On October 28, 2019, HUD and DOJ announced a Memorandum of Understanding (MOU) between the two agencies providing guidance regarding the application of the False Claims Act (FCA) to FHA lenders. In a joint press release, HUD Secretary Carson noted that HUD is “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 is intended to address “concerns that uncertain and unanticipated FCA liability for regulatory defects” led many lenders to withdraw from FHA lending. HUD noted that “depository institutions originate less than 14 percent of FHA-insured mortgages, down significantly from approximately 45 percent in 2010.” The MOU is intended to clarify regulatory expectations within the FHA program, while allaying any concerns mortgage lenders may have about dealing with FCA penalties for their lending practices.
The MOU summarizes the conferral process DOJ and HUD are to follow regarding FCA actions, explains that FHA requirements will be enforced primarily through HUD’s administrative proceedings, and provides guidance on the scope of the FCA’s use. The MOU states, among other things, that:
- Violations of FHA requirements by FHA-approved mortgagees or other FHA insurance participants will be enforced through HUD’s administrative proceedings, unless additional action is warranted.
- Violations of FHA requirements identified by HUD will be referred to the MRB for evaluation.
- The MRB may refer potential FCA violations to the DOJ where: (i) “Tier I or equivalent violations exist in at least 15 loans, or Tier 1 or equivalent violations exist in loans with unpaid principal balance or claims of at least $2.0 million;” and (ii) aggravating factors—such as evidence of systemic or widespread violations—warrant pursuit of FCA litigation.
- “HUD recommends that FCA be pursued only where such action is the most appropriate method to protect the interests of FHA’s mortgage insurance program, would deter fraud against the United States, and would generally serve the best interests of the United States.”
- DOJ will confer with HUD during the investigative, litigation, and settlement phases of a matter where a qui tam relator or HUD’s Office of Inspector General, refers a matter to DOJ, or in the event the matter is directly initiated by DOJ or a U.S. Attorney’s Office.
- HUD may recommend that DOJ seek dismissal of a case filed by a qui tam relator if HUD does not support the FCA litigation.
- If the MRB does not refer a matter to DOJ, or recommends against filing an FCA action, the MRB may still seek administrative action, indemnification or civil money penalties.
Aside from FHA-related FCA enforcement, the MOU noted other initiatives to ensure that “the severity of certain violations is matched with the appropriate remedy.” HUD has focused on refining and streamlining its annual and loan-level lender certifications, as well as revising the Single Family Housing Loan Quality Assessment Methodology (known as the “Defect Taxonomy”) for evaluating lender performance through loan-specific reviews by capturing data on the sources and causes of defects, and categorizing each defect into one of four tiers by level of severity.