised Annual Certification statements, and all lenders applying anew for FHA approval must complete the revised Initial Certification statements. FHA INFO 16-51 further notes that the revised language “may also affect some in-process applications.” FHA released separate documents for supervised/non-supervised mortgagees and investing and government mortgagees to outline the changes implemented. The changes included in the certification statements range from rewording, reformatting, and the refining of policy citations to adding instructions, new requirements, and certain exemptions/qualifiers.
FHA Ed Golding Issues Follow-Up Letter Regarding DPA Programs
On July 18, FHA’s Edward Golding issued a letter sharing HUD Secretary Nani Coloretti’s statement regarding recent events surrounding down payment assistance (DPA) programs. As previously covered in InfoBytes, Golding sent a letter on May 25 to stakeholders informing them that HUD had “determined that finance agency [DPA] programs are legal and consistent with the National Housing Act.” According to the recent July 18 letter, Secretary Coloretti wishes to make clear that HUD does not endorse unlawful practices. She also noted that the HUD Office of Inspector General (OIG) continues to investigate alleged inappropriate practices and that HUD will look separately into “the extent to which government-sponsored Down Payment Assistance (DPA) programs fully informed borrowers of the loan terms, or imposed inappropriate fees or costs, or enabled steering or any other coercion of borrowers.” Coloretti also reiterated that HUD supports DPA Programs and that they “enable access to credit that allows American families to purchase homes.”
HUD Announces Changes to Distressed Asset Stabilization Program
On June 30, HUD announced a series of changes to its Distressed Asset Stabilization Program (DASP). Last year, HUD updated DASP to (i) extend the time period preventing foreclosure after the note is sold from six months to one year; (ii) require servicers to evaluate borrowers for the Home Affordable Modification Program (HAMP) or a substantially similar modification; and (iii) implement non-profit only sales. In accordance with the most recent changes to DASP, “[c]ertain families with distressed mortgages insured by the [FHA] may soon be eligible for a reduction of their outstanding loan amounts should their mortgages be sold through DASP.” In addition, HUD’s fact sheet for the recent changes announces that DASP will, among other things: (i) limit interest rate increases to no more than one percent per year after a five-year period where the rate is fixed, thereby implementing payment shock protection and ensuring consistency with HAMP; (ii) prohibit purchasers from “walking away” from vacant properties; (iii) revise the 120-day delinquency notice to advise borrowers that their loan may be sold; (iv) set a goal to sell 10 percent of assets to non-profits and local governments; (v) release performance and outcome data on a pool level (instead of a sale level); (vi) release demographic data on sales; (vii) strengthen requirements for investors to obtain Neighborhood Stabilization Outcome (NSO) credit when selling to non-profits; and (viii) target loans for DASP sales based on non-profit and local government interest.
HUD Determines Down Payment Assistance Programs Eligible for FHA Insurance
This week, FHA Principal Deputy Assistant Secretary for Housing and Head of FHA, Edward Golding, issued a letter informing stakeholders that “HUD has determined that housing finance agency down payment assistance programs are legal and consistent with the National Housing Act.” We note that the letter was not a Mortgagee Letter nor was it published in the Federal Register and may be considered informal guidance.
In the letter, Golding advised that:
- Government entities may provide borrowers with funds for down payments on FHA loans; and
- Loans that include down payment assistance (DPA) provided by state and local housing finance agencies (HFA) continue to be eligible for FHA insurance.
Golding’s letter emphasized the benefits of DPA programs, commenting that such programs facilitate access to homeownership for low- and moderate-income families. Still, Golding noted that FHA will continue to monitor and mitigate any potential risk associated with DPA programs: “[w]e will work diligently to reduce the impact of these risks on our portfolio. We know it is possible to accomplish this as the research shows carefully designed programs perform better.”
Golding’s letter purports to resolve a matter of dispute regarding DPA between FHA and the HUD Office of Inspector General (OIG). Last year, HUD OIG audited an Arizona-based mortgage lender and issued a report concluding that the lender originated FHA loans that included gift DPA that did not comply with FHA rules and regulations. Specifically, the audit found that, among other things:
- The lender inappropriately allowed premium pricing to be used as a source for the borrowers’ down payments, which were not true gifts and were indirectly repaid by the borrowers through a higher premium rate;
- The lender used programs that had a circular funding mechanism (i.e., the program was structured to generate revenues through the sale of mortgage-backed securities); and
- The lender did not perform due diligence to ensure DPA was eligible.
After the audit, Golding issued a letter to reaffirm FHA’s support of certain DPA programs. Golding’s letter also stated that “[t]he intent of [FHA] rules regarding down payment assistance is clear and allows HFAs the discretion necessary to fund these programs appropriately.” HUD’s General Counsel (GC), Helen Kanovsky, also issued a memorandum to Golding regarding DPA programs concluding that:
- Governmental entities are a permissible source of funds for down payments on FHA loans;
- FHA does not place limitations or prohibitions on how a government entity raises funds for its DPA program; and
- FHA rules on premium pricing are not violated if the borrower and the lender agree on interest rates in relation to DPA programs.
The memorandum also noted that it did not support OIG’s audit conclusions that FHA rules regarding premium pricing or gift DPA were violated. We note that, similar to Golding’s letter from this week, the letter and the memorandum were not issued as Mortgagee Letters and were not published in the Federal Register.
Notwithstanding Golding’s letter after the audit and HUD GC’s memorandum, HUD OIG continues to audit lenders and issue reports on this issue.
The Obama Administration also responded to the DPA uncertainty earlier this year by releasing the FY 2017 Budget Proposal, which would amend the National Housing Act to clarify that “down payment assistance from state and local governments and their respective agencies and instrumentalities are not impermissible sources of down payment assistance.”
Despite Golding’s letter this week, a news website has reported that David Montoya, HUD’s Inspector General, “strongly disagree[s]” with HUD’s assessment of DPA programs. Specifically, it has been reported that Montoya issued the following statement: “we believe this specific aspect, where external lenders are originating FHA loans with ineligible down payment assistance gifts and secondary financing and agree to inflate the interest rate on the borrowers’ FHA loans, violates the law and harms borrowers.” A spokesperson noted that an OIG audit of a lender using funds derived from premium pricing to pay for gift DPA is still underway.