The Department of Housing and Urban Development announced Wednesday that it was delaying the implementation of new rules regarding down payment assistance for loans backed by the Federal Housing Administration in response to a lawsuit filed by a Utah-based Native American group.

Last week, HUD issued what it called “informal guidance” to clarify documentation required for borrowers using funds from another person or entity to cover part of the FHA’s minimum down payment requirement of 3.5%.

But according to the Cedar Band of Paiutes, a federally recognized American Indian band that operates the Cedar Band Corp. and the CBC Mortgage Agency, the rules have far-reaching and damaging consequences, and effectively put its down payment assistance program out of business.

The group filed a lawsuit Monday claiming that the new guidance – which was set forth in Mortgagee Letter 19-06 – represents “a radical shift in longstanding HUD policy that effectively outlaws CBCMA’s business and pulls the rug out from under many borrowers, who now will be unable to close on their home purchase.”

The group further claimed that the mortgagee letter “unlawfully targets American Indian tribes and bands by prohibiting them from participating in home-purchasing assistance programs and thus threatens a critical source of revenue for the Cedar Band.”

The lawsuit sought an order to immediately halt the policy’s enforcement on the grounds that it was adopted without issuing proper notice and opportunity for comment, and that it stands in violation of federal law.

Now, HUD has backed off its guidance, issuing a 90-day stay to review the policy in light of the Cedar Band’s claims.

The group’s lead counsel, Helgi Walker of Gibson Dunn & Crutcher LLP, said the harm caused by HUD’s mortgage letter was staggering.

“We are pleased that the government understood the need to hit the pause button and return to the status quo for a period of time,” Walker said. “We remain confident that we will prevail in permanently rectifying this unlawful agency action.”