Same old song. This time to the tune of $52.4 million paid by Regions Financial Corporation of Birmingham, AL to HUD settling an action brought under the False Claims Act by the Department of Justice (DOJ).
Under this settlement, Regions acknowledged it made and certified FHA insured loans that did not meet all required underwriting criteria. As a result, FHA-insured a larger number of Region’s loans than otherwise should not be insured. When many of these loans subsequently defaulted, FHA ended up paying huge sums of money in claims after foreclosures.
As importantly, HUD stated that Regions did not maintain a fully compliant quality control program. Under their QC plan, Regions did not review an acceptable sampling of FHA loans on a regular basis. They also cured findings with documentation that otherwise was not available when the loan was initially underwritten and approved. Documentation obtained after the fact.
In the end, the QC results and defect rates were understated when reported to senior management making the results look a little rosier than they actual were in reality. Regions also failed to self-report these violations or instances of potential fraud to HUD. Not a good thing.
It is critical that a lender has an accurate quality control plan in place that meets all requirements of all the Agencies. This plan must be in writing and clearly spell out exactly how loans are selected, the audit process, action plans to correct defects, results of those plans and clear, concise, timely and accurate reporting to senior management. Otherwise, you’re just asking for trouble.
All too often, lenders try to make their audit results look better than what they are in reality. They want these reports to reflect a positive view of the company’s operations and originations. The best way to do that is to train personnel on what is needed and to monitor people and processes monthly to ensure things are being done right. Not by fudging the QC results.
Pre and post-closing reviews are required. You might as well do them right, in accordance with the requirements of the regulating entity.
Take the results seriously and develop action plans to correct defects and to identify areas, and people needing improvement. This will protect the company and provide big dividends in the long run.
Otherwise, you’re just throwing money away. If you’re not careful, you may find you’ll be throwing a lot of it to DOJ an HUD. Just ask Regions and the other lenders that have paid fines, penalties or “settlements” to these agencies.
Loan production without loan quality is a recipe for failure.