If there is one particular place every U.S. Department of Housing & Urban Development (HUD)/Federal Housing Administration (FHA)-approved mortgagee wants to avoid it is the Mortgagee Review Board (MRB). It was established in 1989 to take disciplinary action against any HUD/FHA-approved mortgagee who knowingly and materially violates FHA’s program statutes, regulations and handbook requirements.1 The MRB is empowered to enforce administrative sanctions, including reprimand, probation, and suspension, withdrawal of approval, cease-and-desist orders, and civil money penalties.2
Trust me … you don’t want to go there!
If you are an FHA-approved lender within the Title I and Title II programs,3 you will likely provide your defense before the MRB if your violations involve the most serious findings. HUD/FHA staff will refer the lender to the MRB when there is evidence of widespread abuse of its program requirements.4 With respect to the single-family lenders, approximately 10 percent of Quality Assurance Division reviews are referred to the MRB for enforcement, with the remaining 90 percent handled at the Field Office level.
In representing clients before the MRB, I can vouch for the exhaustive due diligence that is virtually mandated, the considerable costs involved, the experienced legal counsel and requisite regulatory compliance expertise that is needed, and the significant adverse impact on an FHA lender’s ability to conduct or even continue in business.
So, what kinds of violations will send your case to the MRB?5
Recently, HUD published its required, Public Notice6 that advises of actions taken by the MRB from July 10, 2008 to March 18, 2010.7 It’s not a pretty picture, but the improper actions (or failure to implement required actions) on the part of other lenders may serve to enlighten you about what could await you—literally and figuratively—if you do not get with the program!
Settlement agreements, civil monetary penalties …
Withdrawal of FHA approval …
Suspensions, probations and reprimands
Let’s take a look at certain violations and administrative remedies that have taken place during the above-mentioned time frame. Many of these violations incurred civil money penalties, as well as other administrative actions. I shall exclude:
(1) Those lenders who had their FHA approval immediately revoked for one year due to failing to meet the annual recertification requirements for HUD/FHA approval, a list of 905 (sic) lenders; and
(2) Those lenders that cured this same violation by coming into compliance and settled by paying a $3,500 civil money penalty without admitting fault or liability, a list of 147 lenders.
In the list that follows, please note that administrative actions often result from several violations of HUD/FHA requirements alleged by HUD, with discovery of such violations, taken together, often determined by means of HUD’s routine quality assurance examination.
1. (a) Used official HUD Seal and FHA acronym on lender’s Web site; (b) violated HUD’s advertising requirements when it misrepresented that its Web site was owned and/endorsed by HUD; (c) continued to violate HUD requirements by displaying the Official Federal Housing Administration-Approved Lending Institution Seal (FHA Seal) improperly on its Web site and failed to accurately identify the lender as the owner of the Web site; and (d) failed to register the fictitious business name in violation of HUD requirements.
Action: $30,000 civil monetary penalty without admitting fault or liability.
2. (a) Used the official HUD Seal on its Web site and (b) improperly implied that it was affiliated, connected or had authorization from HUD for its Web site.
Action: Six months probation and imposing a $7,000 civil money penalty.
3. Failed to implement a quality control plan and conduct quality control reviews in accordance with HUD/FHA requirements.
Action: $7,500 civil money penalty without admitting fault or liability.
4. Closed its only approved office and failed to notify HUD.
Action: Permanently withdrawing FHA approval.
5. (a) Failed to report all delinquent loans to HUD no later than the fifth business day of the following month; (b) failed to correct fatal errors that resulted from its monthly reporting to HUD’s Single Family Default Monitoring System; (c) failed to comply with HUD/FHA’s default servicing reporting requirements when it failed to timely submit a default servicing report; (d) failed to fully implement its quality control for oversight over this functional area.
Action: $700,000 administrative payment to HUD without admitting fault or liability.
6. (a) Improperly used a simulated government form and seal to imply that correspondence relating to HUD’s Home Equity Conversion Mortgage (HECM) program was from, or endorsed by HUD/FHA; (b) misrepresented HUD program requirements in an advertisement by informing recipients that they were “entitled” to monthly benefits through the HECM program.
Action: Six month probation without admitting fault or liability and $11,000 civil money penalty.
7. Failed to notify HUD that its business licenses had become inactive and revoked.
Action: Permanently withdrawing FHA approval.
8. (a) Failed to comply with HUD’s requirements concerning Principal-Authorized Agent relationships by permitting loans to close in the name of an authorized agent; (b) failed to comply with HUD’s requirements when it charged borrowers a broker fee for loans it originated and also charged an origination fee, thus receiving a total loan origination fee in excess of the fee permitted by HUD.
Action: $277,500 civil money penalty and refund broker fees charged to borrowers totaling $147,589.81 without admitting fault or liability.
9. (a) Failed to implement a quality control plan in compliance with HUD/FHA requirements; (b) failed to provide a clear and effective separation between lender and an “identity of interest” life insurance company; (c) failed to comply with HUD/FHA housing counseling requirements.
Action: $97,500 civil money penalty and permanently withdrawing FHA approval.
10. (a) Failed to comply with HUD’s requirements concerning the registration of “doing business as” (d/b/a) name in the states in which it was doing business and with the Department; (b) improperly used the HUD seal on its Web site; (c) failed to ensure that loan applications were taken and processed by lender’s employees; (d) approved loans where borrowers failed to meet HUD’s minimum credit requirements because lender failed to provide adequate explanations for the derogatory credit; (e) failed to adequately document the stability and/or source of income used to qualify for loans; (f) failed to adequately document the source of funds used to close loans; (g) approved loans with debt-to-income ratios that exceeded HUD standards without significant compensating factors and/or explanations; (h) charged borrowers excessive and impermissible fees; (i) failed to resolve discrepancies and/or conflicting information in loan documents; (j) failed to complete quality control reviews for loans that were 60 days past due within the first six payments; (k) failed to have a written quality control plan as required by HUD/FHA.
Action: $413,500, to indemnify HUD on 31 loans, and reimburse fees to 78 borrowers without admitting fault or liability.
11. (a) Used conflicting information in originating and obtaining HUD/FHA mortgage insurance; (b) submitted false certifications on the HUD 92900–A, Addendum to Uniform Residential Loan Application, which stated that an employee of the lender had obtained the information contained in the application directly from the borrower; (c) approved loans where borrowers failed to meet HUD’s minimum credit requirements; (d) failed to adequately document the stability and/or source of income used to qualify the borrowers for the FHA-insured mortgages; (e) failed to document the source of funds used to close the loan or to satisfy various omitted liabilities; (f) omitted liabilities from the underwriting analysis without supporting documentation, approved loans with debt-to-income ratios that exceeded HUD standards without significant compensating factors and/or explanation; (g) exceeded HUD requirements when calculating the maximum insurable mortgage; (h) failed to process a loan in accordance with HUD policy on loans to HUD employees; (i) closed a loan with an excessive mortgage broker fee paid to an FHA-approved loan correspondent; (j) failed to provide the required Verification of Rent to support its loan approval decision; (k) submitted false certifications to HUD in connection with the submission of its Yearly Verification Report that concealed administrative sanctions and investigations by two of lender’s state regulators; (l) failed to notify HUD that one of lender’s employees was involved in fraudulent FHA insured mortgage originations in a timely manner; (m) permitted a borrower’s Verification of Employment to be hand-carried by the borrower; (n) approved loans that were not in compliance with FHA appraisal requirements.
Action: $512,500 civil money penalty.
12. (a) Chief executive officer and 25 percent owner was indicted in the United States District Court, when he was charged with one count of bank fraud for his role in a scheme to create fictitious loans and warehouse those loans; (b) failed to notify HUD of the indictment; (c) failed to submit its Yearly Verification report.
Action: Suspending lender’s HUD/FHA approval pending the outcome of a legal proceeding for federal indictment.
13. Knowingly employed individuals who were debarred and/or had been convicted of an offense that reflects adversely upon lender’s integrity, competence, or fitness to meet the responsibilities of an FHA-approved mortgagee.
Action: Permanently withdrawing FHA approval.
14. (a) Approved and closed a loan where the spouse was added to title without regard for debts and overall creditworthiness; (b) failed to perform quality control reviews of loans that went into default within the first six months; (c) failed to notify HUD of a business change when it failed to notify HUD that it had closed its home office.
Action: Withdrawing FHA approval for a period of one year.
15. (a) Permitted non-employees and/or mortgage brokers to participate in the loan process; (b) failed to adequately staff its office because it never had any employees; (c) failed to comply with multiple requests from HUD’s OIG Office of Investigation to make its mortgage origination files available for review; (d) failed to provide evidence that original documents were reviewed, in that the loan files contained faxed documents with no indication that lender received and/or reviewed the original documents, or was able to clearly identify the source from which the documents originated.
Action: Permanently withdrawing FHA approval.
16. (a) Failed to ensure that its employees were exclusive and did not have outside employment in the mortgage lending, real estate, or other related field; (b) failed to adequately document income, a stable two-year employment history, and other forms of effective qualifying income; (c) failed to document significant compensating factors for loans that exceeded HUD’s debt-to-income ratio; (d) failed to document the source and/or adequacy of borrower’s funds required to close the loans; (e) failed to include all of the borrower’s liabilities in loan qualification for loans.
Action: $68,500 civil money penalty and indemnifying HUD on nine loans without admitting fault or liability.
17. (a) Failed to maintain and implement a quality control plan in compliance with FHA requirements; (b) failed to ensure that quality control reviews were conducted on loans that went into default within the first six months; (c) failed to resolve discrepancies and/or conflicting information in the origination of loans; (d) failed to document a stable two-year employment history and other forms of effective income on loans; (e) approved loans with debt-to-income ratios that exceeded HUD standards without significant compensating factors; (f) failed to calculate income properly on loans; (g) approved loans that did not meet minimum credit requirements; (h) omitted revolving and installment debt liabilities on loans without documenting that the balance had been paid or otherwise should have been excluded; (i) allowed an appraiser who was not on the FHA Roster to appraise a home on a loan; (j) failed to ensure that loans met the eligibility requirements for FHA insurance; (k) exceeded HUD requirements when they calculated the maximum mortgage amount.
Action: Permanently withdrawing FHA approval and imposing a civil money penalty in the amount of $674,000.
18. (a) Permitted a third-party to originate HUD/FHA insured mortgage loans, and subsequently submitted false certifications to HUD that these loans were originated by a full-time employee; (b) failed to implement a quality control plan in compliance with HUD/ FHA requirements; (c) failed to maintain quality control reports as required by HUD/FHA; (d) failed to document the borrower’s income in accordance with FHA requirements; (e) charged a borrower an unallowable tax service fee.
Action: $168,500 civil money penalty without admitting fault or liability.
19. (a) Failed to perform a quality control review on loans that went into default within the first six payments; (b) failed to adopt and maintain a quality control plan in accordance with HUD/FHA requirements; engaged in a prohibited branch arrangement; (c) made false certifications on the form HUD–92900–A Addendum to the Uniform Residential Loan Application (URLA); (d) failed to comply with HUD/FHA requirements for home office operations; (e) failed to report compensation to an employee on IRS form W-2; (f) failed to process Verifications of Employment (VOE) on loans in compliance with HUD/FHA requirements.
Action: Permanently withdrawing FHA approval and imposing a civil money penalty in the amount of $124,000.
20. (a) Hired loan officers as independent contractors and reported their compensation on IRS form 1099’s instead of the required W-2 forms; (b) improperly charged borrowers a broker fee in addition to an approximate one percent origination fee for loans it originated; (c) submitted a false certification to the Department in connection with an FHA-insured loan; (d) failed to disclose the broker fees charged to borrowers on the Good Faith Estimates (GFE); (e) charged borrowers commitment fees without a written agreement guaranteeing the interest rate and discount points.
Action: Permanently withdrawing FHA approval and imposing a civil money penalty in the amount of $71,000.
21. Underwrote HECM loans without having the necessary HECM lending license in the state where the properties were located and failed to notify HUD that the state’s banking department had issued a Findings of Fact and Temporary Order to Cease and Desist Notice against the lender.
Action: Issuing a letter of reprimand and imposing a $10,000 civil money penalty without admitting fault or liability.
22. (a) Failed to ensure HUD’s minimum credit requirements were satisfied; (b) failed to verify income and employment histories; (c) failed to document the source and/or adequacy of funds for the closing costs and/or debt satisfaction; (d) failed to verify documents faxed from an unknown source; (e) failed to ensure that properties met the conditions specified on the Uniform Residential Appraisal Reports, and were eligible for FHA insurance; (f) failed to discontinue misleading advertising concerning the FHA Mortgage Insurance Premium Refund, despite previous sanctions imposed by the Board for the same violation; (g) charged prohibited, duplicative, and/or non-customary, non-reasonable fees to borrowers; (h) failed to ensure the completeness and accuracy of the data submitted to HUD; (i) failed to develop and implement a quality control plan in accordance with HUD/FHA requirements; (j) failed to notify HUD/FHA that it did not renew its license to originate home mortgages.
Action: Permanently withdrawing FHA approval.
23. Failed to comply with HUD documentation requirements for the assignment of a defaulted multi-family apartment mortgage.
Action: $37,500 civil money penalty without admitting fault or liability.
24. No longer had the requisite warehouse line of credit or other mortgage-funding program acceptable to HUD.
Action: Permanently withdrawing FHA approval.
“An ounce of prevention is worth a pound of cure.”
—Benjamin Franklin
I hope you have taken the time to go through this list. It is generally representative of the kinds of violations the MRB will review. If your case comes before the MRB, it will likely be evaluated by the following board members or their deputies: Assistant Secretary for Housing-Federal Housing Commissioner (who serves as the chairperson); the President of GNMA; HUD’s General Counsel; the Assistant Secretary for Administration; the Chief Financial Officer and the Assistant Secretary for Fair Housing and Equal Opportunity (who votes only on cases involving Fair Housing and Equal Opportunity issues). HUD’s Inspector General and the Director of HUD’s Office of Lender Activities and Program Compliance are non-voting advisors to the Board, but they can be expected to participate.
The process starts when HUD sends the lender a Notice of Violation, which describes the particular findings upon which an administrative action is based. The lender will have only 30 days to respond to the Notice of Violation. If the lender does not submit a response, the case moves forward with the Department's record. If the lender does respond, the Departmental Enforcement Center (DEC) staff reviews the response and presents the case to the MRB for its consideration.
I would suggest that you make a firm commitment to implement all of HUD/FHA’s program statutes, regulations and handbook requirements. Be continually prepared for a Quality Assurance Examination and make sure you are fully executing and documenting corrective actions. Consult a competent, mortgage compliance professional to ensure that your policies, procedures, and regulatory compliance requirements are accurate, timely, properly enforced, and updated.
If any of the above violations are in any way part of how you conduct business, be prepared eventually to face the MRB. Only you can avert the costly and, in some cases, terminal mistakes made by other FHA lenders.
Submit your questions …
Do you have a regulatory compliance issue that you’d like to see addressed in the Regulatory Compliance Outlook Column? If so, e-mail your issue or concern to Jonathan Foxx at
[email protected].
Jonathan Foxx, former chief compliance officer for two of the country’s top publicly-traded residential mortgage loan originators, is the president and managing director of Lenders Compliance Group, a mortgage risk management firm devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456 or by e-mail at
[email protected].
Footnotes
1—HUD Reform Act of 1989 (12 USC § 1708) established the Mortgagee Review Board (MRB), and the Code of Federal Regulations (24 CFR Part 25) outlines its duties and procedures.
2—Mortgagees may appeal any sanction the MRB imposes, except for a letter of reprimand.
3—Includes lenders involved in Single Family and Multifamily insurance programs.
4—The MRB also enforces the provisions of the Fair Housing Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, and Executive Order 11063 as they apply to the origination or servicing of HUD/FHA-insured single family and multifamily loans.
5—Lenders do not physically appear before the MRB to present their cases. The Departmental Enforcement Center (DEC) staff will include the lender’s written response in the material provided to the MRB.
6—Section 202(c) of the National Housing Act requires HUD to publish in the Federal Register the cause and description of the administrative action taken by the MRB against HUD approved mortgages.
7—Federal Register/Vol. 75, No. 142/Monday, July 26, 2010/Notices.
