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The Department of Justice announced yesterday that Franklin American Mortgage has agreed to a 70 Million dollar settlement for violations under the False Claims Act.

Folks, this is an issue that is just not letting up, as more and more lenders are hit by the Department of Justice via HUD with these claims.

So what is the False Claims Act?

The False Claims Act (31 U.S.C. §§ 3729–3733, also called the “Lincoln Law”) is an American federal law that imposes liability on persons and companies (typically federal contractors) who defraud governmental programs. It is the federal Government’s primary litigation tool in combating fraud against the Government.

FHA Lenders need to pay attention to what is happening.  If you originated FHA loans (government insured loans) and closed those loans, you could be subject to suit under the False Claims Act.  The findings revolve around the lender’s “negligence” when it comes to underwriting, and ensuring that the closed loans are viable and meet the FHA guidelines.  HUD is asserting that lenders who are being sued for this issue did not meet the underwriting criteria, or were somehow negligent.  As a result, HUD is seeking, via the Department of justice, settlements and restitutions from these FHA lenders.

I had the privilege of attending the Garrett/McAuley dinner, where this was a topic of discussion. One lender was brave enough to share their story over this issue.  What amounted to a very small sampling of loans as compared to the whole of their loans, was being used as the substantiation for the claim. This seems to me, to be like an Economics game.  You can take a bunch of numbers and spin them to different desired results, which is what appears to be happening with HUD and the DOJ; according to lenders.

If you’ve been watching the compliance news, you’ll note that Quicken is also being sued for this issue, and has filed a countersuit.  In fact, just today Quicken announced that they may exit the FHA business, which is written in an article linked below.

There is not really any advice that I can offer about being proactive about this issue, as these findings are based on closed loans.  However, it might be prudent to ensure that your FHA underwriters are really savvy when it comes to the FHA guidelines, as “junior” underwriters have been cited in more than one case as being an issue.

What I find particularly disturbing about all of this, is that lenders may cease offering FHA products, or will add substantial scrutiny to the evaluation of the client in order to protect themselves.  If this happens, it creates a hole in our marketplace for many qualified first time homebuyers seeking financing; as FHA has certain strengths over conventional financing.  There has got to be security on each side of the fence (HUD and the lenders) in order to ensure that we have adequate avenues of financing for consumers.  If these suits continue, then why would a lender choose to originate FHA loans? And that my friends would be a tragedy to the consumers we serve!

To Read the Reuters Article on Quicken, Click Here!

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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