Lending Servicing

Mnuchin's OneWest subsidiary agrees to $89M settlement for reverse mortgage violations

Alleged misdeeds took place while Treasury Secretary was chairman

Money

During the confirmation process for Department of the Treasury Secretary Steven Mnuchin, Congressional Democrats attempted to use the mortgage practices that took place at OneWest Bank during Mnuchin’s time as chairman against him, claiming that Mnuchin oversaw a “foreclosure machine” during his time at OneWest.

One of the Democrats’ weapons of choice was the alleged practices of Financial Freedom, a reverse mortgage servicer owned by OneWest, which Mnuchin sold in 2015.

The Democrats claimed that Financial Freedom was responsible for a “disproportionately high” foreclosure rate on reverse mortgages from April 2009 through April 2016 and nicknamed Mnuchin the “foreclosure king.”

Now, Mnuchin has left OneWest and Financial Freedom behind and is leading the Treasury, but it appears that another section of the government is not done with Financial Freedom quite yet – the Department of Justice.

The Department of Justice announced Tuesday that Financial Freedom agreed to an $89 million settlement over reverse mortgage allegations, some of which allegedly took place while Mnuchin was chairman at OneWest.

Mnuchin, who, along with his partners at Dune Capital Managementformed OneWest after buying the remains of IndyMac Federal Bank from the Federal Deposit Insurance Corp. in 2009.

Mnuchin and his partners sold OneWest and Financial Freedom to CIT Group in 2015 for a profit.

The settlement doesn’t stem from Financial Freedom’s supposed proclivity for foreclosure. Rather, the settlement is for Financial Freedom’s recovery of mortgage insurance payments from the Federal Housing Administration that the company was allegedly not entitled to.

With a reverse mortgage, homeowners that are 62 or above are able to get access the equity in their homes by borrowing money against that equity. The FHA protects lenders from loss by providing mortgage insurance through its Home Equity Conversion Mortgages program.

Through the HECM program, the reverse mortgage lender is repaid the amount of the loan, including the costs of servicing the loan and any interest that accrues on lender expenses after a loan becomes due and payable upon the death of the homeowner, or after the home is sold.

Through the program, the FHA reimburses a lender that is unable to recover the full amount of the loan, but in order to get that money, the servicer is required to meet a number of regulatory requirements and deadlines.

And according to the DOJ, Financial Freedom did not hold up its end of the bargain, but asked for (and received) payment from the FHA in spite of not fulfilling its duties.

According to the DOJ, Financial Freedom tried to obtain insurance payments for interest from the FHA despite “failing to properly disclose on the insurance claim forms it filed with the agency that the mortgagee was not eligible for such interest payments because it had failed to meet various deadlines relating to appraisal of the property, submission of claims to HUD, and pursuit of foreclosure proceedings.”

Therefore, from March 31, 2011 to Aug. 31, 2016, the mortgagees on the reverse mortgage loans serviced by Financial Freedom “allegedly obtained additional interest that they were not entitled to receive,” the DOJ said.

Specifically, the DOJ claims that Financial Freedom committed violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act.

“The Department of Justice is committed to ensuring that those who participate in federal mortgage insurance programs comply with requirements essential to the success of its programs,” said Acting Assistant Attorney General Chad Readler of the Justice Department’s Civil Division.

“Among these requirements are the deadlines imposed by the Federal Housing Administration on those who service government insured mortgages,” Readler continued. “Those deadlines are designed to protect the government’s collateral and stop the unnecessary loss of government funds and resources.”

According to the DOJ, its investigation into Financial Freedom’s dealing came as the result of a whistleblower tip from Sandra Jolley, a consultant for the estates of borrowers who took out HECM loans.

As a result of the settlement, Jolley will receive $1.6 million under a provision of FIRREA that allows whistleblowers to obtain in a share of a settlement.

The DOJ adds that the claims resolved by the settlement are only allegations, and Financial Freedom has not been found liable for the alleged actions.

“Today’s settlement agreement resolves allegations that this lender failed to comply with FHA servicing requirements and sought to receive financial gains that it was not legally entitled to,” said Department of Housing and Urban Development Inspector General David Montoya. “These actions today demonstrate our continued commitment to address and halt business practices that pose a serious risk to the FHA program and the public’s trust in HUD administered programs.”

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