In recent years, lenders have shied away from the Federal Housing Administration’s mortgage program out of fear that minor infractions could lead to major consequences labeled a violation of the False Claims Act.
Indeed, a number of lenders were aggressively penalized under Obama-era policies that imposed harsh fines for those who committed even minor errors that were deemed a violation.
As a result, banks have largely left the business, with the FHA stating that they are responsible for just 13% of recent FHA loan volume, down from 44% in 2010.
But the new administration has expressed its intent to change the old enforcement policies, announcing in May that it was working to clarify the rules of its mortgage program in an effort to ease compliance concerns.
“We are looking to bring clarity to our compliance rules that continue to discourage many lenders – including banks – from doing business with FHA,” FHA Commissioner Brian Montgomery said at the time. “We’re hoping to be more transparent in how we do business with lenders by letting them know what the potential remedies are for mistakes or errors they may make in the origination and servicing of FHA loans.”
To provide that clarity, Montgomery said the agency is aiming to replace the “jumbled legalese” in its certification and compliance documents with “plain English,” publishing a rule-change proposal and soliciting industry feedback.
But it seems some are skeptical about the FHA’s proposed steps, as a number of trade groups expressed their joint belief that the changes do not go far enough to ease compliance concerns and will therefore not encourage more lender participation.
In two letters sent recently to the Department of Housing and Urban Development with feedback on the matter, four trade groups – the Housing Policy Council, the Mortgage Bankers Association, the American Bankers Association and the Bank Policy Institute – cast doubt on the proposed revisions to the FHA’s lender guidelines.
In the first letter, the group suggested the FHA altogether remove the annual certification requirement or amend the requirement to assert a more broad mandate that lenders maintain internal policies reasonably designed to ensure compliance.
As is, annual certifications include “broad statements of absolute compliance without any qualifiers,” the group stated.
“These statements hold lenders to an impossible-to-meet standard of strict adherence to all program requirements, which is subject to a threat of liability under the False Claims Act,” they asserted. “This regulatory framework has caused many lenders to retreat from the FHA program.”
To remedy the situation, the group suggested revisions that reflect the subjective nature of mortgage lending to assure lenders that they will only be accountable for errors that have a direct impact on the FHA’s insurance fund.
“Penalties must be appropriately calibrated to wrongdoing to create the clarity and certainty that HUD is striving to achieve, and that lenders need to foster increased program participation,” the group stated.
The group also said that the FHA’s proposed revisions do nothing to streamline the annual certification process or the operational impact of such far-reaching and overly strict statements.
No corporate officer can know with certainty that his company has met with all of the FHA’s standards set forth in the proposed revisions, and therefore the updated guidelines would present much of the same issues present in current certifications, the group asserted.
“For this reason, any certifications in the FHA program should include language that is narrowly tailored to cover only actual fraudulent acts or schemes against the government, rather than instances of noncompliance that do not rise to the level of fraud that materially impacts the FHA Mutual Mortgage Insurance Fund,” the letter stated.
A second letter from the group addressed revisions to the FHA’s loan-level certification language. Here, too, the group said that the agency’s attempts to ease compliance concerns fall short.
“For many lenders to consider increased participation, the loan-level certifications must make clear to lenders that they will be held accountable only for errors that directly impact insurability,” the group stated.
In revising its approach to loan-level certification, FHA should consider existing enforcement mechanisms rather than imposing its own, overly broad stipulations, the group said.
It might also consider removing certification requirements entirely – both annual and loan-level – the group said, calling them “unnecessary in light of FHA’s ample authority to address deficiencies without certifications.”
But if the agency insists on keeping such certifications in play, revisions that include a reliance on existing oversight and enforcement; language that requires simple lender acknowledgement of key requirements based on loan eligibility; and a statement clarifying that insurance submission will be based on the underwriter’s good judgement.
Finally, the group also took issue to the FHA’s proposed changes to its Defect Taxonomy, stating that it “continues to be limited to loan-level violations of FHA requirements” and that it does not address the potential for sanctions if there is a pattern of fraud.
While recognizing the FHA’s effort to fix the program’s problems, the group asserted that on the whole, its proposed revisions are simply not enough. And, correcting these issues is essential to the program’s success.
“The certifications and the penalties for deficiencies must be appropriately established and calibrated to create the fairness, clarity, and certainty that HUD is commendably striving to achieve, and that lenders require to foster more diverse and broad-based program participation,” the group stated.