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HUD Determines Down Payment Assistance Programs Eligible for FHA Insurance
This week, FHA Principal Deputy Assistant Secretary for Housing and Head of FHA, Edward Golding, issued a letter informing stakeholders that “HUD has determined that housing finance agency down payment assistance programs are legal and consistent with the National Housing Act.” We note that the letter was not a Mortgagee Letter nor was it published in the Federal Register and may be considered informal guidance.
In the letter, Golding advised that:
- Government entities may provide borrowers with funds for down payments on FHA loans; and
- Loans that include down payment assistance (DPA) provided by state and local housing finance agencies (HFA) continue to be eligible for FHA insurance.
Golding’s letter emphasized the benefits of DPA programs, commenting that such programs facilitate access to homeownership for low- and moderate-income families. Still, Golding noted that FHA will continue to monitor and mitigate any potential risk associated with DPA programs: “[w]e will work diligently to reduce the impact of these risks on our portfolio. We know it is possible to accomplish this as the research shows carefully designed programs perform better.”
Golding’s letter purports to resolve a matter of dispute regarding DPA between FHA and the HUD Office of Inspector General (OIG). Last year, HUD OIG audited an Arizona-based mortgage lender and issued a report concluding that the lender originated FHA loans that included gift DPA that did not comply with FHA rules and regulations. Specifically, the audit found that, among other things:
- The lender inappropriately allowed premium pricing to be used as a source for the borrowers’ down payments, which were not true gifts and were indirectly repaid by the borrowers through a higher premium rate;
- The lender used programs that had a circular funding mechanism (i.e., the program was structured to generate revenues through the sale of mortgage-backed securities); and
- The lender did not perform due diligence to ensure DPA was eligible.
After the audit, Golding issued a letter to reaffirm FHA’s support of certain DPA programs. Golding’s letter also stated that “[t]he intent of [FHA] rules regarding down payment assistance is clear and allows HFAs the discretion necessary to fund these programs appropriately.” HUD’s General Counsel (GC), Helen Kanovsky, also issued a memorandum to Golding regarding DPA programs concluding that:
- Governmental entities are a permissible source of funds for down payments on FHA loans;
- FHA does not place limitations or prohibitions on how a government entity raises funds for its DPA program; and
- FHA rules on premium pricing are not violated if the borrower and the lender agree on interest rates in relation to DPA programs.
The memorandum also noted that it did not support OIG’s audit conclusions that FHA rules regarding premium pricing or gift DPA were violated. We note that, similar to Golding’s letter from this week, the letter and the memorandum were not issued as Mortgagee Letters and were not published in the Federal Register.
Notwithstanding Golding’s letter after the audit and HUD GC’s memorandum, HUD OIG continues to audit lenders and issue reports on this issue.
The Obama Administration also responded to the DPA uncertainty earlier this year by releasing the FY 2017 Budget Proposal, which would amend the National Housing Act to clarify that “down payment assistance from state and local governments and their respective agencies and instrumentalities are not impermissible sources of down payment assistance.”
Despite Golding’s letter this week, a news website has reported that David Montoya, HUD’s Inspector General, “strongly disagree[s]” with HUD’s assessment of DPA programs. Specifically, it has been reported that Montoya issued the following statement: “we believe this specific aspect, where external lenders are originating FHA loans with ineligible down payment assistance gifts and secondary financing and agree to inflate the interest rate on the borrowers’ FHA loans, violates the law and harms borrowers.” A spokesperson noted that an OIG audit of a lender using funds derived from premium pricing to pay for gift DPA is still underway.
FHA Proposes Revisions to Reverse Mortgage Program
On May 18, HUD announced that the FHA proposed a new rule that is intended to “strengthen” its Home Equity Conversion Mortgage (HECM) Program by reinforcing reforms that have taken place in the past two years, and by adding new consumer protections. New revisions to the HECM program outlined in the proposed rule include, but are not limited to, (i) ensuring that required HECM counseling occurs before a mortgage contract is signed; (ii) amending the definition of “property charges” to include utilities as a borrower responsibility; (iii) capping lifetime interest rate adjustments for adjustable interest rate products at 5%; (iv) requiring as a condition of eligibility for loan assignment that the HECM mortgage be in lien status prior to homeowners association and condo association liens; and (v) creating a “cash for keys” program to “incentivize parties with legal authority to dispose of a property that serves as the security for a HECM to complete a deed in lieu of foreclosure more quickly.” Comments on the proposal are due by Monday, July 18, 2016.
DOJ Settles with New Jersey Mortgage Lender Over False Claims Act Violations
On April 15, the DOJ announced a $113 million settlement with a New Jersey-based mortgage company to resolve allegations that the mortgage lender violated the False Claims Act. According to the DOJ, the mortgage company – acting as a direct endorsement lender in HUD’s Federal Housing Administration (FHA) program – knowingly originated and accepted FHA-insured mortgage loans that did not properly comply with HUD origination, underwriting, and quality control requirements. As part of the settlement agreement, the mortgage company agreed that it failed to (i) meet HUD underwriting requirements from January 1, 2006 through December 31, 2011; (ii) adhere to FHA’s quality control requirements between 2006 and 2008 by not sharing with production and underwriting management its early payment default quality control review; (iii) perform timely quality control reviews or perform audits of early payment defaults between 2008 and 2010; and (iv) report improperly originated loans between 2006 and 2011. The DOJ’s investigation further found that, after conducting a review of FHA loans underwritten between 2007 and 2012, the mortgage company self-reported to HUD only one of hundreds of loans that the company identified as not meeting FHA mortgage insurance requirements. Per the settlement agreement, the mortgage company must make an initial payment of $26 million by May 2, 2016.
DOJ Settles with National Bank Over Underwriting Practices
On April 8, the DOJ announced a $1.2 billion settlement with a San Francisco-based bank and the bank’s Vice President of Credit-Risk – Quality Assurance to resolve allegations that the bank submitted false claims for FHA insurance in connection with loans that did not meet FHA underwriting standards. According to DOJ, “[d]uring the period May 1, 2001 through on or about December 31, 2008, [the bank] (or its predecessor) submitted to HUD certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not.” The settlement agreement further explains that when certain of these loans defaulted, HUD paid for the insurance claims out of the Mutual Mortgage Insurance Fund. In addition, the settlement agreement states that from January 2002 through December 2010, the bank failed to inform HUD that the bank’s quality assurance personnel had determined that some of the FHA-insured loans contained a material finding. In response to this failure to self-report, the DOJ also asserted claims against the bank’s VP of Credit-Risk – Quality Assurance, as the individual responsible for overseeing the bank’s self-reporting policy and procedures. Both the bank and the individual officer acknowledged responsibility for the alleged violations as part of the settlement agreement.
HUD Issues Guidance Regarding the Application of Fair Housing Act Standards to the Use of Criminal Records
On April 4, HUD issued guidance deploying a disparate impact analysis with respect to the Fair Housing Act’s application to the use of criminal history by those who come under the Fair Housing Act, and in particular by providers or operators of housing and real-estate related transactions. The guidance indicates that, because African Americans and Hispanics are arrested, convicted and incarcerated at rates disproportionate to their share of the general population, criminal records-based barriers to housing are likely to have a disproportionate impact on minority home seekers. HUD then walks through the three step burden-shifting disparate impact analysis to support its argument. To determine whether the use of criminal history has, on its face, a discriminatory effect, HUD looks at national statistics to demonstrate that incarceration rates are disproportionate for African Americans and Hispanics. HUD also notes that, while state or local statistics should be presented when available, national statistics may be used where state or local statistics are not readily available and there is no reason to believe they would differ markedly from the national statistics. HUD then moves to a discussion of whether the practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. HUD warns that, while ensuring resident safety and protecting property may be considered substantial and legitimate interests, bald assertions based on generalizations or stereotypes that any individual with an arrest or conviction record poses a greater risk than any individual without such a record would be insufficient to satisfy the burden set by the second prong. For the final prong, regarding the availability of a less discriminatory alternative, HUD notes that the inquiry is fact specific, but suggests that individualized assessment of relevant mitigating information beyond that contained in an individual’s criminal record is likely to have a less discriminatory effect than a categorical exclusion that does not take additional information into account. The guidance also discusses the potential for intentional discrimination, and notes that a disparate treatment violation may be proven based on evidence that exceptions to a general disqualification based on criminal record are provided to white applicants, but not African American applicants.
HUD Releases Final Loan-Level Certification: Lenders Should Not Be Penalized for Minor Mistakes
On March 15, HUD announced the completion of FHA’s loan-level certification, Form 92900-A. Significantly, the final certification clarifies FHA’s “longstanding position” that “minor mistakes that do not affect the decision to approve a loan are not the focus of [FHA’s] compliance efforts” and that “lenders will be held accountable for only those mistakes that would have altered the decision to approve the loan.” The certification also clarifies that lenders are required to certify only “to what they know to be true to the best of their knowledge” and that they are not responsible for “mistakes or fraud committed by a third party that the lender did not or could not have had reason to know of.” Finally, the certification removes references to the pre-endorsement review requirement. HUD issued Mortgagee Letter 2016-16 to advise mortgagees of the revised certification, which is effective August 1, 2016.
On March 15, HUD’s proposed revisions to the FHA annual lender certification were published in the Federal Register. According to HUD’s announcement, the primary revision to the annual lender certification form is the “addition of language requiring lenders to certify that they have not been involved in fraud or other serious criminal or civil violations that would call into question their ability to carry out the responsibilities of the program.” Previously, this language was included in the loan-level certification. In addition, the proposal also amends the lender-level certification statement regarding compliance with all FHA regulations and requirements by (i) adding guidebooks to cover certain FHA policy; (ii) revising the language to clarify the intent and scope of the statement; (iii) removing timeframes and revising the qualifier so that it matches the similar qualifier in other statements; and (iv) detailing reporting requirements in HUD Handbook 4000.1. Comments on the proposal are due April 14, 2016.
HUD Reaches $2.8 Million Settlement Over Redlining Allegations
On February 29, HUD announced an agreement with a Kansas City-based bank over its alleged redlining practices against African-American mortgage applicants. Two fair housing organizations (Complainants) filed separate complaints with HUD in October 2015 alleging that the bank engaged in discriminatory acts and violated the Fair Housing Act. According to Complainants, the bank’s “lack of market penetration in African-American communities made residential real estate products less available to persons based on race.” Complainants further alleged that the bank “designated their service area, or assessment area, in a way that excluded areas of high African-American concentration, which resulted in making residential real estate products less available to persons based on race” – a practice generally referred to as redlining. The agreement requires that the bank must, during the three-year agreement period: (i) allocate $75,000 in subsidy funds to provide discounts on home purchase loans to majority African-American census tracts in the Kansas City area; and (ii) originate $2.5 million in mortgage loans in African-American neighborhoods. Additional fair lending financing commitments pursuant the agreement require that the bank: (i) establish a loan pool of $105,000 to rehabilitate vacant or destroyed homes; (ii) spend $50,000 on marketing and outreach to African-American communities; (iii) provide $30,000 to support financial education in African-American communities; and (iv) spend $50,000 in support of the Complainants’ fair lending and community reinvestment work. The bank will also be required to appoint a Community Development Lender to focus on African-American neighborhoods and other lower-income communities. Finally, dependent upon the OCC’s approval of the bank’s application for a merger, the bank will be required to maintain three full-service branches in majority-minority census tract in the Kansas City area.
FY 2017 Budget Proposal: Implications for FHA Down Payment Assistance Programs
As previously noted, the White House released the FY 2017 Budget Proposal this week. President Obama’s proposed HUD budget for FY 2017 would revise the FHA down payment assistance requirements found under Section 203(b)(9) of the National Housing Act (12 U.S.C. 1709) by (i) replacing subparagraph (C) (Prohibited sources), and adding a new subparagraph (D) (Government assistance). The proposed amendment to the National Housing Act “seeks to clarify that down payment assistance from state and local governments and their respective agencies and instrumentalities are not impermissible sources of down payment assistance.”
HUD Announces $1.9 Million Settlement with Memphis-Based Bank over Alleged FHA Discrimination
On February 1, HUD announced a $1.9 million settlement with a Memphis-based bank to resolve alleged violations of the Fair Housing Act. Specifically, the complainant alleged that the bank “was responsible for discriminatory terms and conditions for making loans, discrimination in the making of loans, and discriminatory financing, with respect to real estate transactions.” In addition, the complainant alleged that the bank engaged in discriminatory practices by failing to place bank branches in minority-concentrated areas, ultimately denying African-American and Hispanic applicants mortgage loans. The bank denied the allegations, but agreed to “voluntarily settle [the] controversy and resolve [the] matter without the necessity of an evidentiary hearing or other judicial process . . . .” Under the agreement, the bank will (i) establish a subsidy fund of $1.5 million over three years to provide interest rate reductions on home mortgages, along with down payment or closing cost assistance to qualified borrowers in identified regional areas; (ii) contribute $270,000 over the course of three years to support governmental or community-based organizations’ efforts to help homeowners repair properties in predominantly minority communities, or to provide credit, financial, homeownership, or foreclosure-prevention services to homeowners in affected areas; (iii) pay directly to the complainant $105,000 to fund similar home repair, credit, financial, homeownership, and foreclosure services; and (iv) pay directly to the complainant $25,000 in damages.
FHA Loan Limits for Forward Mortgages to Increase in 2016
On December 9, FHA announced new maximum loan limits for forward mortgages for 2016 in 188 counties due to changes in housing prices. The new loan limits for forward mortgages are effective for case numbers assigned on or after January 1, 2016 through the end of the year. FHA noted that no areas saw a decrease in the maximum loan limits for forward mortgages and that, as detailed in Mortgagee Letter 2015-30, the national standard loan limits for low cost and high cost areas remain unchanged at $271,050 and $625,500, respectively.