Housing finance agencies from seven states recently filed an amicus brief in support of HUD’s position against a Utah-based Indian tribe which offers downpayment assistance to borrowers across the country. In their friend of the court brief, the agencies compare the tribe’s downpayment assistance activities to the “risky” mortgage financing practices which played a role in the Great Recession of 2008.
The underlying case arose when the tribe filed suit in Utah federal district court on May 24, 2019, seeking an injunction to prevent HUD from implementing Mortgagee Letter 19-06—which “clarified” the rules concerning downpayment assistance for FHA borrowers where such assistance takes the place of all or part of the minimum required investment of 3.5 percent that FHA would otherwise require the borrowers to make. Among other changes, the mortgagee letter provided that Indian tribes could only provide homebuyers with downpayment assistance for: (i) properties located on tribal land, or (ii) tribal members. We have previously reported on Mortgagee Letter 19-06, whose implementation has been delayed as a result of this litigation, here and here. The tribe argued that this provision “specifically and expressly targets American Indian tribes by requiring them, for the first time,” to limit their downpayment assistance programs to the physical confines of their reservations. The tribe asserts that the mortgagee letter has essentially forced the tribe’s mortgage company out of the mortgage business, as most lenders now refuse to do business with them as a result of the mortgagee letter. The tribe also claims that the mortgagee letter is “the result of an improper process and violates federal law” because it was issued “without prior notice, without soliciting comment, without consulting with affected American Indian tribes and bands, and without gaining the approval of necessary executive branch officials, including the president.”
In their amicus brief, the state housing finance agencies—from Pennsylvania, Alaska, Idaho, Tennessee, Virginia, Washington and Wyoming—accused the tribe’s assistance program of engaging in improper practices, such as “representing that its funds were governmental,” funding mandatory downpayments for a profit, without authority or accountability; and allowing “low credit requirements, lack of any special caps on lender fees,” and defiance of requirements, all of which, the agencies allege, have the potential to “inflate home prices” and “increase default risk” on underlying loans. The agencies argue that the mortgagee letter is consistent with HUD’s 2012 interpretive rule that governmental entities—including tribes—may offer downpayment assistance when “operating in their governmental capacity.” They argue that the tribe’s downpayment assistance program as it relates to off-reservation business is not operated within the tribe’s “governmental capacity,” and thus, the program has always violated HUD policies. Further, the agencies claim that since the program was “invalid at the outset, HUD was not required to engage in formal rulemaking or consultation before adopting Mortgagee Letter 19-06.”