Quicken Loans Considers Quitting FHA Lending Over DOJ Dispute

Quicken Loans, the third biggest mortgage lender in the U.S. is considering an exit from Federal Housing Administration (FHA) lending programs as the company sits mired in a legal dispute with the Department of Justice (DOJ) over false claims allegations, according to a Reuters exclusive report.

The parent company of top-10 reverse mortgage lender One Reverse Mortgage, Quicken told Reuters that it is considering baking away from government lending, or scaling back its exposure, as a result of the company’s ongoing lawsuit with the DOJ, which alleges that Quicken violated standards for underwriting and originating FHA-insured loans.

Quicken is one of four major lenders in the U.S. that is grappling with the FHA over how the agency handles loans that sour and interprets its lending rules, including JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and Wells Fargo & Co. (NYSE: WFC).

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While the other three major banks have scaled back their lending through FHA, now Quicken is “looking at bowing out as well,” company founder and Chairman Dan Gilber told Reuters. Quicken loans is also considering “cutting the risk it takes in the program,” he added.

Specifically, FHA is arguing with lenders over when the agency is entitled to back out of the insurance that its program provides. Lenders like Quicken, however, say that the FHA demands repayments for “even the most minor of mistakes that a bank may make when extending a loan, to force them to bear the agency’s losses, making the government’s insurance an illusion,” Reuters writes.

The lawsuit against Quicken earlier in April arrived just days after the company filed its own suit against the FHA and the Department of Housing and Urban Development. In its reasoning for taking this action, Quicken said the DOJ demanded the company make public admissions that were “blatantly false, as well as pay an inexplicable penalty or face legal action.”

The lawsuit followed three years of probing by the DOJ into Quicken, which provided the government with more than 85,000 documents, including 55,000 emails, along with “hundreds of hours” of depositions from numerous Quicken Loans employees.

“After three years of struggling to understand the DOJ’s position and methodology that would warrant the country’s largest and highest qualify FHA lender to make untrue admissions and pay an inexplicable penalty or face public legal action, it is time to as the court to intervene,” said Quicken Loans CEO Bill Emerson in a statement at the time of the initial lawsuit filing.

Last month, Quicken Loans ranked highest in customer satisfaction in the J.D. Power 2015 U.S. Primary Mortgage Origination Satisfaction Study, with an index score of 850, which was up 15 points from 2014.

In its lawsuit, Quicken said HUD as well as the DOJ both sought penalties from the lender for overstating a borrower’s income by just $17, or for lending $26 too much on a $99,500 loan.

Meanwhile, the DOJ lawsuit claims that Quicken submitted “hundreds of loans” for FHA insurance that it knew did not meet the agency’s standards, and also accused the company of having a “culture that elevated profits over compliance.”

Since 2013, Quicken closed $200 billion of mortgage volume across all 50 states. It operates a centralized loan processing facility in Detroit as well as its San Diego-based One Reverse Mortgage subsidiary.

Given that FHA-insured Home Equity Conversion Mortgages comprise most of the reverse mortgages on the market, what lies in store for One Reverse is unclear as a Quicken Loans spokesman told RMD that the company is not making any further comments at this time.

Read the Reuters article.

Written by Jason Oliva

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  • Here is a dilemma for those who refuse to stop promoting the myth that FHA insurance has any value to the borrower. FHA does not contract with the borrower. It does have a contract with the lender. HUD can withdraw its insurance coverage at any time that a lender has violated its policies without allowing the borrower to cure the problem. If the myth were true, then borrowers would find themselves with a recourse mortgage as soon as FHA refused to insure the lender following closing.

    The truth is and remains that to qualify as a reverse mortgage, the mortgage by definition MUST BE nonrecourse. If it is not nonrecourse, it is not a reverse mortgage under current federal law [15 USC 1602(bb)].

    When our marketing and ads settle for a lower standard than the truth, news like this can undo the confidence of borrowers and the public in what we tell them. Who can blame them?

    If you are told that FHA insurance makes your HECM nonrecourse and suddenly HUD removes insurance coverage on your loan, is your mortgage suddenly recourse? Based on the nonsense our industry feeds the public, borrowers have every reason to believe that is true, even though it is NOT.

    We need to quit excusing the high cost of HECM FHA insurance with the excuse that it makes HECMs nonrecourse when in fact it allows lenders to offer them with greater proceeds and lower interest rates than these loans would otherwise require due to their very, very high risk.

    • While I cannot argue, nor would I want to do so, with your description of how and why a reverse mortgage is non-recourse, it is NOT true that HUD can “withdraw” or “remove” its mortgage insurance “at any time that a lender has violated its policies”. The contract for mortgage insurance is inviolate and cannot be withdrawn once issued. HUD can, however, seek indemnification from a mortgagee who violates program requirements where material risk exceeding acceptable tolerance levels results. This simply means that, should HUD pay a claim for mortgage insurance benefits, the indemnifying mortgagee agrees to reimburse HUD for the expense. HUD still pays the claim to the holder of the mortgage when a valid claim is filed…with the exception of those cases where the violating mortgagee remains the holder (pretty rare these days). Just wanted to make that clear.

      • Moonman1,

        With most lenders being required to reacquire all securitized HECMs going into assignment or being paid off, we will see far more lenders being the holder of the HECM at assignment and at termination. So it will be less rare for the lender to be the holder of the HECM for loss reimbursement purposes over time.

        But you are correct, I overstated my case; however, if fraud is discovered, no contract existed.

        When repayment of the reimbursement for loss is required, the problem is still the same. By reclaiming the loss reimbursement, under the myth presented by the industry (i.e., non-recourse is afforded by HECMs because FHA pays the difference between the value of the home and the balance due to the lender) the same dilemma exists. I misstated my case but your correction results in the same problem, the lender is ultimately not compensated for its loss. Based on the myth, eventually the borrower or the heirs could somehow be required to make up that difference?

        The fact is, it is the mortgage that is non-recourse. It is not a recourse mortgage with insurance covering any risk of loss for the borrower. This is why FHA insurance does not make any difference to the borrower from a non-recourse point of view.

        Thank you for your correction but why don’t we hear your voice speaking out against the myth? It seems you are well aware of its falsehood.

  • “… a culture that elevated profits over compliance.” True or not, that is a DOJ perception that could do grave damage not only to One Reverse but also to our struggling industry.

    As a former financial auditor when analyzing compliance, the issue is never the size of the error but rather that an error exists. Compliance testing is used extensively to determine if the internal controls of a business entity are working as designed and are adequate. If not, auditors will ordinarily need to expand quantitative testing to determine if balances shown on financial statement are materially correct since internal controls cannot be relied upon to work adequately.

    While we may want others to believe that education is our primary goal, it is compliance which should be our first goal and deepest line of defense. That starts with marketing and advertising. Current research shows that while 83% of people may know that reverse mortgages are a means for seniors to take equity out of the home, only 43% know they are loans which indicates too little emphasis on compliance. For more information see:

    http://reversemortgagedaily.com/2015/11/19/research-reveals-factors-influencing-consumers-reverse-mortgage-acceptance/

    The quotation at the start of this comment will not help our efforts of trying to bring larger banks into the industry. With this type of reputation risk will the profits from HECMs be sufficient to draw larger banks in?

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