Over the past few years, the DOJ, on behalf of HUD, has been bringing actions and settling investigations with lenders related to loans underwritten by the lender and insured by HUD (Direct Endorsement or “DE”). Notable actions and settlements include a $1.2 billion settlement with Wells Fargo and an ongoing action against Quicken Loans, just to name a few . In many cases, HUD will take a statistical sampling of loans where HUD has paid on insurance claims related to the loans originated by one lender and, if the failure rate is high enough, accuse the lender of violating HUD rules in the underwriting of individual loans or not complying with overall HUD policies in the operation of the lender’s business.
HUD DE lenders sign annual certifications declaring compliance with all HUD rules. The DOJ has taken the position in the past that a failure to comply with HUD rules related to quality control, business organization or other required disclosures could make signing the annual certification itself a false claim. That could mean that any loan that caused HUD to pay out on a claim, regardless of the reason, could be part of a HUD loss. So, even if the borrower defaulted a year after getting the loan because the borrower was fired from his/her job and there was nothing wrong with the underwriting of the loan, any HUD loss related to that loan could be considered an actionable loss. The reasoning is that the lender never would have had approval to participate in the program if it hadn’t lied on the annual certification. Thus, any loss related to a loan as a result of the lender’s participation in the program creates actionable damages – even if it was properly underwritten.
Obviously, this is a scary prospect – that a lender can be on the hook for fraud and possible treble damages under the law for a properly underwritten loan that goes into default for reasons out of the control of the lender. This annual certification argument is one that HUD has made in the past, without much success. But, it certainly isn’t settled law. If you are being audited or investigated by HUD as a DE lender or have any questions regarding your obligations to HUD, please give us a call. We may be able to help you.