The Litigation Factor

Five years of litigation against FHA lenders under the False Claims Act has netted $5 billion in settlements for the federal government. But at what price? Some of the largest FHA lenders have curtailed or exited the business.

 

Mortgage Banking

April 2016

 

By Robert Stowe England

 

Five years ago, federal false claims litigation was a tiny cloud on the horizon. Since then, the clouds have filled the sky and released a relentless deluge of lawsuits and settlements on lenders that originate home loans insured by the Federal Housing Administration (FHA).

 

And there’s no sign it is going to slow down or stop.

 

The false claims suits filed by the U.S. Department of Justice (DOJ) and Department of Housing and Urban Affairs (HUD) are brought under the False Claims Act, a Civil War–era law aimed at military contractors that defrauded the government. Its application has been expanded over the years to include fraud against Medicare and Medicaid and, more recently, against the FHA, a federal government agency.

 

For the government, a lot is at stake. The FHA insures $1.046 trillion in single-family and $105 billion in reverse mortgages in its Mutual Mortgage Insurance (MMI) Fund, according to FHA’s latest annual report to Congress in November 2015.

 

The toll of the federal government litigation wave against FHA lenders has been exceedingly high. “The banks have had to pay a king’s ransom and then some to settle the claims,” says Jeff Davis, managing director of the Financial Institutions Group at Mercer Capital, a Nashville, Tennessee–based financial advisory firm.

 

In the 16 major cases brought so far, the federal government has recovered about $4 billion in settlements in 14 of those cases, according to a tally by K&L Gates LLC, a Washington, D.C., law firm that has defended lenders in some of the cases. No cases have been resolved through a trial and a court verdict.

 

The federal government’s total recovery might soon hit $5.2 billion. That’s because Well Fargo & Co., San Francisco, after a lengthy and determined effort to avoid a settlement, revealed in an early February filing with the Securities and Exchange Commission (SEC) that the bank had reached an agreement in principle to settle for $1.2 billion.

 

The Wells Fargo settlement will thus be the largest single settlement as of this writing, although virtually no details beyond the amount of the settlement have yet emerged.

 

Still to be resolved is a high-profile case against Quicken Loans Inc., Detroit. The company has refused to settle charges and has blasted the methodology used by DOJ and HUD to extrapolate claimed losses for what Quicken says are mostly minor errors that do not, in fact, affect the credit quality of the loans.

 

Quicken pre-emptively sued HUD and DOJ in April 2015 for pressuring the company to reach a nine-figure settlement on charges of fraud the company claims it did not commit. “The rumored amount is $300 million” for what DOJ is reportedly asking Quicken to pay in a settlement, says Guy Cecala, chief executive officer (CEO) and president of Inside Mortgage Finance.

 

In its complaint, Quicken stated it is a target of a “political agenda under which DOJ is ‘investigating’ and pressuring large, high-profile lenders into nine- and 10-figure sums and publicly ‘admitting’ wrongdoing.”

 

HUD and DOJ countersued a few days later, and in December 2015 the Quicken lawsuit was dismissed by Judge Mark Goldsmith in the U.S. District Court for the Eastern District of Michigan. It is not yet clear whether Quicken will appeal the ruling.

 

Sledgehammer?

 

So what happened? How did the litigation risk for false claims go from a small risk to being such a significant threat that major lenders are abandoning the program to escape the potential liability?

 

Before 2011, false claims lawsuits were based on individual cases of deliberate fraud. However, in the last five years FHA lenders have been sued because of defective underwriting and loan-quality review procedures in their FHA lending programs.

 

Lenders have been charged with making false annual certifications and loan-level certifications to HUD that assert their loans submitted for FHA insurance have complied with the Direct Endorsement program rules and procedures.

 

As one FHA lender after another has been compelled to reach large settlements, voices of opposition have been rising against the litigation wave.

 

“I think they overuse [the False Claims Act], and it has had a pretty detrimental effect on lenders’ willingness to do FHA loans,” says Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, Washington, D.C.

 

More recent cases seem to be going farther and farther afield to apply the law to an ever-diminishing supply of larger lenders, with fewer and fewer loan defects to justify the actions.

 

The 2015 case against Quicken Loans is a case in point. The case “makes for some fascinating reading,” Goodman says. “You can see that a lot of the claims that were used to figure out the defect rate for the purposes of the False Claims Act were actually very, very minor errors,” she says.

 

“They sample some number of loans to establish a defect rate and then use that defect rate on the entire portfolio,” Goodman adds. Penalties per loan can be as high as $11,000 per claim, with potentially treble damages of those amounts.

 

Early success in 2013 in extracting $100 million-plus settlements emboldened the DOJ, according to Mercer Capital’s Davis. U.S. Attorney General Eric Holder, who oversaw the expansion of the false claims litigation, “had an 800-pound sledgehammer he could bring into a board room,” says Davis, referring to the treble damages of the False Claims Act.

 

While Davis concedes that underwriting was loose in the last decade, giving the government a strong basis for bringing many of the lawsuits, some of actions that have been brought are based simply on “technical deficiencies.” Besides, Davis points out, a lot of the losses suffered by FHA were inevitable in any downturn. He asks, “How could you not have losses with 3 percent down mortgages?”

 

Even so, FHA lenders who are convinced they are not guilty often face a losing hand if they want to fight the charges, according to Davis.

 

“When you see people settle before going to trial, they are thinking, ‘I am not guilty—but if I lose, the penalties are so draconian, I’ll settle and admit [wrongdoing],’” Davis says. “I think there’s very much an element of that here, but how much, I don’t know,” he adds.

 

For DOJ, winning the early cases with big settlements has vindicated its approach and helped it perfect the targeting of FHA lenders for the maximum return, according to Davis.

 

“If Eric Holder were an investment banker, he’d be the top investment banker on Wall Street by far because he’s [so] good at bringing in fees,” says Davis. “He knew where to go” to land the big settlements.

 

Phillip Schulman, a partner at Mayer Brown in Washington, D.C., explains why companies may want to settle even when they feel they were wrongly accused.

 

“When you litigate, it draws resources from the company. People get deposed. You produce millions of pages of documents. The expenses associated with litigation are quite significant for cases of this nature,” Shulman says. “All that takes you away from your mission—putting people into housing.”

 

Neither the DOJ nor HUD, nor HUD’s Office of Inspector General would comment on the false claims litigation. Media specialists at all three entities recommended online department press releases and documents for information and quotes on the cases.

 

Misapplied law

 

The strategy at DOJ driving the wave of false claims litigation against FHA lenders misapplies the clear meaning and purpose of the False Claims Act, said Bill Emerson, CEO of Quicken Loans and chairman of the Mortgage Bankers Association (MBA), in an interview with Mortgage Banking.

 

“I think someone inside the DOJ concocted this crazy theory we can apply the False Claims Act to FHA lenders because the FHA book was not performing as well as they thought it would,” Emerson says. It has worked for DOJ because so few companies have stood up to the bureau, he adds.

 

The Quicken CEO points out that FHA loans have always been somewhat countercyclical in that the FHA program continues to provide mortgage credit in times when it might be more difficult to get credit in the rest of the mortgage market. FHA lenders filled that vital role in the downturn and, not surprisingly, some of the loans did not perform, he points out.

 

“The easiest way to extract a settlement from a lender was to take this 1863 law and try to apply it to FHA loans—and do so in a manner that would say even the most technical error on a FHA loan falls under the False Claims Act,” says Emerson. “Then, because an FHA lender had signed an annual certification and loan-level certification, the federal government feels it can go after them for false certifications—even if no actual intended fraud is ever proved,” he adds.

 

Emerson sees the attitude at DOJ toward FHA lenders as somewhat cynical: “‘Because your loans were not perfect, we’re going to take a sample of your loans. We’re going to extrapolate that sample across a larger population and we’re going to figure out a number,’” Emerson says. “‘Then we’re going to multiply it times three. And you’re going write us a check. And if you don’t write us a check, we’re going to make your life hell.’”

 

What really troubles Quicken is that at the time the DOJ began to examine Quicken’s FHA loans in 2012, the DOJ admitted to Quicken it was just looking at all the large lenders, according to Emerson. Then DOJ began to make demands and insist Quicken admit it “had done bad things and committed fraud against the government, which we did not do and we would not agree to,” Emerson says. “They left us with no choice but to file a suit against them.”

 

Quicken’s stellar record as a major FHA lender seemed not to be a factor in DOJ’s calculations, according to Emerson.

 

“The crazy thing is that we were at the time—and are still—the largest FHA lender, and we had the single best quality of any lender by their own objective standards from the compare ratio,” says Emerson. “And yet they still decided they wanted to come after us for what would be minor faults,” he says.

 

The DOJ examined 116 loans at Quicken and decided 55 had defects, according to Emerson. Quicken reviewed the loans and decided maybe nine of them had defects. DOJ wanted to use the ratio of defects in those loans and apply it across all the company’s FHA loans over a period of years, and then make “some ridiculous demand” for a settlement that Quicken was not going to entertain, says Emerson.

 

“Really what has happened is the DOJ has taken the FHA program hostage,” Emerson says.

 

As a result, he adds, access to mortgage credit for low- and moderate-income families has been reduced because there are not enough lenders to play in the space—and the ones who do impose significant credit overlays that limit the use of the program.

 

“It’s almost unconscionable to me that the government would do this and do it in the manner they are doing it,” says Emerson.

 

Quicken will continue to hold fast in defying demands from DOJ, according to Emerson. “We will not be bullied. We will not be threatened. Just because you’re the big, bad government doesn’t make you right.”

 

Consumer groups

 

The adverse impact of the wave of false claims litigation on the availability on credit has brought in opposition to the enforcement crackdown from consumer advocacy groups.

 

When FHA proposed and then reproposed changes to its certification rules to make it more attractive to lenders who had left the FHA program, the Center for Responsible Lending weighed in against both proposals.

 

“Our position has been that there needs to be more clarity regarding the certification. You should focus enforcement on violations that truly pose risk to the insurance fund and are a risk to borrowers,” says Mike Calhoun, president of the Center for Responsible Lending, Washington, D.C.

 

“We’ve encouraged them to clarify that the certification of accuracy only applies to serious errors that go to the basic insurability of the loan,” says Calhoun.

 

“If a few numbers in an application are incorrect and the loan would have otherwise met the criteria for underwriting, that should not be a violation of certification and should not trigger a False Claims Act liability,” he says.

 

For example, if a borrower’s income was overstated in the application but his or her actual income was still sufficient to qualify for the loan, that would be the kind of error that does not go to the insurability of the loan, explains Calhoun.

 

Seeing both sides

 

Some observers, while seeing why mortgage bankers and others are opposed to the wave of litigation, see the need for a better way of preventing fraud against FHA. “I feel like I can see both sides of it,” says Mark Calabria, director of financial regulation at the Cato Institute, Washington, D.C.

 

Calabria thinks that before the financial crisis, FHA did not take fraud seriously enough. “Certainly their hands were a bit tied,” Calabria says. “It used to be the case that FHA had a difficult choice: either do pretty much nothing or throw the endorser out of the program.”

 

The essential question for the FHA, Calabria contends, is how do you penalize people without throwing them out of the program (except, of course, those endorsers that should be thrown out of the program)?

 

For one thing, Calabria says, there should be incentives in place to improve the underwriting. “As long as we have a system where FHA has a credit box that takes a considerable amount of risk, you have to have something that nudges the lenders back into being a little bit more of a gatekeeper and bring some sanity to this,” he says.

 

One way FHA could incentivize better underwriting is to establish a policy that gives lenders certainty that if a loan does not default within three years, HUD should not require the lender to indemnify HUD against any losses that occur after that, according to Calabria. The other side of the policy is that when FHA asks lenders to buy back the loan that defaults before three years, lenders should not fight that request and should be willing to buy back the loan.

 

The DOJ and FHA also need to work together to balance the federal government’s approach to false claims litigation, according Calabria.

 

FHA might take more of a role to work with DOJ on helping decide which potential False Claims Act cases to pursue and then be willing to take a more active role in terms of testifying in those cases, according to Calabria. In this way, the FHA might temper some of the incentives that drive DOJ to concentrate on lenders with deep pockets.

 

“There is this degree to which DOJ is looking to put points on the board so they can say they’ve done something about the mortgage crisis,” says Calabria.

 

Big lender settlements

 

An examination of the final actions memos from HUD’s Office of Inspector General’s Office offers a more detailed look into the targets and the financial toll that’s been taken by the litigation wave.

 

All the top-five FHA lenders in 2012 have been hit by false claims lawsuits. Three have settled, while a fourth—Wells Fargo—has agreed in principle to a settlement.

 

Bank of America, Charlotte, North Carolina, settled for $1.05 billion in July 2014 for loans made mostly by Countrywide Financial, Calabasas, California, which it acquired in 2008.

 

JPMorgan Chase, another top FHA lender in 2012, settled in September 2014 for $614 million, which included $49.4 million for Department of Veterans Affairs (VA) loans. The settlement prompted Chairman, CEO and President Jamie Dimon to warn that without a safe harbor, the bank would curtail its FHA lending. And indeed it has. In 2015, JPMorgan chase ranked No. 159 in FHA lending, according to Inside Mortgage Finance.

 

Flagstar Bank, Troy, Michigan, another top-five lender in 2012, settled with the government for $132.8 million—although only $14.5 million was immediately due. Out of 2012’s top-five FHA endorsers, only Quicken has not settled.

 

The first Bank of America case—there is a group of cases two years later—started out as a qui tam action by whistleblower Kyle Lagow, a district manager at LandSafe Inc., Plano, Texas, the appraisal arm of Countrywide. (A qui tam suit is one where an individual or organization brings a lawsuit on behalf of the government and can also win an award if the lawsuit is successful in bringing a recovery.) Lagow was represented by Shayne Stevenson, a partner at law firm Hagens Berman LLP in Seattle.

 

The case was joined by the U.S. Attorney’s Office for the Eastern District or New York in Brooklyn on behalf of HUD. Lagow’s lawsuit eventually led to a $1 billion settlement with Bank of America in July 2012 that also covered VA loans.

 

“Essentially Kyle [Lagow] charged that homes were being appraised [for Countrywide] with material deficiencies that were subsequently being insured by FHA,” says Stevenson. “When the loans defaulted, FHA was suffering a loss on homes it would not have insured had it known the true circumstances of the underwriting as it relates to appraisal fraud,” he says. Lagow was awarded $14.5 million as the whistleblower.

 

There has been a raft of other large settlements in false claims cases involving FHA loans. In July 2012, Deutsche Bank and its subsidiary, MortgageIT, agreed to pay $202.3 million in a federal case.

 

This settlement was the first major resolution of a case involving DOJ’s new strategy of bringing cases based on false certifications. The case was filed in May 2011 on behalf of HUD by Preet Bharara, U.S. Attorney for the Southern District of New York. Bharara had established a Civil Fraud Division the prior year to find and prosecute cases of financial fraud.

 

CitiMortgage

 

CitiMortgage and Citibank settled for $158.3 million in February 2012 in a case filed in August 2011 by whistleblower Sherry Hunt, a former CitiMortgage vice president who supervised 65 underwriters at the O’Fallon, Missouri–based subsidiary of New York–based Citibank.

 

Hunt filed as a relator in a qui tam lawsuit under the False Claims Act, meaning that she was suing on behalf of the government to recoup losses suffered by the FHA with as much as triple damages paid to the U.S. Treasury. The False Claims Act is designed to incentivize whistleblowers by giving them a share of the proceeds.

 

When this case was settled, Hunt was awarded $31 million. The relator award in qui tam false claims lawsuits varies from 15 percent to 30 percent, plus reasonable attorneys’ fees.

 

This was a high-profile case because due to mortgage woes CitiMortgage had moved into the national spotlight after CBS News’ investigative program 60 Minutes in 2011 aired an interview with another Citigroup whistleblower, Richard Bowen. Bowen is the former senior vice president and chief underwriter for correspondent and bulk acquisitions from 2002 to 2005, in O’Fallon, Missouri.

 

Bowen, who never filed a qui tam case himself but talked with government investigators working on the Hunt case, is not happy about all the settlements of false claims suits. It would have been better if they had gone to trial to give them a proper public airing, according to Bowen.

 

The biggest hit

 

There was a second Bank of America FHA false claims settlement in September 2014 for $800 million that was part of a mammoth $16.65 billion settlement. The agreement resolved claims that Countrywide and Bank of America certified loans that did not comply with FHA requirements, based on a sample the government claimed found unacceptable rates of material underwriting defects.

 

The broader $16.65 billion settlement—the largest such in history, according to DOJ—encompassed misconduct at Countrywide before it was acquired by Bank of America. It resolved a number of federal and state cases involving residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs).

 

Additionally, $1 billion of the Bank of America settlement was earmarked to resolve claims arising out of misrepresentations about mortgage originations fraudulently sold to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

 

The GSE charges came out of a federal investigation into Countrywide’s Consumer Markets Division and Bank of America’s Retail Lending Division. The investigation was conducted by the U.S. Attorney’s Office for the Southern District of New York, as well as the Federal Housing Finance Agency’s (FHFA’s) Office of Inspector General and the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

 

The GSE portion of the settlement also resolved several  qui tam cases that brought awards of $170 million to whistleblowers, according to a report in the Dec. 19, 2014, New York Times DealBook section. The whistleblowers were identified as Edward O’Donnell, a former executive at an appraisal company; Robert Madsen, a former Countrywide property appraiser; Shareef Abdou, an executive at Countrywide’s operations group; and Mortgage Now Inc., a Shrewsbury, New Jersey–based mortgage lender.

 

The qui tam plaintiffs were represented by Brian Mahany of Mahany & Ertl LLC, Milwaukee. He pieced together the case involving Countrywide’s “Hustle” program aimed at lower-credit-quality borrowers, and presented it to DOJ. The complaint charged that inflated appraisals were used to qualify loans, which Mortgage Now sold off to the FHA while Countrywide sold mortgage-backed securities (MBS) to Fannie Mae and Freddie Mac.

 

The inclusion of GSEs in the settlement is troubling, according to Andrew Schilling, a partner who heads BuckleySandler LLP’s New York office and its False Claims Act and FIRREA practice. (FIRREA is the Financial Institutions Reform, Recovery and Enforcement Act of 1989.)

 

The potential use of false claims claiming fraud against Fannie Mae and Freddie Mac “is not just a theoretical point,” he says. There have been three such settlements.

 

DOJ has argued that Fannie and Freddie are part of the federal government, not private business, before the U.S. Court of Appeals in the Ninth Circuit. However, on Feb. 22, the court ruled against the DOJ and affirmed the ruling of a lower court dismissing the case of two qui tam plaintiffs against a raft of major Fannie Mae and Freddie Mac lenders, including many with deep pockets.

 

More settlements

 

In addition to all the companies described already in this story, there have been five more settlements in false claims lawsuits against FHA lenders exceeding $100 million.

 

SunTrust, Richmond, Virginia settled for $418 million in June 2014 in a case involving the Consumer Financial Protection Bureau (CFPB), 49 state attorneys general and the attorney general for the District of Columbia. In a separate case, U.S. Bank, Minneapolis, settled in June 2014 for $200 million.

 

In June 2015, Memphis, Tennessee–based First Tennessee Bank NA, a wholly owned subsidiary of First Horizon National Company, settled for $212.5 million for loans originated between 2006 and 2008. First Horizon sold its mortgage business to New York–based MetLife Inc. in 2008.

 

MetLife Home Loans LLC, Irving, Texas, a subsidiary of MetLife Inc., settled for $123.5 million in February 2015. While the company was one of the top-five FHA originators in 2011, soon thereafter it exited the business entirely.

 

What’s the total amount from the settlements?

 

Neither DOJ nor HUD has published a running tally on all that has been paid out from the false claims settlements so far. However, the Civil Fraud Division of HUD’s Office of Inspector General regularly files final action memos on each of the False Claims Act cases and other litigation outcomes as well.

 

Mortgage Banking obtained HUG OIG final action memos on 11 false claims cases settled from 2012 through the third quarter of 2015. Adding them up, the total settlement dollar amount for the 11 cases is $3.369 billion. Of this amount, $824.5 million was placed in the U.S. Treasury’s General Fund.

 

FHA’s Mutual Mortgage Insurance Fund received by far the lion’s share of the settlements, taking in $2.261 billion on the 11 cases, according to a tally of the amounts in the HUD OIG memos.

 

This considerable gain from the settlements is significant for FHA because the funds came into the insurance fund at a time when it was reeling from losses—much of it from the reverse-mortgage program. The FHA fund required a $1.7 billion injection in 2013. FHA was not able to restore its mandated 2 percent excess capital reserves until 2015.

 

Was the timing of the litigation wave a coincidence, given the shortfalls at FHA? Most observers think not.

 

The false claims litigation wave was “a way for the FHA to recoup large dollar amounts from the largest FHA lenders in the country” to replenish its fund, claims an attorney who represented defendants in some of these cases.

 

DOJ has received up to $77.2 million in funds. Under the False Claims Act, DOJ can receive up to 3 percent of the total amount of settlements. “That’s enough to hire many more attorneys to go after more cases,” confided an attorney who represents FHA false claims defendants.

 

According to the HUD OIG, whistleblowers in two of the cases received a combined total of $81 million—but that does not include the $14.5 million payout in 2012 to whistleblower Lagow in the first Bank of America settlement. It also does not include $63.9 million awarded to whistleblower Keith Edwards, a former assistant vice president at JPMorgan. Nor does it include the $170 million payment made to the plaintiffs in the $1 billion Bank of America settlement in 2014.

 

If one combines all the publicly known whistleblower settlements involving FHA-insured loans originated by large banks, the grand total would be $329 million.

 

The pull back

 

The exit of the largest FHA lenders from the program has been quite dramatic. Citibank was the first to scale back in 2008, before the scope of such cases was expanded. By 2009, Citi was ranked No. 30 and has disappeared from the top rankings of FHA lenders since then.

 

JPMorgan Chase was also pulling back before its $614 million settlement in 2014, according to Cecala. In 2012, JPMorgan originated $3.9 billion in FHA mortgages, according to  Inside Mortgage Finance. By 2015, JPMorgan had dropped far outside the top 100.

 

The largest cutback came at Wells Fargo. Wells was No. 1 in FHA lending in 2011 ($24.8 billion) and 2012 ($25.98 billion), according to Inside Mortgage Finance. No one else came close to producing that level of FHA loans.

 

By 2015, however, it originated only $6.33 billion in FHA loans. Yet, because so many large lenders had left the program, Wells still ranked No. 2 last year.

 

Bank of America has also sharply curtailed its FHA lending. In 2011, the bank was the second-largest FHA lender with $10.23 billion in originations, according to Inside Mortgage Finance. By 2015, Bank of America had slipped to 22nd place with $1.36 billion in FHA loans.

 

Recently Bank of America rolled out a new 3 percent down-payment program without mortgage insurance that was not an FHA-insured loan. The loans are expected to offer lower overall costs to borrowers than FHA loans.

 

Other big FHA lenders that have settled false claims lawsuits have slashed their FHA business. SunTrust, which ranked No. 16 in 2011 with $1.4 billion in FHA originations, last year ranked No. 95 with $399 million in FHA loans.

 

Quicken Loans, which was the top FHA lender in 2015 with $13.1 billion in loans, is considering exiting the business entirely in response to pressure from DOJ to enter a settlement.

 

As a result of the exodus of large lenders, 73 percent of the FHA program’s production—once dominated by large banks—was originated by non-banks in fourth-quarter 2015, according to Inside Mortgage Finance.

 

Some large institutions have remained in the FHA program by taking FHA loans originated and closed by correspondents and putting them into Ginnie Mae pools, according to Cecala. This eliminates the company’s role as a Direct Endorsement lender.

 

Chase Home Finance, for example, an Edison, New Jersey–based division of JPMorgan Chase, was the second-largest issuer of Ginnie Mae securities in 2015, with $64 billion in new issues, according to Inside Mortgage Finance. Wells Fargo was the largest with $251.7 billion in Ginnie Mae issues.

 

Other former top FHA lenders, burned by their settlements in false claims lawsuits, are still in the top ranks of Ginnie Mae issuers last year. Bank of America, for example, ranked No. 5 with $43.7 billion in issues, according to Inside Mortgage Finance. U.S. Bank was No. 6 with $43.5 billion in issues. SunTrust was No. 16 with $10.2 billion in issues. CitiMortgage ranked No. 20 with $9 billion in Ginnie Mae issues.

 

FHA’s response

 

The major pullback in FHA lending by large banks has not gone unnoticed at the FHA, where efforts have been underway for a year to coax large banks back into the program.

 

A year ago FHA first proposed and then last September revised new documents for certifying loans. The idea, according to FHA chief Edward Golding, HUD principal deputy assistant secretary, Office of Housing, was to leave room for minor errors to be made by lenders while still allowing room for the government to pursue damages when there are significant defects.

 

For Wells Fargo, both the original and revised proposal put forth last September by FHA fell short of what it thought was needed.

 

“This will now force us to add back certain credit overlays on the FHA single-family program,” said Mike Heid, former executive vice president and head of Wells Fargo Home Mortgage, Des Moines, Iowa, in a released statement.

 

On March 15, FHA issued a final rule for loan level certifications and proposed a revision to annual certifications by lenders.

 

FHA sought to reassure lenders with its clarification. “FHA is not intent upon penalizing lenders for minor mistakes that may not impact their ultimate decision to approve a borrower’s loan,” Golding said at a press conference. “Lenders will attest to what they know to the best of their knowledge. There’s no intent here to hold lenders responsible for mistakes committed by a third party.”

 

Importantly, the changes “do not bind DOJ,” says Calabria. “But certainly for the lenders, it seems a small step in the right direction,” he adds.

 

Indeed, DOJ issued a statement March 15 that liability under False Claims Act is established only for those who “knowingly” make false claims and only for “material” records or statements. “Thus, insignificant violations that have no effect on a person’s entitlement to the payment of a claim also do not give rise to liability,” the DOJ stated.

 

It is not clear whether the changes will ultimately reduce the level of credit overlays that lenders have put in place to make sure loans certified to the FHA have almost no chance of going delinquent.

 

Fears by those burned by triple damages in federal lawsuits may not subside. Some may want to wait and see if the DOJ scales back its aggressive litigation of companies with deep pockets.

 

 

MB

 

 

Robert Stowe England is a freelance writer based in Milton, Delaware, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at Amazon.com. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

 

Copyright © 2016 Mortgage Banking Magazine

Reprinted With Permission. All Rights Reserved.

 

 

 

Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

Visit Mind over Market:

Mind Over Market

Click Here>>