HUD, Justice Dept. aim to ease lenders' False Claims Act burden

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WASHINGTON — The Trump administration announced a dramatic pullback in its use of the False Claims Act to bring civil fraud claims against mortgage lenders.

The Department of Housing and Urban Development and the Department of Justice on Monday released a joint a memorandum of understanding, stating that HUD will deal with False Claims Act violations — involving Federal Housing Administration lenders — mainly through administrative proceedings.

Under the agreement, which is intended to provide lenders with more legal certainty and lure banks back to the FHA program, HUD’s Mortgage Review Board will refer cases to the Justice Department only in certain instances of False Claims violations.

HUD Secretary Ben Carson said the changes are meant to prevent lenders from being targeted with enforcement for negligible errors.

“Non-material errors are looked at very differently now,” Carson said Monday on CNBC’s “Squawk Box.” “And this doesn’t mean by any stretch of the imagination that we’re not going to vigorously pursue fraud and people who do things intentionally, but non-material, ineffectual things — we’re not going to torment people about those. We will make sure that they learn from them.”

The review board will refer cases where "Tier 1" violations are present in at least 15 loans, or loans with an unpaid principal balance or at least $2 million in claims.

The memorandum of understanding also includes a provision that allows HUD to recommend that the Justice Department dismiss a False Claims Act Case if HUD doesn’t support the litigation.

“While the decision of whether to seek dismissal remains the exclusive authority of DOJ, DOJ will consult with HUD in making such a decision,” the memo says.

In any case, the Mortgage Review Board will retain the ability to seek administrative action and civil money penalties to address violations.

“This MOU sets forth a robust and collaborative process for deciding when to pursue False Claims Act cases to remedy material and knowing FHA violations,” Attorney General William Barr said in a statement. “DOJ and HUD will work together to determine when HUD’s administrative remedies are sufficient, or other recourse is appropriate, to address harm to the borrower, the taxpayer, or the government."

The memorandum of understand is the latest in a set of efforts to address lenders' fears of being sued under the False Claims Act. Carson noted on “Squawk Box” that before the financial crisis, about 50% of loans insured by the FHA were originated by depository institutions, but that number is now closer to 15%.

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.

Banks had 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.

“I suspect things will normalize once we once again establish a normal environment for people to work in,” Carson said. “We live in a society where market forces rule, and market forces mean that people look at the things that are advantageous to them and the things that are not advantageous to them, and they act accordingly.”

Carson officially announced the memorandum of understanding during remarks at a Mortgage Bankers Association conference in Austin, Texas.

MBA President and CEO Robert Broeksmit applauded the changes.

“Today is a significant step toward providing clarity for those currently participating in the FHA program, as well as encouraging more lenders to offer FHA-insured loans,” Broeksmit said in a statement.

But some analysts warned that the memo may not ease lenders' concerns overnight.

"While this could be a positive for FHA lenders and could attract more banks back into this market, KBW analysts think change is likely to be slow," analysts with KBW said in a research note. "First, it remains unclear if changes under the agreement are meaningful enough to make lenders comfortable. Second, they think lenders are likely to remain concerned about whether the agreement could be changed by a future administration."

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False Claims Act Enforcement actions Mortgage fraud Ben Carson Robert Broeksmit HUD FHA DoJ
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