In an effort to provide clarity and certainty to Federal Housing Administration (FHA) approved lenders, the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Justice (DOJ) jointly issued a memorandum of understanding (MOU) on October 28, 2019, describing broad guidelines about how HUD and DOJ will coordinate using the False Claims Act (FCA) to enforce alleged violations of FHA requirements. More specifically, the interagency MOU describes coordination efforts between the departments in civil FCA litigation.
The MOU reflects but one component of a broader initiative by HUD to encourage the re-entry of depositories and other well-capitalized financial institutions into the FHA lending space. HUD’s press release announcing the MOU noted that depository institutions represented approximately 14% of all FHA originations today, down from 45% in 2010. The MOU emphasizes that the FHA is a program in which all responsible lenders should participate, and states that the MOU “is intended to address concerns that uncertain and unanticipated FCA liabilities for regulatory defects led to many well-capitalized lenders, including many banks and credit unions statutorily required to help meet the credit needs of the communities in which they do business, to largely withdraw from FHA lending.
The MOU identifies two other initiatives HUD has recently undertaken to encourage the return of depositories to the FHA lending space by providing greater certainty about the enforcement of alleged violations of FHA requirements. First, HUD has streamlined its annual lender certification requirements by removing a representation made under penalty of perjury that the lender complied with all HUD regulations and requirements, a representation that arguably gave rise to independent FCA liability if the lender had violated any FHA requirement. Second, HUD evaluates lender performance through its Quality Assessment Methodology (commonly referred to as the “Defect Taxonomy”). HUD uses the data reported in the Defect Taxonomy to identify loan defects and then to categorize those defects into four tiers based on the defects’ severity. HUD is revising its guidance to better tie the Defect Taxonomy to applicable HUD remedies and violations.
As detailed in the MOU, HUD expects that FHA requirement violations will primarily be enforced through HUD administrative proceedings. In cases where the Defect Taxonomy identifies potential violations of FHA requirements with FCA implications, HUD will refer those matters to the Mortgagee Review Board (MRB), which has administrative authority to, among other things, exact civil money penalties and suspend or terminate an FHA lender’s approval. The MRB will then complete its own review of the referred violations and will refer those matters to the DOJ when the following conditions exist:
- A Tier 1 Defect Taxonomy or equivalent violation exists in at least 15 loans or equivalent violations exist in loans with an unpaid principal balance or claims of $2 million or more; and
- Aggravating factors warranting pursuit of FCA litigation, such as evidence that the violations are systemic or widespread.
In general, the MOU describes that HUD intends to refer FCA litigation to DOJ “only
where such action is the most appropriate method to protect the interests of FHA’s mortgage insurance programs, would deter fraud against the United States, and would generally serve the best interests of the United States.” In the cases where the MRB approves the referral of alleged FCA violations to the DOJ, HUD’s General Counsel will do so in writing. In cases where the MRB declines to refer potential FCA violations to the DOJ, the MRB may still exercise its discretion to pursue administrative actions or work with the DOJ to file a Program Fraud Civil Remedies Act complaint.
Finally, the DOJ will confer with HUD when any party other than HUD — including qui tam relators, HUD’s Office of Inspector General, or litigation directly initiated by DOJ or a U.S. Attorney’s Office — refers a potential FCA violation to DOJ. In these cases, DOJ and HUD will work together during the investigation, litigation, and settlement phases of the matter. This includes DOJ’s consideration of HUD’s support or opposition to DOJ’s pursuit of the FCA litigation. For allegations reported to DOJ by a qui tam relator, DOJ will consider any recommended dismissal by HUD if HUD believes the alleged conduct does not rise to HUD’s FCA evaluation standards, the alleged conduct does not materially violate FHA requirements, or the FCA litigation would potentially interfere with HUD’s policies or the FHA program.
The MOU between HUD and DOJ provides needed clarity about when an approved FHA lender faces FCA liability. HUD provided this additional interagency guidance in hopes of creating a more predictable regulatory environment for lenders engaged in or considering FHA lending. Any FHA lender who self-identifies or is alleged to have committed violations of FHA requirements should seek experienced counsel to consider its FCA liability in light of the MOU.