FHA to Ease Up on Mortgage Mistakes?

Mortgage lenders could face less risk of penalties if the Federal Housing Administration succeeds in altering a long-standing provision. However, the FHA faces pushback from the Department of Justice that ultimately could block the change, The Wall Street Journal recently reported.

The law in question is the False Claims Act, which was passed during the Civil War and allows the government to recover triple damages—as it did in collecting $614 million in a 2014 settlement with J.P. Morgan Chase & Co.

J.P. Morgan Chase is only one of many banks that have faced stiff False Claims Act penalties since the financial crisis, as the government has sought to crack down on banks for making improper mortgages, the WSJ noted. Banks that originate FHA-backed mortgages must certify that the mortgages contain no errors. If an error is present, the bank could be in jeopardy of the huge FCA penalties.

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The FHA is attempting to ease up on banks by making the penalties apply only to “significant underwriting errors,” according to the Journal.

“The FHA’s attempt to change the provision shows the tightrope policy makers and regulators are trying to walk,” wrote WSJ reporter Joe Light in the Feb. 9 article. “While they want to hold lenders accountable for crisis-era mistakes and retain recourse should the loans go bad, they also want the banks to extend loans to some consumers who have been largely shut out of the mortgage market since the crisis.”

Wary of the steep penalties that loom, J.P. Morgan Chase and other banks have sharply backed away from originating FHA mortgages.

The DOJ reportedly wants to keep the stiff penalties in place even for minor errors. DOJ officials believe that the Department of Housing and Urban Development is trying to change the provision basically at the behest of lenders, and they say that the federal government needs a strong deterrent to prevent another mortgage crisis.

Written by Tim Mullaney