BLOG VIEW: The False Claims Act has taken center stage over the last few years as regulators crack down on small and large lenders responsible for misconduct related to underwriting, selling or servicing Federal Housing Administration (FHA) loans. In response, servicers must understand their portfolio and get ahead of the claims process before they file claims for non-performing loans. Failure to understand the portfolio and its history may unintentionally alter staking a claim into a costly and dangerous quest for fool's gold.
According to Acting Associate Attorney General Stuart F. Delery and Acting Assistant Attorney General Joyce R. Branda, the civil division of the U.S. Department of Justice, collected nearly $6 billion from False Claims Act cases in the 2014 fiscal year.
Currently, FHA loans make up around 17% of market share, compared to its peak of 24% from 2008 to 2013 and its historical low of 3% in 2005 when there was a flight from the FHA due to the booming subprime business. Although FHA loans have gained popularity since the housing crisis started, they also tend to have higher delinquency rates. In fact, vintages originated between 2010 and 2013 continue to carry high delinquency rates (11%).
In some cases, when a defaulted loan cannot be remedied or the borrower abandons the home, the lender may file a claim to be reimbursed for losses, but the claim must be filed properly and timely, per the False Claims Act. In addition, both the original underwriting and default servicing activities must be in compliance. Making the claims process even more complicated, servicers deal with a multitude of claims types, such as private mortgage insurance claims and investor claims (the government-sponsored enterprises or other investors), FHA, etc. Each claim type carries different requirements and qualifications processes.
Underwriting and lending compliance requirements set forth by the FHA should be adhered to – and ignoring them could result in hefty penalties. A case in point is a New York-based lender that was recently fined $36 million. The lender was accused of violating the False Claims Act for misconduct relating to its participation in the FHA's Direct Endorsement Lender Program. The lender failed to maintain an independent quality control program, neglected to notify the U.S. Department of Housing and Urban Development of serious issues within 60 days of discovery and failed to perform a review of loans that defaulted within six payments.
Although it isn't possible to go back in time to decline loans that never qualified and were approved in error, there are steps servicers can take to help mitigate false claims and get ahead of the current claims overload.
First – and most importantly – servicers must gain visibility into the loans at a transactional level. It is imperative to understand how the loan was originated and if it was in compliance at the time of underwriting. Then, the servicer must ascertain the loan was serviced in accordance with routine and default servicing requirements.
Servicers must evaluate the following:
- If the loan met the guidelines at that time of underwriting;
- If the loan was serviced properly;
- If appropriate loss mitigation options were offered; and
- If foreclosure actions were in compliance and executed during the correct time frames.
To properly manage the claims process, automation is key. Servicers must eliminate manual processes and inconsistencies to speed the process and improve accuracy. Ultimately, a good claims system will automate the process and provide a clear view into the claim, investor requirements, supporting documentation and connectivity.
To avoid false claims in 2015 – this fool's gold – servicers must strive for compliance, transparency and automation. Doing so will not only avoid hefty fines and settlements, but bring peace of mind.
Lisa Weaver is senior vice president of mortgage solutions for ISGN, a provider of end-to-end technology solutions and services to the U.S. mortgage industry.
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