Representative Pete Aquilar submitted a letter to HUD on May 8, 2019, seeking clarification regarding FHA guidelines for DACA status borrowers seeking an FHA-Insured loan.
On June 11, he received his response from Len Wolfson who is Assistant Secretary for Congressional and Intergovernmental Relations at HUD.
Bottom Line: “because DACA does not confer lawful status, DACA recipients remain ineligible for FHA loans.”
On September 5, 2017, DACA was rescinded. This caused lenders to question whether or not they were permitted to offer FHA loans to DACA borrowers who had a legal EAD [Employment Authorization Document].
FHA does not specifically offer in their guidelines which types of Non-U.S. Citizens are eligible, only that they must have legal residence and the ability to work in the United States. Once DACA was rescinded, this forced lenders to determine whether or not someone with DACA status who could demonstrate their ability to work through an EAD, was considered a legal residence. As a result, some lenders continued to offer FHA loans for DACA status clients with an EAD and other lenders determined the risk of the “unknown” was too great. Confusion is always the end result when agencies that support loan programs do not issue clear guidance.
Fannie Mae & Freddie Mac felt pressure on this issue and released guidance that clarified their position on DACA borrowers, and as a result, lenders began allowing DACA status borrowers under conventional programs.
Now that FHA has come out and said “no”, where does this leave lenders who have done FHA loans for DACA status borrowers after September 5, 2017? That is almost 2 years of production! If I were in the C-Suite of one of these lenders, my greatest fear would be the “False Claims Act”. This has been a big beast of burden for our industry and many mortgage lenders have paid the price to the tune of hundreds of millions of dollars in fines. Some have paid the ultimate price of losing their company. Under the False Claims Act, a lender can be prosecuted, for as HUD has put it, “defrauding the government” by issuing loans that were not up to the guideline standards. Much of this litigation occurred over loans originated before and during the recession. Will FHA now open suits on those lenders who have allowed DACA status on FHA-insured loans? Unfortunately, we will not know until it either happens or this issue fades into the sunset.
What Can Lenders do to Mitigate Their Risk Now?
If you are a lender that allowed DACA status FHA loans, you need to wrap your arms around how big of an issue this may become for you. Get in front of the potential risk vs. crossing your fingers and hoping for the best. Immediately start looking at what loans were closed and insured by FHA, that have a DACA status borrower, from the period of September 2017 through the present to understand your exposure. Talk with your legal counsel about the possible exposure and start to think through a plan of action. You cannot change the past, but you can try to plan for the future.
Impacts on Fair Lending?
In my opinion, this news takes pressure off of the compliance team. Now the decision is not the company, but that of FHA. Remember, he/she that makes the rule has to justify their decision, so now the “rule'” was just clarified by FHA. That being said, I would not let my guard down and would also pay close attention to the new political war that this decision is going to cause. The House Financial Services Committee and consumer advocacy groups will likely take up this issue so you should pay attention to how this story develops and adjust your policy accordingly.
To Read Len Wolfson’s letter to Representative Aquilar, Click Here!