BLOG VIEW: Officials at the Federal Housing Administration (FHA) are reportedly considering dialing-back some of the agency's mortgage rules that can result in major penalties when lenders originate loans with minor defects.
According to a report in the Wall Street Journal, recent actions brought against lenders by the U.S. Department of Justice (DOJ) – including the $614 million settlement with JPMorgan Chase & Co. last year – were, in part, the result of minor loan defects that were immaterial with regard to whether the borrower had demonstrated their ability to repay (ATR). It points out that under the False Claims Act, the DOJ, in some of its recent actions, has been able to collect triple the damages for each instance or defect.
The harshness of these recent actions has rattled lenders and caused them to self-impose strict internal overlays to ensure they do not violate any of the regulations established under the Dodd-Frank Act and the Consumer Financial Protection Bureau's new ATR/qualified mortgage rules. This, in turn, has resulted in a tightening of credit, particularly for FHA loans – thus, working against the Obama administration's goal of freeing up more credit to underserved borrowers.
Furthermore, this has resulted in many lenders, including JPMorgan, to significantly curtail their FHA lending programs. As the article points out, James Dimon, CEO of JPMorgan, questioned whether the bank should be in the FHA business at all during a call with investors last July.
As a result, the FHA is considering limiting the penalties for loan defects to only those errors that are ‘significant’ in nature – in other words, lenders would be off the hook for minor defects that would not have prevented the loan from funding.Â
As the article points out, though, there is no guarantee that – should the FHA relax its requirements – mortgage giants, including JPMorgan and Wells Fargo, would expand their FHA lending programs again.
If this grows legs, I think it will be interesting to see how the FHA goes about defining ‘significant’ loan defects. Such a measure, if there is consensus, could present a powerful precedent for the rest of the industry. Could it be that the FHA will set things in motion for the development of a new set of standards defining which loan defects are material and immaterial?
For more, check out the WSJ report here.