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DOJ Settles with National Bank Over Underwriting Practices
On April 8, the DOJ announced a $1.2 billion settlement with a San Francisco-based bank and the bank’s Vice President of Credit-Risk – Quality Assurance to resolve allegations that the bank submitted false claims for FHA insurance in connection with loans that did not meet FHA underwriting standards. According to DOJ, “[d]uring the period May 1, 2001 through on or about December 31, 2008, [the bank] (or its predecessor) submitted to HUD certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not.” The settlement agreement further explains that when certain of these loans defaulted, HUD paid for the insurance claims out of the Mutual Mortgage Insurance Fund. In addition, the settlement agreement states that from January 2002 through December 2010, the bank failed to inform HUD that the bank’s quality assurance personnel had determined that some of the FHA-insured loans contained a material finding. In response to this failure to self-report, the DOJ also asserted claims against the bank’s VP of Credit-Risk – Quality Assurance, as the individual responsible for overseeing the bank’s self-reporting policy and procedures. Both the bank and the individual officer acknowledged responsibility for the alleged violations as part of the settlement agreement.
HUD Issues Guidance Regarding the Application of Fair Housing Act Standards to the Use of Criminal Records
On April 4, HUD issued guidance deploying a disparate impact analysis with respect to the Fair Housing Act’s application to the use of criminal history by those who come under the Fair Housing Act, and in particular by providers or operators of housing and real-estate related transactions. The guidance indicates that, because African Americans and Hispanics are arrested, convicted and incarcerated at rates disproportionate to their share of the general population, criminal records-based barriers to housing are likely to have a disproportionate impact on minority home seekers. HUD then walks through the three step burden-shifting disparate impact analysis to support its argument. To determine whether the use of criminal history has, on its face, a discriminatory effect, HUD looks at national statistics to demonstrate that incarceration rates are disproportionate for African Americans and Hispanics. HUD also notes that, while state or local statistics should be presented when available, national statistics may be used where state or local statistics are not readily available and there is no reason to believe they would differ markedly from the national statistics. HUD then moves to a discussion of whether the practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. HUD warns that, while ensuring resident safety and protecting property may be considered substantial and legitimate interests, bald assertions based on generalizations or stereotypes that any individual with an arrest or conviction record poses a greater risk than any individual without such a record would be insufficient to satisfy the burden set by the second prong. For the final prong, regarding the availability of a less discriminatory alternative, HUD notes that the inquiry is fact specific, but suggests that individualized assessment of relevant mitigating information beyond that contained in an individual’s criminal record is likely to have a less discriminatory effect than a categorical exclusion that does not take additional information into account. The guidance also discusses the potential for intentional discrimination, and notes that a disparate treatment violation may be proven based on evidence that exceptions to a general disqualification based on criminal record are provided to white applicants, but not African American applicants.
HUD Releases Final Loan-Level Certification: Lenders Should Not Be Penalized for Minor Mistakes
On March 15, HUD announced the completion of FHA’s loan-level certification, Form 92900-A. Significantly, the final certification clarifies FHA’s “longstanding position” that “minor mistakes that do not affect the decision to approve a loan are not the focus of [FHA’s] compliance efforts” and that “lenders will be held accountable for only those mistakes that would have altered the decision to approve the loan.” The certification also clarifies that lenders are required to certify only “to what they know to be true to the best of their knowledge” and that they are not responsible for “mistakes or fraud committed by a third party that the lender did not or could not have had reason to know of.” Finally, the certification removes references to the pre-endorsement review requirement. HUD issued Mortgagee Letter 2016-16 to advise mortgagees of the revised certification, which is effective August 1, 2016.
On March 15, HUD’s proposed revisions to the FHA annual lender certification were published in the Federal Register. According to HUD’s announcement, the primary revision to the annual lender certification form is the “addition of language requiring lenders to certify that they have not been involved in fraud or other serious criminal or civil violations that would call into question their ability to carry out the responsibilities of the program.” Previously, this language was included in the loan-level certification. In addition, the proposal also amends the lender-level certification statement regarding compliance with all FHA regulations and requirements by (i) adding guidebooks to cover certain FHA policy; (ii) revising the language to clarify the intent and scope of the statement; (iii) removing timeframes and revising the qualifier so that it matches the similar qualifier in other statements; and (iv) detailing reporting requirements in HUD Handbook 4000.1. Comments on the proposal are due April 14, 2016.
HUD Reaches $2.8 Million Settlement Over Redlining Allegations
On February 29, HUD announced an agreement with a Kansas City-based bank over its alleged redlining practices against African-American mortgage applicants. Two fair housing organizations (Complainants) filed separate complaints with HUD in October 2015 alleging that the bank engaged in discriminatory acts and violated the Fair Housing Act. According to Complainants, the bank’s “lack of market penetration in African-American communities made residential real estate products less available to persons based on race.” Complainants further alleged that the bank “designated their service area, or assessment area, in a way that excluded areas of high African-American concentration, which resulted in making residential real estate products less available to persons based on race” – a practice generally referred to as redlining. The agreement requires that the bank must, during the three-year agreement period: (i) allocate $75,000 in subsidy funds to provide discounts on home purchase loans to majority African-American census tracts in the Kansas City area; and (ii) originate $2.5 million in mortgage loans in African-American neighborhoods. Additional fair lending financing commitments pursuant the agreement require that the bank: (i) establish a loan pool of $105,000 to rehabilitate vacant or destroyed homes; (ii) spend $50,000 on marketing and outreach to African-American communities; (iii) provide $30,000 to support financial education in African-American communities; and (iv) spend $50,000 in support of the Complainants’ fair lending and community reinvestment work. The bank will also be required to appoint a Community Development Lender to focus on African-American neighborhoods and other lower-income communities. Finally, dependent upon the OCC’s approval of the bank’s application for a merger, the bank will be required to maintain three full-service branches in majority-minority census tract in the Kansas City area.
FY 2017 Budget Proposal: Implications for FHA Down Payment Assistance Programs
As previously noted, the White House released the FY 2017 Budget Proposal this week. President Obama’s proposed HUD budget for FY 2017 would revise the FHA down payment assistance requirements found under Section 203(b)(9) of the National Housing Act (12 U.S.C. 1709) by (i) replacing subparagraph (C) (Prohibited sources), and adding a new subparagraph (D) (Government assistance). The proposed amendment to the National Housing Act “seeks 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.”
HUD Announces $1.9 Million Settlement with Memphis-Based Bank over Alleged FHA Discrimination
On February 1, HUD announced a $1.9 million settlement with a Memphis-based bank to resolve alleged violations of the Fair Housing Act. Specifically, the complainant alleged that the bank “was responsible for discriminatory terms and conditions for making loans, discrimination in the making of loans, and discriminatory financing, with respect to real estate transactions.” In addition, the complainant alleged that the bank engaged in discriminatory practices by failing to place bank branches in minority-concentrated areas, ultimately denying African-American and Hispanic applicants mortgage loans. The bank denied the allegations, but agreed to “voluntarily settle [the] controversy and resolve [the] matter without the necessity of an evidentiary hearing or other judicial process . . . .” Under the agreement, the bank will (i) establish a subsidy fund of $1.5 million over three years to provide interest rate reductions on home mortgages, along with down payment or closing cost assistance to qualified borrowers in identified regional areas; (ii) contribute $270,000 over the course of three years to support governmental or community-based organizations’ efforts to help homeowners repair properties in predominantly minority communities, or to provide credit, financial, homeownership, or foreclosure-prevention services to homeowners in affected areas; (iii) pay directly to the complainant $105,000 to fund similar home repair, credit, financial, homeownership, and foreclosure services; and (iv) pay directly to the complainant $25,000 in damages.
FHA Loan Limits for Forward Mortgages to Increase in 2016
On December 9, FHA announced new maximum loan limits for forward mortgages for 2016 in 188 counties due to changes in housing prices. The new loan limits for forward mortgages are effective for case numbers assigned on or after January 1, 2016 through the end of the year. FHA noted that no areas saw a decrease in the maximum loan limits for forward mortgages and that, as detailed in Mortgagee Letter 2015-30, the national standard loan limits for low cost and high cost areas remain unchanged at $271,050 and $625,500, respectively.
Mortgage Company Resolves DOJ Allegations of False Claims Act Violations
On December 2, a Tennessee mortgage company agreed to pay the United States $70 million to resolve allegations that it violated the False Claims Act. According to the DOJ, the company, acting as a direct endorsement lender, knowingly originated and accepted FHA-insured mortgage loans that did not meet applicable HUD underwriting and quality control requirements. As part of the settlement agreement, the company admitted to engaging in the following conduct between January 1, 2006 and March 31, 2012: (i) employing unqualified junior underwriters to complete important underwriting tasks; (ii) setting high quotas for underwriters and disciplining them if the quotas were not met; and (iii) offering underwriters bonuses based in part on the number of loan files reviewed as incentive to increase loan production. Even though deficiencies in the loan underwriting process were identified in post-close audits, the company did not make any self-reports until 2009 and, even then, “[v]ery few of these self-reported loans were reported for containing serious underwriting deficiencies.” As a result of the company’s conduct, the FHA insured loans that were not eligible, purportedly suffering “substantial losses when it later paid insurance claims on those loans.”
HUD Proposes "Quid Pro Quo" Rule to Amend FHA Regulations
On October 21, HUD announced a proposed rule that would formalize the standards for evaluating harassment claims in housing or housing-related transactions under the FHA. The rule – “Quid Pro Quo and Hostile Environment Harassment and Liability for Discriminatory Housing Practices under the Fair Housing Act” – would define “quid pro quo harassment” and “hostile environment harassment,” respectively, as (i) subjecting a person to an unwelcome request or demand because of the person’s protected characteristic and submission to the request or demand is, explicitly or implicitly, made a condition related to the person’s housing; and (ii) subjecting a person to unwelcome conduct that is sufficiently severe or pervasive such that it interferes with or deprives the person the right to use and enjoy the housing or to exercise other rights protected by the FHA. In addition, the proposed rule also would describe standards for “direct liability” and “vicarious liability”, which would apply to all violations under the Act, not solely harassment. In particular, the proposed rule would define “direct liability” to include (i) a person’s own conduct; (ii) failure to take prompt action with respect to a discriminatory housing practice by an employee or action; and (iii) failing to fulfill a duty to take prompt action to correct and end a discriminatory housing practice by a third-party, where the person knew or should have known of the discriminatory conduct. The proposal was published in the Federal Register on October 21, and comments are due by December 21, 2015.
HUD Publishes Withdrawal of Proposed Rule Limiting FHA Insurance Claim Period
On October 16, HUD’s FHA published a notice of partial withdrawal of its July 6 proposed rule to limit the time frame in which FHA-approved lenders must file insurance claims for benefits. The July 6 proposal would have required mortgagees to file claims (i) within three months from when marketable title to the property was obtained; or (ii) when the property was sold to a third party. In addition, the proposal sought to terminate the FHA’s insurance contract as a penalty for missing the proposed filing deadlines. Based on feedback that HUD received through its notice and comment process, HUD withdrew the proposed provisions to limit the FHA insurance claim period and its proposed amendment to the penalty provisions.