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First Tennessee Bank will end up paying $212.5 million to settle allegations that they originated and delivered FHA insured loans that did not meet FHA eligibility (Fined). The settlement was brought about by an action by HUD and DOJ against First Tennessee under the False Claims Act.
Interestingly, First Tennessee admitted that they had knowingly certified loans for the FHA insurance that did not meet HUD’s underwriting guidelines. It seems the bank ignored the warning signs raised in their own quality control reviews of the FHA loans they were originating (what were they thinking?) As a direct endorsement lender, First Tennessee could originate, close and insure the loans on behalf of FHA. In doing so, they certified that these loans met all HUD requirements for approval and insuring. Not all of their loans did.
This highlights some very important points…
- FHA & DOJ are still out there collaborating to find and fine bad actors
- The certifications made by a Lender to FHA annually, and for each loan, are binding and will be enforced, as needed
- DOJ continues to use the False Claims Act as a tool to go after Lenders
- FHA Lenders are not yet out of the woods, as this settlement was the result of loans originated between 2006 & 2008
- Quality Control is an important function; results should not be ignored and/or altered to make a Lender look good.
In September 2015, under their new rules, the FHA will require Lenders to perform pre-closing audits in addition to those now required post-closing. This should help Lenders identify and correct potential problems before their loans close.
It will help, only if the Lender is willing to perform the review on an adequate sampling of their loans coming up for closing and if they heed the warning signs provided as a result. My suggestion, until a Lender is sure that everything is under control, is that they should perform some level of a pre-closing audit on 100% of their loans. The initial investment in time and money will pay big dividends. Think of what First Tennessee could have saved.
Pre and post-closing QC reviews should not be treated as a necessary evil but rather a viable process to avoid problems, reduce costs and improve profits and customer service. As an added by-product, they may also save the costs associated with defending repurchase or indemnification requests, loan repurchases and government fines.
Every Lender must have in place the adequate staff, systems and technology to perform a complete review of their loans, both prior to and after the loan closing, to ensure everything is done properly at each stage by each employee. If not, you’re just asking for trouble.
Loading ...Regardless, don’t ignore the results. You may choose to look the other way, but rest assured the DOJ and FHA won’t.
