Guild Mortgage has decided to fight a suit brought by the U.S. Department of Justice (DOJ) alleging that the lender improperly underwrote mortgages backed by the Federal Housing Administration (FHA) from January 2006 through December 2011, resulting in losses to the FHA insurance program when the borrowers defaulted during the economic downturn that began in 2008.
The complaint, filed in the U.S. District Court for the District of Columbia, alleges that Guild Mortgage violated the False Claims Act when it submitted mortgages for the FHA’s insurance program that did not meet FHA guidelines – in violation of its status as a direct endorsement lender (DEL).
The U.S. Department of Housing and Urban Development’s (HUD) DEL program allows mortgage lenders that meet certain criteria to submit mortgages for FHA insurance without an upfront review of each mortgage.
“This case is another example of the Justice Department’s continued efforts to ensure that lenders that participate in the FHA mortgage insurance program act in good faith and conduct appropriate due diligence when committing the U.S. to insure home loans,” says Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the DOJ’s civil division, in a release. “To protect the housing market and the FHA fund, we will continue to hold responsible lenders that knowingly violate the rules.”
The government’s complaint alleges that Guild knowingly submitted, or caused the submission of, claims for hundreds of improperly underwritten FHA-insured loans. The complaint further alleges that Guild grew its FHA lending business by ignoring FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages.
The DOJ says Guild allowed underwriters to waive compliance with FHA requirements when underwriting loans and used junior underwriters who were not qualified to underwrite higher-risk loans for the DEL program.
The complaint further alleges that Guild failed to follow proper policies and procedures when originating FHA loans and that through audits, “significant defects were found in over 20 percent of the FHA loans reviewed between 2006 and 2011, and over half the loans had either significant or moderate defects,” the DOJ says in its release.
In a statement, Mary Ann McGarry, president and CEO of Guild Mortgage, calls the DOJ’s claims “unwarranted” – in particular that a high percentage of the loans in question contained significant defects – and vowed to defend the suit in court.
“We are extremely disappointed that the Department of Justice has elected to pursue this action,” McGarry says. “Guild has a proud record of making FHA loans since 1961, and we welcome the opportunity to set the record straight and correct the numerous misstatements in the government’s complaint.
“The government’s action is unwarranted and without merit,” she says. “The implication that any default on an FHA loan by a borrower represents wrongdoing by the lender is not justified. For more than five decades, Guild has responsibly underwritten fixed-rate and fully documented loans in accordance with FHA requirements.”
McGarry warns that such enforcement actions threaten “to limit opportunities for homeownership and hurt the housing market.”
“It is contrary to the mission of HUD and the FHA program to help the underserved – a Guild tradition since its founding in 1960,” she says.
“It is unfortunate that lenders such as Guild have been placed in this untenable position where any minor error could result in substantial financial penalties,” she adds. “To help families with low and moderate incomes, we need to expand home buying opportunities, not shrink them. Sadly, if this punitive environment continues, the cost of lending will continue to increase for FHA borrowers, and only the wealthy will be able to buy homes. Although we disagree with the allegations and intend to defend ourselves vigorously, we will continue to serve the FHA and first-time home buyers, which we have served for more than 50 years.”