HUD Servicing Contract Found Illegal in Court

A contract the Department of Housing and Urban Development awarded to service a group of loans insured by the Federal Housing Administration has been deemed illegal in Federal court.  The contract, given to C&L Service Corporation with Morris-Griffin Corporation (MGC) as the subcontractor was in dispute because MGC asked a judge to force C&L to pay for the work it provided.

The Virginia judge failed to enforce the contract because it was an “agreement conceived in fraud” and called for the parties to violate the Federal Acquisition Regulation and the SBA’s regulations.

According to court documents, in order to obtain this type of contract, at least fifty percent of all personnel costs must be incurred for payment of C&L employees.  Additionally, a non SBC subcontractor cannot perform the “primary and vital requirements of a contract,” and the SBC cannot be “unusually reliant” on the subcontractor.  Because MGC performed the majority of the contract requirements, the judge said the contract was illegal.

“Flying directly in the face of these restrictions, MGC and CLS contemplated a business relationship in which MGC would take on a leading role. CLS had “no prior experience in the mortgage loan servicing industry and no capacity to provide the related and necessary IT or accounting services for HUD,” said the Judge.

In fact, at the time, CLS was operating as a janitorial and a maintenance firm and had no real servicing experience.

Despite the lack of experience, HUD’s website states the company is responsible for servicing FHA Single Family Secretary-Held Assets including Assigned HECM Mortgages, Secretary-Held Title II Mortgages, Partial Claim Subordinate Mortgages, HECM Subordinate Mortgages, and other FHA loan types.  Despite the judges ruling, HUD tells RMD there is no impact on its servicing agreement.

“Currently, the loan servicing contractor, C&L Service Corporation is performing the primary role of providing all services under the contract,” said Lemar Wooley, spokesperson for HUD in an email to RMD.

RMD contacted C&L Service corporation for comment and has yet to receive a response at press time.

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