The U.S. Departments of Justice (DOJ) and Housing and Urban Development (HUD) issued a joint Memorandum of Understanding (MOU) on Monday setting out the appropriate use of the False Claims Act (FCA). The FCA, also known as the Lincoln Law, was enacted in 1863 by a Congress concerned that companies supplying goods during the Civil War were defrauding the Army. The law provides that any person who knowingly submits false claims to the government is liable for double the government's damages plus a fine. Since then the law has been amended to permit treble damages and fines in the range of $5,000 to $10,000. The FCA has been invoked by in litigation against mortgage lenders arising out of practices prior to the housing crisis.
HUD Secretary Ben Carson said the MOU it is a clear outline of FHA mortgage program requirements "so they do not impede or discourage lenders from offering affordable FHA-insured loans to credit-worthy borrowers." He called it an important element in the administration's Housing Finance Reform Plan, making clear "to all responsible lenders that FHA's mortgage program is a program they should participate in. At the same time, HUD will not tolerate irresponsible or fraudulent lenders who defraud borrowers and taxpayers."
The MOU states that FHA requirements will be enforced primarily through HUD's administrative proceedings, but specifically addresses how HUD and DOJ, including the U.S. Attorneys' Offices, will consult with each other regarding use of the FCA in connection with defects on mortgage loans insured by FHA. HUD will utilize the Mortgagee Review Board (MRB) to review and refer FCA claims. The MRB was created by statute and empowered to take certain actions for non-compliance by FHA lenders.
The MOU prescribes the standards for when HUD, through the MRB, may refer a matter to DOJ for pursuit of FCA claims, and also sets forth how DOJ and HUD will cooperate during the investigative, litigation, and settlement phases of FCA matters when DOJ receives a referral from a third party, such as in qui tam (whistleblower) cases. The MOU also recognizes that application of the FCA requires, among other elements of proof, a material violation of HUD requirements, and DOJ attorneys will solicit HUD's views to determine whether the elements of the FCA can be established.
According to the joint press release, the interagency understanding is intended to address concerns of many lenders, including banks and credit unions with statutory obligations to help meet the credit needs of their communities, that they faced uncertain and unanticipated FCA liability for regulatory defects. This led many well-capitalized lenders to largely withdraw from FHA lending which has dramatically shifted FHA's lender base during the last decade. Today, depository institutions originate less than 14 percent of FHA-insured mortgages, down significantly from approximately 45 percent in 2010.
In addition to the interagency press release, the MOU was introduced by Carson during his remarks at the Mortgage Bankers Association's (MBA's) annual convention in Austin Texas. The Secretary also told the audience that FHA is simplifying the certifications that lenders make in connection with the FHA program. The certifications will better track statutory requirements and address materiality and culpability considerations. FHA is also refining its defect taxonomy that it uses to assess the appropriate remedies for identified loan underwriting defects.
Following the announcement, MBA President and CEO Robert D. Broeksmit issued a statement on behalf of the organization applauding the efforts of Carson and Attorney General William Barr "to create an environment where lenders of all sizes - from depository institutions to independent mortgage banks (IMBs) - can operate with more certainty and less risk. Today is a significant step toward providing clarity for those currently participating in the FHA program, as well as encouraging more lenders to offer FHA-insured loans.
"MBA is also pleased to learn that FHA is revising the loan review process and simplifying the certifications that lenders make in connection with the FHA program. These combined actions will go a long way toward ensuring that low-to-moderate income households and first-time buyers have access to affordable mortgage credit in order to achieve their dream of homeownership," Broeksmit said.