New HUD Secretary, Ben Carson, made it clear that FHA is concerned about lenders, especially banks, not participating in FHA lending, due to fears from potential False Claims Act (FCA) actions by the Department of Justice (DOJ). Secretary Carson made it quite clear that HUD wishes to bring more clarity into the FHA lending process when it comes to what might cause such an action.
But, DOJ says, “Hey, not so quick.” Their position remains that any lenders lacking the proper internal controls, or those not operating within the bounds of the law and/or FHA requirements, will be held accountable for their actions, or inactions. I believe that everyone would agree. The big question remains, “Where do they draw the line?”
According to the lending industry, the problem is not with the actions, it’s what triggers the actions. Most fear that minor clerical or operational errors may bring about major investigations and fines costing the lenders millions of dollars. These errors have no direct bearing on defaults. With income margins spread thin, they just cannot afford the risks involved in doing FHA loans.
On the other hand with the exodus of many banks, many non-bank mortgage lenders have increased their share of FHA loan originations. Guess they’re not afraid of the uncertainty or the potential for the FCA actions. Lend on, my friends, as long as you do so carefully.
Hopefully, HUD and DOJ will come together over what should constitute grounds for an FCA action. This would create much more certainty in the markets so more lenders will participate in FHA lending. This will help more low to moderate and first time home buyers. The challenge remains how these potential homebuyers find affordable housing.
HUD has taken steps toward more certainty by developing a new taxonomy to assess which loan defects may cause an action under the False Claims Act.
The new system, which was implemented in May, is meant to better distinguish between clerical errors that do not impact the decision to make a loan and intentional fraud that would prompt DOJ to sue a lender under the False Claims Act. HUD has also taken steps to change the letter by which lenders certify that a loan meets FHA requirements.
These are positive steps that should help solidify the FHA programs and give lenders a little more incentive to originate FHA insured mortgages. Unfortunately, there is no clear way for a lender to reach any safe harbor from a DOJ/FCA action.
Hopefully, through HUD and DOJ working together, with some prodding from the current Administration, lenders will see some relief from over-burdensome regulations and enforcement actions. Only time will tell.
In the meantime, lenders must continue to pay very close attention to loan quality and compliance. This compliance must include all the new lending laws and regulations, with all FHA, and other secondary market requirements.
Now is not to time to ease up on loan quality. FHA and especially DOJ are still out there watching to make sure everything is being done right. You need to make sure as well.
With the new HMDA rules, CFPB will also be on the lookout for fair lending issues and monitoring lenders for QM, ATR, and TRID compliance. There’s no rest for the weary. Somebody is always watching.
Regardless of HUD’s intention to make things a little clearer and less burdensome for lenders, others may not be so ready to cooperate. That means that lenders need to continue to fend for themselves.
We’ve come a long way baby. Now is not the time to relax any of our lending standards. They’ll be market challenges in 2018 that will make lending a little more difficult. But, rest assured there will still be plenty of opportunities to lend.
Those lenders who follow the rules to originate good quality, compliant loans will be the ones to avoid the FCA actions and succeed in meeting the new lending challenges. Will you be one?