Lenders should adhere to all requisite pre-foreclosure loss mitigation measures for HUD loans.
Lenders should adhere to all requisite pre-foreclosure loss mitigation measures for HUD loans. Fotolia

A lawsuit alleges that lenders that fail to take required loss mitigation steps prior to foreclosing on Department of Housing and Urban Development loans have violated the False Claims Act. The gist of the complaint, which a legal aid group recently filed, is related to the fact that HUD makes payments to the lenders on these guaranteed mortgages. However, a condition of every HUD loan (and thus a condition supporting these payments) is that the lender must undertake certain loss mitigation measures before foreclosing on the loan. If the lender fails to take these steps and still receives the money from HUD based on the representation it would/did take such actions, it allegedly creates the basis for a False Claims Act action.

While the current Ohio-based case is on weak footing based on the U.S. Justice Department’s refusal to intervene in that action (usually a fatal blow to most False Claims Act cases), it is unclear what the Justice Department would do in the event multiple copy-cat claims were filed in other jurisdictions. Indeed, one can see why the Justice Department would be reluctant at this particular time to bring another wave of mortgage related lawsuits against lenders. Yet, if consumer-based complaints started rolling in, DOJ could revisit the issue and later intervene in this or other similar cases.

The best course of action for lenders is to carefully review all of the requisite pre-foreclosure loss mitigation measures and adhere to them before foreclosing on HUD loans. Many times, certain steps that are overlooked can be easily accomplished. Lenders know all too well that the wrong judge, with the wrong fact pattern, can lead to significant liabilities that are completely avoidable. Thus, while the instant lawsuit may not succeed, lenders should carefully evaluate adherence to required loss mitigation procedures on HUD loans.