On October 28, HUD and DOJ announced a long-awaited Memorandum of Understanding (MOU), which provides prudential guidance concerning the application of the False Claims Act to matters involving alleged noncompliance with FHA guidelines. The announcement was made by HUD Secretary Dr. Benjamin S. Carson at the Mortgage Bankers Association's Annual Conference, and both agencies issued releases shortly after Carson's comments. The intention, HUD noted, is to bring greater clarity to regulatory expectations within the FHA program and ease banks' worries about facing future penalties for mortgage-lending errors.
According to HUD and the DOJ, "uncertain and unanticipated FCA liability for regulatory defects" has led to many responsible lenders, and banks in particular, withdrawing from affordable FHA lending. Carson noted that depository institutions originate less than 14 percent of FHA-insured mortgages, a significant decrease from the approximately 45 percent originated in 2010. During these years, the DOJ recovered more than $7 billion1 from mortgage lenders in FCA cases. By bringing greater clarity to potential litigation and enforcement risks under the FCA, HUD and DOJ hope that banks and credit unions that previously withdrew from the program will consider offering FHA-insured loans.
The MOU -- which outlines a process for the agencies to consult with each other regarding the use of the FCA in connection with defects impacting mortgage loans insured by FHA -- clarifies that FHA requirements will be enforced primarily through HUD's administrative proceedings, and provides a framework that establishes clear guidance on the scope of the FCA's use. Specifically, the MOU:
- Stipulates that FHA violations by FHA-approved mortgagees or other FHA mortgage insurance program participants will primarily be enforced through HUD's administrative proceedings, unless additional action is warranted
- Instructs HUD to utilize the Mortgagee Review Board (MRB) -- which is empowered to take certain actions for non-compliance by FHA lenders -- to evaluate violations for potential action under the FCA and make referrals to the DOJ as necessary ("In general, HUD recommends that FCA matters be pursued only where such action is the most appropriate method to protect the interests of FHA's mortgage insurance programs, would deter fraud against the United States, and would generally serve the best interests of the United States")
- Sets forth how the DOJ and HUD will cooperate during the investigative, litigation, and settlement phases of FCA matters, in the event that the DOJ receives a referral from a third party, such as a qui tam relator or HUD's Office of Inspector General, or in the event a matter is initiated directly by the DOJ or any U.S. Attorney's Office
- Recognizes that, in connection with a case filed by a qui tam relator, application of the FCA requires, among other things, a material violation of FHA requirements, and states that DOJ attorneys will consult with HUD to determine whether the elements of the FCA can be established
- Establishes that, should the MRB decide to decline referral or recommend against filing suit under the FCA, "the MRB may still exercise its discretion under the applicable statutes and regulations to seek administrative action, indemnification, or civil money penalties for any violation of FHA policy"
The MOU also specifies that the MRB intends to refer potential FCA violations to the DOJ where the following standards are met: (i) Tier 1 or equivalent violations exist in at least 15 loans, or Tier 1 or equivalent violations exist in loans with unpaid principal balance (UPB) or claims of at least $2.0 million; and (ii) aggravating factors warrant pursuit of FCA litigation, such as evidence that the violations are systemic or widespread.
Carson stressed, however, that increasing the number of FCA-related claims that are handled administratively should not be seen as an easing of standards -- "HUD will not tolerate irresponsible or fraudulent lenders who defraud borrowers and taxpayers."
HUD also noted that the MOU is one of three initiatives to ensure that, consistent with a Department of Treasury report, violations are punished with an appropriate remedy. The two other related initiatives undertaken to improve certainty around FCA compliance are: (i) simplifying and streamlining certifications (both annual and loan-level) that lenders make in connection with the FHA program to better track statutory requirements and address materiality and culpability considerations; and (iii) refining the Single Family Housing Loan Quality Assessment Methodology (known as the "defect taxonomy") used by FHA to assess the appropriate remedies for identifying loan underwriting defects, as well as evaluating ways to tie the defect taxonomy to applicable HUD remedies for violations.
In the upcoming months, Buckley and industry participants will be closely monitoring whether the MOU results in an increase in MRB actions and a corresponding decrease in FCA investigations and cases. Moreover, the MOU does not extend to agencies such as the United States Department of Veterans Affairs (VA) or the United States Department of Agriculture (USDA). While the DOJ has historically refrained from bringing a high volume of FCA cases for violations of VA or USDA requirements, in recent months Buckley has seen a number of civil investigative demands issued to VA-approved lenders. We will carefully monitor whether this MOU changes the DOJ's enforcement posture with respect to other government agencies.