In an effort to woo banks back to FHA lending, the U.S. Housing and Urban Development (HUD) and U.S. Justice Department (DOJ) have set forth new guidance on the appropriate use of the False Claims Act (FCA) for violations by Federal Housing Administration (FHA) lenders.
The agreement and memorandum of understanding between the two agencies fulfills a key component of HUD’s Housing Finance Reform Plan, introduced in September.
Among the major changes, claims of violations of the False Claims Act against mortgage lenders will be reviewed using “a robust and collaborative process” involving both HUD and the DOJ.
“HUD expects that FHA requirements will be enforced primarily through HUD’s administrative proceedings,” HUD says in a release. “But the MOU specifically addresses how HUD and DOJ, including the U.S. Attorneys’ Offices, will consult with each other regarding use of the FCA in connection with defects on mortgage loans insured by FHA.”
“HUD will utilize the Mortgagee Review Board, which was created by statute and empowered to take certain actions for non-compliance by FHA lenders, to review and refer FCA claims,” HUD says in the release. “The MOU prescribes the standards for when HUD, through the MRB, may refer a matter to DOJ for pursuit of FCA claims, and also sets forth how DOJ and HUD will cooperate during the investigative, litigation and settlement phases of FCA matters when DOJ receives a referral from a third party, such as in qui tam cases.”
A second major change is that HUD and the DOJ will now require “elements of proof” when a plaintiff brings forth a complaint. There must be “a material violation of HUD requirements, and DOJ attorneys will solicit HUD’s views to determine whether the elements of the FCA can be established.”
“DOJ and HUD will work together to determine when HUD’s administrative remedies are sufficient, or other recourse is appropriate, to address harm to the borrower, the taxpayer, or the government,” says Attorney General William P. Barr. “Importantly, this MOU is the product of the excellent working relationship that has developed between our two agencies in our shared pursuit of greater clarity and fairness.”
In recent years, mortgage lenders, in particular banks, have shied-away from the FHA loan program for fear of being held liable in violation of False Claims Act and other regulations which were tightened in response to the financial crisis of 2008. This triggered a deluge of large settlements with lenders which made minor errors when underwriting FHA loans or which failed to detect misrepresentations in the information provided by borrowers.
Now, the Trump Administration is seeking to realign HUD/FHA’s role in the housing market, in consideration of Fannie Mae and Freddie Mac, which it plans to soon transition out of conservatorship. By adjusting the process by which FCA complaints can be bought against mortgage lenders, the administration seeks to relax the more burdensome regulations that have resulted in lenders shying away from the FHA lending market, which has been a direct result of the increased regulatory and legal risk.
In a statement, Robert D. Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), applauded “the efforts between DOJ and HUD to set guidance on the appropriate use of the False Claims Act.”
We commend Attorney General William Barr and Secretary Ben Carson for their leadership and commitment to create an environment where lenders of all sizes – from depository institutions to independent mortgage banks (IMBs) – can operate with more certainty and less risk,” Broeksmit says. “Today is a significant step toward providing clarity for those currently participating in the FHA program, as well as encouraging more lenders to offer FHA-insured loans.
“In addition to the MOU, MBA is also pleased to learn that FHA is revising the loan review process and simplifying the certifications that lenders make in connection with the FHA program,” Broeksmit adds. “These combined actions will go a long way toward ensuring that low-to-moderate income households and first-time buyers have access to affordable mortgage credit in order to achieve their dream of homeownership.”
In a statement, John Smaby, president of the National Association of Realtors, also applauded the decision to ease the use of the False Claims Act.
“The National Association of Realtors commends HUD and the DOJ for the memorandum of understanding announced today that clarifies the departments will take the lead on False Claims Act reviews,” Smaby says. “NAR believes this change will help more consumers access low down payment loans and ensure a wide range of financial institutions will offer FHA-backed loans in the future, which is particularly important as new FHA condominium loan policies have created additional opportunities for potential homebuyers across the country.”