No relief yet for lenders where False Claims enforcement is concerned
It was a big win for Quicken Loans — small fine, no punitive damages — in its dispute with the government over allegations it submitted loans ineligible for insurance to the Federal Housing Administration.
Taken along with recent statements by Department of Housing and Urban Development acting Deputy Secretary and Federal Housing Commissioner Brian Montgomery regarding enforcement of the False Claims Act, that may portend a shift in regulatory attitudes regarding liability for unintentional errors in loan files.
The defect taxonomy that Montgomery referenced — a listing of nine broad underwriting categories for which potential errors in loan files could be identified and then placed into severity tiers — was created for post-closing reviews, but at the time of its introduction it did not create a standard when it came to administrative or civil enforcement.
And while using the taxonomy is important when it comes to determining violations, it was the certifications that lenders must make with each file submitted for coverage, along with an annual corporate statement, that provided the trigger for the HUD and the Justice Department — which share enforcement powers for the Act — to go after mortgage lenders in the first place.
When it comes to the discussions on revising the certifications, with the initial proposal from HUD, said Laurence Platt, an attorney with Mayer Brown, "the industry appreciates the effort; [HUD's] getting a high effort grade but they're not getting a good content grade."
Lenders are still looking for assurance when it comes to enforcement, not just from HUD but from Justice as well.
"Getting that legal certainty through the revised certification process and the taxonomy is necessary going forward" to encourage participation in the FHA program, said Pete Mills, the MBA's senior vice president of residential policy.
It was large penalties for underwriting errors assessed primarily to banks in federal fiscal years 2014 and 2016, which caused several lenders to reduce their FHA volume or drop out of the program entirely.
But in fiscal year 2018, which ended on Sept. 30, there was just one FHA-related False Claims Act recovery and that wasn't even from a lender. There was a $149.5 million payment from Deloitte & Touche for its role as the independent outside auditor for Taylor, Bean & Whitaker.
And in fiscal year 2017, a $296 million a jury verdict against Allied Home Mortgage and another $25 million finding against the company's former President and CEO Jim Hodge made up the majority of the period's fines.
But both of those cases were proven instances of mortgage fraud, and didn't involve the penalties for minor errors that the industry was looking to get clarity and relief from.
There is "always a risk for companies that intentionally, materially make false statements to the government. What it does do is give people a little sigh of relief that knowledge and honesty will matter in these cases," Platt said.
"In some respects you can analogize it with what's going on with the Consumer Financial Protection Bureau. They're still bringing claims, but they're not bringing the wild claims where they're trying to make new law at this point," he continued.
For the lenders who acted in good faith and did what they were supposed to do during the process, but still faced manufacturing defects in originations, they should be comforted by this, he said.
Montgomery's comments seem to provide that respite, but even so, now is not the time for lenders to pull back on their internal compliance efforts.
For example, legal liability as well as regulatory examinations of loan files can cover periods going back several years, and if there is an administration change, it is likely to bring a shift in enforcement priorities.
"I tell the regulated entities — I said this to them in 2017 and 2018, when the Trump administration first came in — don't let up, don't think that you can pull back on your compliance resources and cut your budgets as much as you can," said Ed Kramer, a senior advisor for Asurity Technologies and a former New York regulator. "My advice was and is, you shouldn't because that next regulator comes in and says 'let's do the exam and cover 2017, '18 and '19.'"
The result for lenders is a bunch of problems that could cost them plenty of money.
While False Claims Act enforcement was cited as one of the causes for the market share shift of low down payment mortgages out of the FHA program and toward the use of private mortgage insurance, the settlement and Montgomery's statements are not enough to reverse that trend, said Bose George, a Keefe, Bruyette & Woods analyst.
"If the False Claims issue is addressed in a more meaningful way, if they come out with a different certification that provides some clarity," that should benefit to the FHA program when it comes to those loans that could go into the conforming channel, George said.
"If there are changes there that can potentially make lenders comfortable that the False Claims Act won't be used against them, that's the kind of change that could bring some of the lenders back," he said. But other meaningful changes to the FHA program also have to take place for it for some lenders to return, including addressing life of loan premiums, which makes it less competitive with PMI for higher credit score borrowers seeking low down payment mortgages.