HUD wants banks to return to FHA lending

Just over two years ago, Department of Housing and Urban Development Secretary Ben Carson told the crowd at the 2017 Mortgage Bankers Association Annual Conference in Denver that HUD was working with the Department of Justice to address the use of the False Claims Act to extract massive settlements out of lenders.

And now, two years later, Carson delivered on his promise, announcing Monday that HUD and the DOJ have reached an agreement that will see the DOJ back away from Federal Housing Enforcement lending enforcement and leave enforcement mostly to the FHA itself.

According to HUD and the DOJ, the FHA will typically handle lending enforcement through “administrative” means.

The goal of the move, according to Carson, is to bring banks back to FHA lending.

Many of the nation’s largest banks, including JPMorgan Chase and Bank of America moved away from FHA lending in recent years after the government began using the False Claims Act to extract massive settlements from FHA lenders, like Wells Fargo.

But Carson and HUD want to change that, telling HousingWire Monday that the False Claims Act “monster” is no more.

“[Banks] were in before and obviously they were in because it was beneficial to them,” Carson told HousingWire about banks’ presence in FHA lending.

“And then the housing crisis occurred and all of the sudden, the False Claims Act became a monster that started chasing everybody around the room, making their lives miserable, causing them an inordinate amount of pain,” Carson continued. “So they got out. But now, the monster has been slayed.”

But Carson was quick to say that despite HUD’s move away from frequently using the False Claims Act, that doesn’t mean HUD will turn a blind eye to bad actors.

“I have to emphasize that it doesn’t mean that we’re ignoring fraud or things that are done with malicious intent,” Carson said. But, Carson stated that HUD will be much more forgiving of “immaterial errors that occur any time human beings exist,” Carson said.

“To make those into the kind of deal that they were made into absolutely makes no sense,” Carson said of the previous enforcement approach.

During his speech, Carson addressed the impact of False Claims Act era of enforcement on the lending market.

“Depository institutions, which represented nearly half of FHA’s lender base in 2010, represent less than 14% today,” Carson said.

“That isn’t to imply we don’t value the many independent and non-depository FHA lenders. You have helped countless families across America realize the American Dream and we want you to continue as a welcomed FHA partner,” Carson continued. “But we know that at least part of the reason for the decade-long decline in depository participation is because of uncertainty about how federal agencies apply the False Claim Act.”

The agreement between HUD and the DOJ, called a memorandum of understanding, establishes a specific three-step process for how FHA lending enforcement will be handled going forward.

First, HUD will review the situation and determine whether it can be addressed through “administrative means.” As for what those means, Carson told HousingWire that it depends on the situation.

“Education would be a big thing. Working with the servicers themselves to make sure they understand what happened and how we can change that,” Carson said.

“And looking at their process and seeing there are things in their process that we can change, working with them,” Carson continued. “Could some fines be levied? They could be. But we’re talking about smaller fine amounts. Nothing outrageous.”

As for when the DOJ may come into play, that’s step two and three.

If HUD determines the situation exceeds its administrative options, the case will be referred to as a “Mortgagee Review Board,” which, according to the agencies, “was created by statute and empowered to take certain actions for non-compliance by FHA lenders, to review and refer FCA claims.”

According to Carson, the Mortgagee Review Board is made up of some senior HUD personnel, HUD’s office of general counsel, and perhaps the HUD Office of the Inspector General, who’s been invited to participate.

Then comes step three. If that group determines that the situation needs to be referred to the DOJ, then it will be referred to the DOJ for review.

The purpose of the group, according to Carson, is to prevent one party from having too much power over FHA enforcement. “It’s so we don’t have a situation where any one person has an inordinate of influence,” Carson said.

“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,” HUD and the DOJ said in a statement.

“The MOU also recognizes that application of the FCA requires, among other elements of proof, 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.”

In a statement, Attorney General William Barr said that the DOJ is pleased with the agreement and is looking forward to working with HUD in a new way.

“This MOU sets forth a robust and collaborative process for deciding when to pursue False Claims Act cases to remedy material and knowing FHA violations,” Barr said.

“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,” Barr continued. “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.”

Carson told the crowd at MBA Annual that he expects these changes to bring banks back to FHA lending, and invited them to do so.

“In taking these steps, our intention is to make it crystal clear to all responsible lenders that this is a program you should be participating in – and if you are already, thank you,” Carson said on stage. “At the same time, HUD will never tolerate ‘bad actors’ who defraud borrowers and taxpayers, and will continue to enforce all violations under the newly revised guidance.”

The new standard, according to Carson, will likely lead to far fewer False Claims Act actions by the government.

“I’m not going to say we’re not going to use it. We have a mortgage review board. And when issues come up, they will do an initial analysis. The vast majority of problems can be resolved through administrative remedies that we have available to us,” Carson told HousingWire. “But if it’s something that’s more significant than that, then that will cause us to consult with the DOJ.”

Carson added his “suspicion” is that “relatively few things” will rise to the DOJ level going forward. “I mean, if it’s an obvious case of fraud, that’s one thing,” Carson said. “But if this is not a pattern and it’s a mistake that’s correctable, we’re not going to make a big deal of that.”