In the new era following the subprime-lending disaster most mortgage lenders are looking more carefully at the implementation of their underwriting and quality control criteria—including the Federal Housing Administration.
Citing “serious” underwriting standard violations the FHA Mortgagee Review Board has permanently withdrawn FHA approval of Cambridge Home Capital LLC and is also seeking a monetary penalty of $182,000.
In addition, the Department of Housing and Urban Development reported that it “worked closely” in related civil fraud charges filed against the bank by the U.S. attorney’s office in the Southern District of New York.
The Great Neck, N.Y.-based lender is now permanently banned from FHA lending.
The FHA board said these actions were based on “numerous and egregious violations of FHA requirements,” such as failure to implement required quality controls, failure to document borrower income sources, unjustifiable approvals of loans “with grossly excessive debt-to-income ratios,” and using conflicting information during FHA loan origination and insurance.
Commissioner David Stevens called these violations to FHA’s underwriting standards so damaging to the interests of the FHA and the public that they required “strong action.”
The investigation revealed that CHC failed to hire a sufficient number of trained quality control personnel. According to the FHA, the bank did not have “an acceptable quality control plan” for the origination of FHA-insured loans and did not comply with the requirement to not set a minimum loan amount limit.
Filing of conflicting information, inadequate documentation and unacceptable debt-to-income ratios were some of the reasons.
According to the FHA, Cambridge “failed to adequately document” the stability, source of income, or both, with qualifying borrowers ignoring the fact that the goal of underwriting standards is to help determine more accurately a borrower’s ability and willingness to repay the mortgage debt.
More specifically, CHC failed to examine and verify income and employment information, thus did not comply with FHA requirements in at least nine sampled loans. In these examples investigators found “borrowers’ income was significantly overstated and sources of income were not verified.”
Regarding mortgage and overall debt-to-income ratios used to determine whether a borrower can reasonably be expected to meet mortgage expenses, FHA said CHC approved loans with ratios that exceeded FHA guidelines without the required “significant compensating factors” in 13 sampled loans that did not have adequate significant compensating factors and/or documentation.
Finally, CHC “used conflicting information” in originating and obtaining FHA mortgage insurance by failing to verify and document all information that supported the decision to approve a loan. In four sample loans CHC used documentation with “discrepancies involving borrowers’ employment, credit scores and property addresses.”
While appeals do not delay the aforementioned actions the lender may appeal FHA’s withdrawal by submitting a written request for a hearing before an administrative law judge by mid-January.
Similarly, HUD said, the lender will have the opportunity to contest a complaint seeking civil money penalties that will be served “in due course.”
