A recent settlement was made between the Department of Justice and Walter Investment to the tune of $29.6 million under a False Claims Act action. The whistleblower who brought the violations to the attention of the DOJ was paid $5.15 million as his share of this recovery (FCA Settlement). Nice pay day!
This is important for two reasons; 1) in light of the new certifications required by FHA from lenders doing FHA-insured loans and, 2) that DOJ, and FHA are still out there looking for those who break the rules.
This is no joke. Lenders doing government insured loans need to be very careful that they play by the rules. If not, they stand to incur huge fines and penalties with the potential to lose their privilege to originate FHA-insured loans. This could be devastating to a lender that depends on FHA business.
As it now stands, FHA is requiring any lender doing FHA business to certify annually, and with each loan insured, that the lender has complied with FHA/HUD loan requirements. If a lender is found to have violated the rules, the lender can lose their right to originate FHA-insured loans.
If a loan defaults where misrepresentations were made, and FHA ends up paying a claim, FHA and/or DOJ can also bring an action against the lender under the False Claims Act. Double jeopardy; no more FHA business and pay a big fine. Is it worth the risk?
As it stands now, lenders are very concerned that an honest mistake and/or error may lead to such an action. They are asking FHA to clarify in writing, and to possibly modify the required certifications, that this is not their intent, and won’t happen. Under the present certification wording, lenders fear they may be left to defend themselves against frivolous actions brought by both DOJ and HUD for minor mistakes.
The Walter Investment settlement is real evidence that DOJ and FHA mean business. Also, every employee is a potential watchdog for these agencies – especially in light of a big payout. Lenders need to have the systems in place to carefully monitor the activities of all employees, subsidiaries and agents to ensure that everything is being done according to Hoyle. Otherwise, they may find themselves on the wrong end of a DOJ False Claims Act action.
Defect management is key to identifying problems and areas for correction and training. Such management should be done throughout the life of the loan, not merely at pre or post-closing. Loans should be evaluated based on characteristics similar to those that had past defects. Do not depend on a random audit sample. Loans should be selected for review based on a myriad of factors, e.g. originator, underwriter, branch, Broker. Trust but verify.
Are you comfortable that everything is being done correctly in all areas of your loan originating and/or servicing activities? Are all employees properly trained to identify defects and potential problems? Will they bring any defects to your attention or the attention of DOJ or HUD?
Have a written statement, provided to all employees that it is the intention of the company to follow all the rules governing mortgage loan originations and that any potential problems must be immediately reported to senior management. Then, if and when they do, act quickly to correct the problems and completely document your actions to do so. This will go a long way in your defense. Hopefully, you won’t need it.
Stay compliant my friends.