Since 2008, the Department of Justice (DOJ) has drastically increased its use of the False Claims Act (FCA) to go after what say are bad actors in FHA mortgage lending. Since 2009, they have collected fines and penalties totaling more than $7 billion. That ain’t chump change.
Many banks discontinued making FHA loans and some nonbank lenders became increasingly more cautious in their FHA lending activities.
Lenders hoped that these FCA actions would decrease under the new administration. So far, no such luck while everyone still awaits the appointment of new HUD Commissioner.
Because of the FCA threat, the credit scores on bank originated FHA loans has been consistently on the rise, while those of many nonbank lenders loans fell.
Better credit scores potentially mean better loans for banks, hopefully leading to less potential defaults, and potential DOJ actions.
Seems many non-bank lenders are not as concerned since they believe they don’t have the deep pockets to draw a DOJ action. That may be true in some cases, but larger lenders still need to be watchful of their FHA business as some have found out…the hard way.
Just ask PHH who recently agreed to a $75 million settlement with DOJ under an FCA action. This based on a review of FHA loans originated between January 2006 and December of 2013.
PHH said they agreed to the pay the amount to avoid the distractions and costs of litigation, albeit not admitting any wrongdoing. DOJ knows most lenders will do the same.
For now, it appears the DOJ is still on the prowl for more FCA actions. They are out there looking for lenders with high FHA default and claims rates that they can investigate and fine. Don’t kid yourself, they still mean business.
This is all the more reason to ensure you are originating clean loans, whether FHA or not, in accordance with all relative lending guidelines, rules and regulations.
It’s no joke and something that lenders should not be taking lightly. Under an FCA violation, a lender can be held responsible for treble damages; meaning 3 times the losses sustained by FHA.
That could be huge. Just ask those who have been fined. The answer; do things right, no shortcuts, no shenanigans. Business is tight. But, be careful not to stretch the envelope too much just to make a loan.
Also, keep in mind, the Whistleblower rule. Your employees can report you for violations and receive as a commission a percentage of any penalties levied. That could make for a nice pay day; especially for a disgruntled employee.
Now is not the time to play it fast and loose with your lending practices. Check and double check your loan originations and closings, as well as your people, to ensure quality and compliance.
Pre and post close reviews are critical. Make sure everyone is doing things the right way. With production down, there is even less room for errors.
Regardless of what comes from the current administration, more or less DOJ activity, you don’t want to be involved. Take the time and effort to do things right because that’s the right thing to do and it just may keep the DOJ and HUD away from your door.
Lend responsibly, and carefully, my friends.