Can FHA's promise of softer enforcement get lenders back on board?

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WASHINGTON — The financial services industry welcomed a proposed overhaul of how the Federal Housing Administration identifies False Claims Act violations, but some observers say it remains to be seen if the changes will lure mortgage lenders back to the FHA.

For years after the financial crisis, lenders charged that False Claims Act enforcement — both by the Department of Housing and Urban Development and the Department of Justice — went too far, targeting companies for overly minor infractions. Many large banks stopped offering FHA loans as a result, including Bank of America, JPMorgan Chase and Wells Fargo.

But after signs that the Trump administration wanted to soften its approach, the FHA on Thursday announced a package of changes to give lenders more legal certainty. The industry's immediate reaction was positive, lauding the agency for hearing companies' concerns.

“We are confident that the changes will lead to more lenders participating fully in the FHA program, making these mortgages available to even more Americans — particularly first-time homebuyers,” Robert Broeksmit, the president and CEO of the Mortgage Bankers Association, said in a statement.

But some industry experts say lenders' legal teams will have dig deeper into the FHA proposal to determine if the revisions are enough.

“There’s no doubt that they want to do something that allays the industry’s concerns about what the industry perceives as unjustified enforcement actions by the DOJ," said Brian Chappelle, a partner at Potomac Partners and a former FHA official. "While I don’t know if HUD agrees with that, they certainly want to help allay the industry’s concerns. … The issue is going to be do the large banks think that these changes go far enough to address those issues?”

In the proposal, the FHA said clarifications to its loan-level and annual certifications, as well as changes to its "defect taxonomy" tool, would provide lenders and servicers with greater certainty, and at the same time, would boost market competition.

After the crisis, the Justice Department employed the False Claims Act — a Civil War-era law to combat fraud by government contractors — to fine major banks and other FHA lenders billions of dollars for alleged abuses.

But banks argued that the penalties were unjustified, expressing concern that any single defect in an FHA loan could result in a fine. Ensuing False Claims Act ligation prompted several large banks and other mortgage lenders to exit the FHA program, leaving most of the FHA’s business to nonbank lenders.

FHA Commissioner Brian Montgomery said the proposed changes are intended to address the industry's concerns.

“We think based on some very preliminary feedback and input we’ve had from banks and even nonbanks currently participating in the program is that even putting the False Claims Act aside, these are good improvements to the loan certifications and defect taxonomy,” he said on a conference call with reporters about the agency’s proposal.

The proposed changes will be available for public comment for 30 days. They would replace “jumbled legalese” with references to the FHA’s Single Family Handbook and remove unnecessary certifications, said Gisele Roget, the FHA’s deputy assistant secretary for single- family housing.

For the agency’s defect taxonomy, which was first implemented in May 2017 to enable lenders to fix problems before being hit with an enforcement action, the FHA proposed suggesting potential remedies for flagged defects. The proposal would also provide more transparency into the agency’s loan-level quality assurance process.

Revisions of the certifications and defect taxonomy were “long overdue”, said Ed DeMarco, president of the Housing Policy Council.

“Successfully addressing these issues will give lenders more confidence in participating in the FHA program and enable participating lenders to better serve homebuyers seeking an FHA loan,” he said in a statement.

Chappelle said that, while "HUD is trying to do things to allay [industry] concerns ... the issue is do [the banks'] attorneys think it does that."

"We’ll have to see,” he said. “The devil’s in the details as far as what the banks think of it.”

Clarifying FHA certification requirements and updating the defect taxonomy is expected to narrow the scope of how the DOJ enforces the False Claims Act.

“In sum, today’s proposed revisions to the certifications and defect taxonomy will provide clarity, transparency and certainty for all lenders, including the depositories that we want to return to the FHA program and what stays the same is that there will continue to be no room at FHA for bad actors,” Roget said.

The effort in providing more clarity to lenders is part of the Trump administration’s larger directive to reduce regulations that officials deem burdensome, HUD Secretary Ben Carson said in a statement.

“While HUD will preserve its strict enforcement authority where our requirements are violated, we will continue to reduce unnecessary burdens on stakeholders across our programs,” he said.

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False Claims Act Enforcement actions Mortgages Crime and misconduct Brian D. Montgomery Ben Carson HUD FHA DoJ