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Industry Impact: HUD to Address FHA Regulation

Dr. Ben Carson, Secretary of the Department of Housing and Urban Development, revealed that the department will address FHA perimeters, which will impact how the False Claims Act is invoked, during a segment on CNBC's [1]Squawk Box [1]

Carson cited the need for "depository lenders to come back" as a key reason for this change.

“Almost 50% of the people who originated loans that were originated by FHA were depository banks. That number is down to less than 15% because of the way people fled. We really looked at that and said ‘what can we do to fix this?’”

“We revised the annual eligibility certifications, the loan limit certifications, and the defect taxonomy so that we even out things," Secretary Carson revealed.

Carson added that the Department of Justice and HUD following the financial crisis began going after many of the banks engaged in wrong practices. In their pursuit, however, Carson said many banks left the market.

“They were so vigorous in their pursuit of these individuals they did get a lot of money, but they basically drove them away because, in many cases, the banks had been involved in some very minor, non-material defect in the process and were slammed with enormous fines and suspension," Carson said. 

Carson said that nondepository banks helped fill the gaps following the Great Recession, but HUD wants to expand the credit pool for low-to-moderate income people.

“The major mechanism for building wealth in this country is home ownership and doing it in a responsible—that’s they key—and this is all look at in terms of sustainability," Carson said. "Not only do we want to put people in homes, but we want them to stay in those homes so they can accumulate that wealth.” 

Ed DeMarco, President of the Housing Policy Center, said HUD's announcement is a "very positive step" for the FHA, and helps the agency move to a "fair and transparent enforcement regime."

“This set of enhancements to FHA’s compliance policies demonstrates to the industry that the legal team at HUD appreciates the need for lenders to operate with confidence in the FHA program. We commend the Department for these changes," said Tom Wind, Housing Policy Council Chairman and Mortgage Division President for U.S. Bank.

SitusAMC Managing Director Tim Rood discussed with DS News the impetus behind the trend Secretary Carson pointed to. "The False Claims Act was used rather casually during the Obama administration to brutally punish lenders for what often amounted to simply manufacturing errors in connection with FHA insured mortgages. As a result, banks fled the FHA program despite enjoying federal insurance on their deposits. The lenders who continued offering FHA mortgages often made the business case for raising rates to build reserves for future enforcement actions—raising costs for borrowers,” Rood said.

According to Holland and Knight [2], the Department of Justice recovered $2.8 billion in settlements during Fiscal Year 2018. 

"There are a lot of people talking about affordable housing but this is something that will actually make a difference," Carson underscored, going on to say that, "This doesn’t mean we’re not going to vigorously pursue fraud and people who do things intentionally, but we’re not going to torment people about nonmaterial, ineffectual things.”

Secretary Carson's interest in the False Claims Act goes back to when he first assumed his position. In 2017, SecretaryCarson testified [3] before a House Financial Services Committee, where he was asked by Rep. Dave Trott (R-Michigan) if HUD was going to address the improper use of the False Claims Act to impose penalties against lenders for “defense in loan origination files on FHA loans.” 

“We are already addressing that problem …. And we’re committed to getting that resolved,” Carson said.

When discussing the possibility of streamlined loan certifications for FHA eligibility, FHA Commissioner Brian Montgomery told the Wall Street Journal [4] in May that, “It would be a step in the right direction telling the whole world that these are the parameters you have to stay within. I think there was a little too much gray before, and I think people seized upon that gray area.”

“This change represents a responsible streamlining of HUD’s approach to fraudulent claims,” said Ed Delgado, President and CEO, Five Star Global. “I applaud the leadership displayed by Secretary Carson on this matter and look forward to positive benefits for both the industry and the American homeowner.”