Board That Punishes Problem Mortgage Lenders Called Ineffective
Friday, May 22, 2009
The board in charge of sanctioning mortgage lenders who violate Federal Housing Administration policies is ineffective and slow at a time when the volume of loans backed by the agency is exploding, according to an inspector general's report scheduled for release today.
The report responds to concerns raised by Sen. Charles E. Grassley (R-Iowa), who questioned the FHA's ability to weed out fraudulent lenders approved to do business with the agency. These lenders are chasing the borrowers who are flocking back to the agency for low-down-payment mortgages now that the subprime industry has vanished.
The concern is that some lenders may be using the same abusive tactics that contributed to the collapse of the subprime market and that the FHA may not have the resources or policies to stop them and protect itself against losses. The agency insures lenders against defaults.
"Tax dollars are at risk because this board is a toothless tiger," Grassley said in a statement. "It's not visible and moves slowly."
The report by the Housing and Urban Development inspector general focused on the Mortgagee Review Board, created in 1989 to sanction problem lenders. It found that the board has ruled on only 94 cases since the beginning of October even though 12,641 lenders do business with the agency, raising questions about whether the system is set up to catch abuses. The board rules only on cases referred to it by HUD offices.
The board "will remain marginal as an effective sanctioning body unless its enforcement actions include a much larger caseload," the report said.
"As the inspector general suggests, we are increasing our staff and modernizing our systems to meet FHA's growing loan volume," HUD spokesman Neill Coleman said in response. Newly enacted laws will also give the agency more enforcement power, he said.
Yesterday, after HUD received the report, the department announced that the board had recently taken action against more than 120 additional lenders: 102 had their FHA approval withdrawn, five agreed to make payments to the FHA totaling more than $500,000, and 24 were assessed fines or administrative costs totaling more than $1.2 million.
The inspector general's report also concluded that the board's sanctions have not been aggressive enough to deter bad behavior. The harshest penalties were rarely applied.
Since October, the board has placed three lenders on probation, temporarily suspended two others and barred four from working with the FHA.
Its monetary sanctions totaled $28.26 million from fiscal 2004 through fiscal 2008. But a huge chunk of that -- about $20 million -- involved settlements with only two companies. And the office responsible for collecting money could not determine how much it had received during part of that time because of how the computer systems are set up, the report said.
In some cases, the penalties were crafted in a way that enabled lenders to dodge public disclosure rules.