The government’s proclivity to use the False Claims Act as a weapon against mortgage lenders could soon be coming to an end, Department of Housing and Urban Development Secretary Ben Carson told members of Congress on Thursday.
Carson was on Capitol Hill to address the House Financial Services Committee in a hearing entitled “The Future of Housing in America: Oversight of the Department of Housing and Urban Development.”
Carson’s last questioner in the three-plus-hour hearing was Rep. Dave Trott, R-Michigan, who complimented Carson for his forthrightness throughout the hearing.
Trott’s questioning was focused on the future of the Federal Housing Administration, and specifically on the government’s recent use of the False Claims Act as a means to extract settlements from mortgage lenders engaged in FHA lending.
In recent years, the Department of Justice under President Barack Obama accused a number of lenders of violating the False Claims Act by knowingly originating and underwriting mortgages that did not meet FHA standards.
Using the False Claims Act, the government secured sizable settlements against lenders like Wells Fargo, which agreed to a $1.2 billion settlement; Franklin American, which settled with the government for $70 million; Walter Investment, which settled for $29.6 million; First Tennessee, the regional bank for First Horizon National which settled for $212.5 million; M&T Bank, which settled for $64 million; Freedom Mortgage, which agreed to pay $113 million; Regions Bank, which settled for $52.4 million; BB&T, which settled for $83 million; United Shore Financial Services, which settled for $48 million; and PHH Corp., which settled for $75 million.
And that list does not include two lenders – Quicken Loans or Guild Mortgage – that are fighting back after the DOJ accused each of similar actions.
Trott began his questioning by referencing a “great article” in HousingWire written in June by Mortgage Bankers Association President and CEO David Stevens, who wrote that the government’s “misuse” of the False Claims Act is driving lenders away from FHA lending.
Trott noted that phenomenon as well, stating that the government’s “unprecedented” use of the False Claims Act is impacting borrowers who end up paying more for mortgages.
“I believe you and (Attorney General Jeff) Sessions could easily solve that problem and the consequence of the improper use of the False Claims Act to impose outrageous penalties against lenders for immaterial defects in loan origination files on FHA loans,” Trott said to Carson. “The consequences are many lenders left the FHA program and those that have stayed in the program, it’s more costly for the borrowers who can least afford it.”
Trott then asked Carson if HUD and the FHA have any plans to address the use of the False Claims Act once Brian Montgomery takes over at the FHA. Last month, the Trump administration announced that it chose Montgomery, who previously served as FHA commissioner under President George W. Bush, to serve in that role again.
Carson said that Trump administration is already working with the DOJ on the use of the False Claims Act.
“We are already addressing that problem; our staff, along with the DOJ staff. And we’re committed to getting that resolved, because it’s ridiculous, quite frankly,” Carson said of the use of the False Claims Act.
“And I’m not exactly sure why there had been such an escalation previously, but the long-term effects of that escalation is obviously providing fewer appropriate choices for consumers,” Carson added. “And that’s exactly the opposite of what we should be doing.”
Carson did not provide any additional specifics, and given that Trott was the last member of the committee to ask questions, there were not any follow-up questions, but Carson’s response suggests that the government’s use of the False Claims Act to go after lenders could either be ending entirely or be significantly curtailed.
In recent years, there’s been a shift away from FHA lending by the big banks. The government’s use of False Claims Act is often cited among the reasons for that shift.
From 2013 through July 2017, Ginnie Mae experienced the largest shift in the source of its mortgage originations, with its share of nonbank originations rising from 37% in 2013 to 75% this year. In 2011, nonbanks made up only 11% of Ginnie Mae’s originations.
Ginnie Mae is the arm of the federal government that securitizes federally insured mortgages, including FHA loans.
Earlier this year, JPMorgan Chase CEO Jamie Dimon cited the False Claims Act as a reason that the bank moved away from FHA lending.
Dimon previously said that the bank drastically cut its FHA lending in 2015 due, in part, to the risk of a False Claims Act charge from the government.
“The FHA plays a significant role in providing credit for first-time, low- to moderate-income and minority homebuyers,” Dimon wrote in his 2017 letter to shareholders. “However, aggressive use of the False Claims Act (a Civil War act passed to protect the government from intentional fraud) and overly complex regulations have made FHA lending risky and cost prohibitive for many banks.”
Dimon writes that False Claims Act settlements “wiped out a decade of FHA profitability,” adding that FHA lending is too expensive for lenders, even without the threat of a False Claims Act settlement.
“This has led us to scale back our participation in the FHA lending program in favor of less burdensome lending programs that serve the same consumer base – and we are not alone,” Dimon writes.
And In 2015, Bill Emerson, then-CEO of Quicken Loans, told HousingWire: “The FHA has been hijacked by the Department of Justice” by the use of the False Claims Act.
Now, it appears that the era of the False Claims Act standing in way of FHA lending could be coming to an end.
