FHA Has Cracked Down On Lenders’ Claims
Denying claims and threatening lawsuits, the Federal Housing Authority has cracked down on lenders. The agency has heavily scrutinized recent claims and is forcing lenders to shoulder the risk on new loans. As a result, claims fell 15 percent last quarter, according to a May 25 American Banker article.
Even the smallest inaccuracy, such as an incorrect address, has disqualified claims at the agency, which operates under the umbrella of the Department of Housing and Urban Development.
Darlin McRoyal, an FHA consultant and compliance advisor at a firm in Burlingame, Calif., told American Banker that HUD is acting like any insurance agency. “If a loan goes bad and there is some deficiency, they are not going to pay the claim,” he said.
Even when a claim is not denied, it has taken a much longer time for FHA to approve and pay it.
Matthew Pineda, president of Castle & Cooke Mortgage, LLC, in Salt Lake City, told American Banker a few years ago it only took FHA about 10 days to pay a claim. Today lenders are required to move through a more complex process including reviews by a due diligence committee and a quality control committee.
Pineda said FHA loans were attractive because of the insurance. “Now you can’t depend on the insurance,” he told American Banker. He said lenders are accepting more liability now than ever on FHA loans because they are losing the ability to make claims.
FHA told American Banker payments are delayed because they are processing a record 176,000 loan foreclosure claims.
Although FHA can deny claims, HUD can enforce even stronger punishments, including issuing fines and forcing lenders to repurchase bad loans. Moreover, HUD can bring criminal charges against executives responsible for overseeing FHA compliance. If a lender falsely certifies that a loan has met FHA criteria and it has not, the lender can be penalized for up to three times the amount of the loan.
Lawyers whose clients are in settlement discussions with HUD for violations that occurred several years ago are concerned that their agreements may not be binding with other agencies such as the Justice Department.
According to American Banker, the Justice Department filed a civil fraud suit in May against Deutsche Bank AG and its home lending unit, MortgageIT, for failing to perform quality-control reviews of FHA-insured loans. FHA paid $386 million in claims on 14,000 defaulted loans from Deutsche. The suit has sought damages of $1.2 billion under the False Claims Act, which has a statute of limitations of 10 years.
U.S. Bancorp has settled with HUD for $1.2 million amid allegations it did not comply with FHA standards on 27 loans originated in 2003 and 2004. Their non-compliance resulted in losses of $465,000.
Given recent events, lenders are worried about the increased liability on the FHA loans they have on file and on future loans. Even the four largest lenders are postponing making claims on billions of dollars of delinquent FHA loans.
According to American Banker, in the first quarter, Bank of America Corp. held $19.8 billion of loans insured by the FHA and the Veterans Administration that were 90 days or more past due. In addition, Wells Fargo & Co. held $14.4 billion, while JPMorgan Chase & Co. logged $9.8 billion, and Citigroup Inc. had $5.4 billion.
Before filing claims, lenders are now conducting internal audits of delinquent loans to ensure all HUD requirements, such as loss mitigation, has been offered to the borrower. McRoyal told American Banker that HUD wants lenders to do their own due diligence, find their own errors, report them and put risk controls of their own in place so the same errors don’t happen again.