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This time, it’s Freedom Mortgage to the tune of $113 million. Same story, the Department of Justice, under the False Claims Act, brought the action against Freedom for violations in the FHA insurance program resulting in losses sustained by FHA.
About a week ago, Freedom agreed to the settlement without admitting liability, but it cost them big bucks just the same. This is the same thing that happened to Wells Fargo recently in an amount over a billion dollars. That’s Billion with a capital “B”.
Although these and other recent DOJ settlements with lenders under the False Claims Act are in connection with FHA loans made and insured over 5 or more years ago, the threat of potential actions lingers through today.
Lenders are required to make certain certifications for each loan closed and insured under the FHA loan program attesting to their compliance with all FHA rules, requirements and regulations governing the loan’s origination, approval, closing and insuring. Any slip-ups can result in the lender facing a loan loss indemnification, repurchase or maybe worse, an action under the False Claims Act.
Due to the potential liability under these required FHA certifications, many banks have shied away from FHA lending. This opened the door for non-bank independent mortgage lenders to take up the slack and increase their fair share of the FHA business, but not without risk. The FHA loans being originated today may be the basis for a False Claims Act filed by DOJ in the future if these loans start to default.
It is important that if they are doing FHA lending today, a lender must have in place the necessary safeguards to ensure these loans are originated and insured properly, without exception. There is no such thing as being a little out of compliance with the law or with the FHA rules. A lender must be sure that everything is done right, for all the right reasons.
Although lenders look at them as expenses, pre and post close loan reviews are a very important, and necessary, investment. They are required by FHA, but more importantly, they are the eyes and ears of avoiding defects that could cause the problems resulting in enforcement actions. Since a lender is required to spend the money to perform these required reviews, they may as well take full advantage of this investment, and from what is learned from the results.
A proper audit program will identify defects early to allow for correction and provide the basis for employee training and adjustments in the process so as to avoid these defects on future loans. This will not only pay for the investment in quality but lead to increased profits on future loans.
Don’t wait and learn the hard way by paying big fines and possibly losing the privilege to do FHA loans. Be proactive. Incorporate an effective pre and post-closing audit program into your loan origination process, with ongoing training and action plans to quickly identify and correct deficiencies, while improving overall loan quality. This can be done in-house, or through the use of an outsource QC vendor to better control costs. Either way, the investment is well worth it in the long run.
