FHA Lender Cited for ‘Unallowable’ Downpayment Assistance

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Congress banned the use of downpayment assistance on FHA-insured loans in 2008 but one Phoenix lender just got caught for reimbursing charitable housing groups that provided “gift” downpayments to homebuyers.  

An audit by the HUD Office of Inspector discovered The Lending Co. had “approved 789 FHA-insured loans that contained unallowable gift downpayments.”

FHA requires a 3.5% downpayment on single-family loans. TLC required borrowers to come up with a 1% downpayment based on the sales price. “This gift program was marketed as a 1% down purchase program,” the HUD IG said in an August 20 report. 

The gift program covered the remaining 2.5% of the downpayment. 

HUD warned The Lending Co. about the gift program in October 2010. TLC told HUD it has terminated the downpayment assistance program with the charitable organization. However, TLC entered into a new arrangement with another charitable group and continued originating FHA-insured loans with unallowable gift downpayments.

The HUD IG is recommending that FHA consider levying civil monetary penalties against TLC and its principals, as well as require the Phoenix lender to cover all known losses on the gifted loans and indemnify FHA for future losses.

In a statement issued by the company, TLC said its “lending practices and operations are, and always have been, in full compliance” with FHA guidelines and regulations. “TLC firmly believes that the matter can be resolved in a prudent, fair and amicable manner.”    

A HUD spokesman said the department is reviewing the audit report.   “We received the audit when the IG released it and it is currently under review by program staff and counsel,” the spokesman said.

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