U.S. Housing and Urban Development Secretary Ben Carson and U.S. Attorney General William Barr issued a Memorandum of Understanding (MOU) between the two agencies that sets prudential guidance on the appropriate use of the False Claims Act (FCA) for violations by Federal Housing Administration (FHA) lenders.
“This agreement clearly outlines our FHA mortgage program requirements, so they do not impede or discourage lenders from offering affordable FHA-insured loans to credit-worthy borrowers,” said Secretary Carson. “In taking these steps, we are fulfilling an important element our Housing Finance Reform Plan and making clear to all responsible lenders that FHA’s mortgage program is a program in which they should participate. At the same time, HUD will not tolerate irresponsible or fraudulent lenders who defraud borrowers and taxpayers. We are thankful for the excellent relationship we have with our colleagues at the Department of Justice who have worked diligently with us on this effort and share our goal of advancing affordable housing finance while protecting the interests of taxpayers.”
“This MOU sets forth a robust and collaborative process for deciding when to pursue False Claims Act cases to remedy material and knowing FHA violations,” said Attorney General William P. Barr. “DOJ and HUD will work together to determine when HUD’s administrative remedies are sufficient, or other recourse is appropriate, to address harm to the borrower, the taxpayer, or the government. Importantly, this MOU is the product of the excellent working relationship that has developed between our two agencies in our shared pursuit of greater clarity and fairness.”
As the MOU makes clear, HUD expects that FHA requirements will be enforced primarily through HUD’s administrative proceedings, but the MOU specifically addresses how HUD and DOJ, including the U.S. Attorneys’ Offices, will consult with each other regarding use of the FCA in connection with defects on mortgage loans insured by FHA. HUD will utilize the Mortgagee Review Board (MRB), which was created by statute and empowered to take certain actions for non-compliance by FHA lenders, to review and refer FCA claims. The MOU prescribes the standards for when HUD, through the MRB, may refer a matter to DOJ for pursuit of FCA claims, and also sets forth how DOJ and HUD will cooperate during the investigative, litigation, and settlement phases of FCA matters when DOJ receives a referral from a third party, such as in qui tam cases. The MOU also recognizes that application of the FCA requires, among other elements of proof, a material violation of HUD requirements, and DOJ attorneys will solicit HUD’s views to determine whether the elements of the FCA can be established.
This interagency understanding is intended to address concerns that uncertain and unanticipated FCA liability for regulatory defects led to many well-capitalized lenders, including many banks and credit unions statutorily required to help meet the credit needs of the communities in which they do business, to largely withdraw from FHA lending. For decades, FHA has been the hallmark product for the nation’s first time homebuyers. This important segment of the market currently constitutes over 80 percent of FHAs loans. Additionally, a third of FHA loans are made to minority borrowers. This has dramatically shifted FHA’s lender base during the last decade. Today, depository institutions originate less than 14 percent of FHA-insured mortgages, down significantly from approximately 45 percent in 2010.
The MOU is part of a comprehensive plan to bring greater clarity to regulatory expectations within the FHA program, and fulfills a key component of the HUD Housing Finance Reform Plan. In addition to the MOU, FHA is simplifying the certifications that lenders make in connection with the FHA program. The certifications will better track statutory requirements and address materiality and culpability considerations. FHA is also refining its defect taxonomy that it uses to assess the appropriate remedies for identified loan underwriting defects. Together, these new and revised components are intended to make affordable FHA-insured mortgages more accessible to qualified borrowers, reduce risks within the FHA program, and preserve appropriately tailored remedies.