Mortgage industry observers expected the Trump administration to be less aggressive in using the False Claims Act to pursue fraud cases against lenders and servicers of Federal Housing Administration-insured loans.
But so far, the only change has been a shift in emphasis to loan servicing activities and reverse mortgages.
The act is being applied in a heavy-handed fashion, bringing all violations large and small together under the same penalty umbrella, which is inherently unfair, industry advocates claim.
One way to alleviate this concern would be to use the FHA's new loan defect taxonomy to segment violations by degrees of severity. But while the tool is currently used in the loan review process for quality control purposes, the FHA and Department of Justice have yet to adopt the taxonomy for administrative or civil enforcement actions.
What's more, the False Claims Act allows for treble damage penalties, meaning the DOJ can extract triple the losses incurred by the government as a deterrent to future bad actors. That makes the act a potent enforcement tool and many mortgage companies accused of violations elect to settle cases rather than face a substantial penalty if they go to trial and lose.
For example, PHH Corp. cited its desire "to avoid the distraction and expense of potential litigation," when it recently agreed to pay a $75 million settlement with the DOJ to resolve a False Claims Act investigation that began in 2013. It's a notable motivation, given the company appears ready to take its legal wrangling with the Consumer Financial Protection Bureau all the way to the Supreme Court.
Another challenge is how Fale Claims Act damages are arrived at in the first place. Quicken Loans, in its pre-emptive suit against the DOJ, said the agency used a small sample of the FHA-insured originations, cited the violations and extrapolated an error rate it applied to all of those loans.
Using a sample to determine an error rate is fine, said Laurie Goodman, the co-director of the Urban Institute's Housing Policy Center, but it should be "a reasonable sample. No statistician would use the sample size they're using."
Industry groups, including the American Bankers Association, American Financial Services Association, Consumer Mortgage Coalition, Independent Community Bankers of America and Mortgage Bankers Association, have approached Attorney General Jeff Sessions to request a meeting to discuss the DOJ's approach to enforcement actions. But any change to how the False Claims Act is applied to mortgage companies may not come until a new FHA commissioner is in place.
The DOJ would not been pursuing these False Claims Act actions without at least tacit support from the Department of Housing and Urban Development and the FHA, said Joseph Murin, a former president of Ginnie Mae.
The next FHA commissioner will no doubt address enforcement policies with DOJ officials. In their talks, the new commissioner is likely to make it clear that while the FHA wants bad actors taken care of, the act is being used with a heavy hand and things need to change, Murin said.
The Justice Department obtained more than $1.6 billion in False Claims Act settlements and judgments during the 2016 fiscal year that ended on Sept. 30, primarily from cases of FHA lenders accused of origination defects in forward mortgages. Since 2009, the total has been over $7 billion.
The DOJ's actions are justified because of the extent of misconduct in the industry, spokeswoman Nicole Navas said in a written response to NMN.
"The FHA's mortgage insurance program plays a critical role in helping eligible citizens to purchase homes. Unfortunately, working closely with HUD and the HUD Office of the Inspector General, the DOJ has uncovered widespread misconduct by lenders in originating and underwriting mortgages guaranteed by the FHA, which have caused homeowners to lose their houses, and the federal government to suffer substantial losses," the statement reads.
"In the settlements that the Department has reached to date, lenders have admitted originating loans that they knew were not eligible, and failing to disclose these ineligible loans to the FHA. The Department will continue to pursue such fraudulent lending practices," it adds.
The act is an appropriate enforcement tool to protect consumers, said the California Reinvestment Coalition's Deputy Director Kevin Stein.
"Where people have been harmed and where communities have been harmed, there should be some redress, some remedy," he said. "And the same can be said for where the Treasury is harmed, where the taxpayer is taken advantage of by faulty practices, there should be some remedy, too."
The aim of enforcement is to deter improper acts and practices, and to make certain the rules are being followed. "And if the rules are followed, we hope that people won't be harmed, and communities won't be harmed and the taxpayer won't be harmed," he said.
But the threat of treble damages has caused banks to reduce the amount of FHA-insured loans they originate. So taxpayers might end up being harmed because the FHA is insuring more loans written by nonbank lenders.
"Because the banks are so petrified with the False Claims Act, their credit scores [on FHA originations] have been going up through time. By contrast, the nonbanks have reduced their credit scores. They have a lot less deep pockets," so they are less worried about getting sued, said Goodman.
There were 96,191 FHA loans included in Ginnie Mae issuances in April with a median credit score of 689, according to an analysis Ginnie worked on with the Urban Institute. Nonbank originators accounted for 77,802 of those loans, with a median credit score of 669.
There were 18,389 loans originated by banks, with a mean credit score of 684.
Quote"Where the Treasury is harmed, where the taxpayer is taken advantage of by faulty practices, there should be some remedy, too."
— Kevin Stein, California Reinvestment Coalition
Back in October 2013, the overall median score of FHA loans put into Ginnie MBS (684) was closer to the bank median score (686) than the nonbank median (676).
Getting the banks back as FHA lenders must start with the next FHA commissioner making it clear to the Justice Department that the policy around the False Claims Act has to change, said Murin, who is currently the chairman of the title and settlement services provider JJAM Financial Services. "DOJ needs to focus on bad actors and there are plenty of bad actors in the marketplace."
But the flip side, said the CRC's Stein, is that it is hard to get away from the fact there had been significant, not minor, violations of laws, rules and standards over the past several years and those had a large impact on communities.
"We are talking about a lot of harm over the last several years resulting from egregious violations of various statutes and rules," he said. Yet there is room to discuss clarifying standards and the appropriate remedies for certain violations.
If everyone — regulators, lenders and consumer groups — can agree on reasonable regulatory standards and that means the rules will be followed, that is a good outcome, Stein said. "If there is harm, we want a remedy, but we'd rather there not be any harm."