Written By: Joel Palmer, Op-Ed Writer
When Donald Trump was elected president of the United States a year ago, the mortgage industry was hopeful his administration would alleviate the regulatory burden that intensified under the Obama Administration.
Items on the table included overhauling Dodd Frank, minimizing the enforcement power of the Consumer Financial Protection Bureau, and pursuing fewer cases against lenders for False Claims Act (FCA) violations.
Little progress has been made on these fronts through President Trump’s first 10 months in office. But relief could be on the way based on recent public statements made by HUD Secretary Ben Carson.
In October, Carson twice indicated that he was working with the Department of Justice to address the use of the FCA to enforce violations of Federal Housing Administration (FHA) lending. The first instance was to the House Financial Services Committee; the second was to the Mortgage Bankers Association Annual Conference in Denver.
The FCA law dates all the way to the time of Lincoln. It was passed in 1863 to address fraud against the government during the Civil War, specifically the selling of sick horses, spoiled rations and faulty equipment. Over the years it has been mostly used to penalize defense contractors who knowingly defraud the government.
But following the 2008 financial crisis and the collapse of subprime mortgages, the Obama administration began using it as a way to go after mortgage lenders who they accused of knowingly making loans that violated FHA standards.
The first target was Deutsche Bank in 2011. Since then, the government has the FCA to secure multi-million-dollar settlements against Wells Fargo, M&T Bank, PHH Corp. and a host of other institutions.
The use of FCA fines has prompted large lenders out of the FHA market.
According to the Urban Institute, Wells Fargo’s share of the FHA market plummeted from 37 percent in 2011 to 16 percent by the first quarter of 2015. Likewise, during the same period, JPMorgan Chase’s FHA share fell from 9 percent to 2 percent and Bank of America’s share dropped from 17 percent to 2 percent.
While smaller lenders picked up some of the slack, the Urban Institute said consumers were adversely impacted by the pull-out of major lenders from the FHA market.
For starters, any lender remaining in the FHA market has become more cautious in response to FCA enforcement. The Urban Institute report showed that borrowers with credit scores below 640 accounted for 55 percent of FHA loans in 2007, but only 6 percent in 2014.
The institute also raised concern about small, nonbank mortgage lenders accounting for so much of the FHA market. That’s because these lenders are not as regulated, nor do they have the capital of large institutions.
“It would thus appear that HUD and DOJ’s enforcement effort, which presumably intends to protect consumers by penalizing bad actors and to better contain risk in the system, is instead constraining access to credit and pushing risk into quarters where it is less well managed. A lose-lose situation of the worst sort,” wrote the institute.
David H. Stevens, CEO of the Mortgage BankersAssociation, wrote earlier this year that the industry has suffered from excessive FCA penalties that are often the result of clerical errors or “immaterial mistakes.
“The use of FCA is an inappropriate and harmful response that only reduces access to credit for qualified borrowers, harming the entry level buyer and those on the lower end of home price ranges in America,” he wrote.
The argument for continuing the use of FCA enforcement is that lenders have not been punished for inadvertent errors, but rather “egregious” violations.
Many of the penalties, according to those who supporting continued use of FCA, have been assessed against lenders who eventually admitted to years of FHA violations or that failed to report violations they were aware of.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.