Beware the Mortgagee Review Board: The Federal Housing Administration Has a Powerful Enforcement Arm That Sanctions Lenders That Don't Follow FHA's Rules. Smart Lenders Will Take All Necessary Precautions to Avoid MRB Sanctions
Gordon, Steven D., Niles, Stephen D., Mortgage Banking
The Mortgagee Review Board (MRB) was established by statute in 1989 as an enforcement body to oversee the performance of Federal Housing Administration (FHA) lenders. Its mission is to protect FHA and its mortgage insurance funds from fraud and program abuse, and to deter noncompliance and mortgage lending irregularities. * The MRB imposes administrative sanctions on FHA-approved lenders that violate applicable statutes, regulations and handbook requirements relating to the origination and servicing of Department of Housing and Development (HUD)-insured and FHA-insured single-family and multifamily loans. These sanctions include reprimand, probation, suspension, withdrawal of approval, cease-and-desist orders and civil money penalties. * In 2009 and 2010, the MRB increased the number and size of the sanctions it imposed. There is heightened focus on lender originations in the wake of the real estate collapse and the increasing number of loan defaults that are triggering claims against the FHA mortgage insurance funds. The Mortgagee Review Board evidently is responding to a May 2009 report to Congress by the HUD Office of Inspector General (OIG) recommending that the MRB should undertake a much larger caseload and impose stiffer sanctions. * An MRB enforcement action is a very serious matter for a lender. MRB actions can and do put lenders out of business, cost big dollars (six- or seven-figure penalties and requirements that a lender absorb the losses on deficient loans) and greatly tarnish a lender's reputation and ability to expand into other HUD programs and non-HUD programs.
Moreover, MRB procedures impose short deadlines for a lender to respond to a notice of violation, and time is critical because intensive review of many documents and witness interviews are frequently required to establish potential defenses. Thus, a lender that receives a notice of violation from the MRB--or thinks that one may be forthcoming--must act promptly and wisely to mount an effective defense.
What is the makeup of the MRB?
The MRB is chaired by David Stevens, the assistant secretary for housing-federal housing commissioner. The other voting members are the president of Ginnie Mae (Ted Tozer); HUD's general counsel (Helen Kanovsky); the chief human capital officer (Janie Payne); the chief financial officer (Doug Criscitello); the director of the Departmental Enforcement Center (DEC) (Craig Clemmensen); and the assistant secretary for fair housing and equal opportunity (John Trasvina), who votes only on cases involving fair housing and equal opportunity issues.
HUD's inspector general and director of the Office of Lender Activities and Program Compliance are non-voting advisers to the MRB.
What does the MRB do?
The MRB does not review or audit FHA lender performance. Instead, it rules on referrals from other HUD offices, such as the Office of Housing, Homeownership Centers (HOC), Ginnie Mae, the Office of General Counsel, and the OIG. Serious findings, such as widespread abuse of HUD's program requirements, are referred to the MRB for consideration.
Historically, HOC referrals have constituted about 90 percent of the MRB's workload; the remaining 10 percent come from the OIG based on its audits and investigations. Approximately 10 percent of lender reviews conducted by the HOCs are referred to the MRB.
These figures, though, may be changing with the increased emphasis on MRB enforcement actions. Referrals to the MRB may be triggered by findings during routine reviews of lender operations, by a lender's default/delinquency ratios (relative to other lenders serving the same geographic area), and by consumer complaints. No MRB enforcement authority will be taken over by the new Consumer Financial Protection Bureau.
What sorts of violations are handled by the MRB?
What sorts of problems end up in front of the MRB? A list of 32 different types of violations that may result in an administrative action by the board appears in the Code of Federal Regulations at 24 C.F.R. [section] 25.6. Common issues in recent cases include:
* Failure to implement and maintain a quality-control plan;
* Source-of-funds issues regarding a borrower's down payment (e.g., improperly documented gift letters, insufficient funds to close, use of unacceptable sources of funds, improperly documented source of funds);
* Questionable income, assets and liabilities of the borrower (e.g., failure to document discrepancies between the credit report and credit application);
* Problems with appraisals (e.g., poor comparables, unsubstantiated value adjustments, unsupported values based on the information available, unreported physical deficiencies, "flip" transactions involving a recent change in ownership or a different owner than on the sales contract, and the same people involved in numerous transactions);
* False statements and certifications;
* Excessive mortgage-payment-to-income ratios and debt-to-income ratios;
* Inaccurate HUD-1 settlement statements (e.g., charging unallowable fees);
* Failure to properly submit mortgage insurance premiums to HUD;
* Failure to comply with FHA's annual renewal requirements; and
* Improper branch operations (e.g., allowing employees to work for other lenders or real estate firms).
What sanctions are imposed by the MRB?
The principal administrative sanctions imposed by the MRB are as follows:
* A (one-time-only) letter of reprimand that explains the violation and describes actions the lender should take to correct it--subsequent violations must be sanctioned more severely;
* Probation for a period up to six months, which may include conditions such as supervision by the FHA, periodic reporting to the FHA or submission to audits by the FHA or an independent certified public accountant (CPA);
* Suspension for a period between six and 12 months, which can be extended for an additional six months; or
* Withdrawal of approval, which is for a minimum of one year and must be permanent if the violation is egregious or willful.
A lender whose approval has been suspended or withdrawn may not originate new Title I loans or apply for a new contract of insurance. And HUD will not endorse any mortgage originated by the lender under the Title II program unless, prior to the date of suspension or withdrawal, a firm commitment already has been issued or a Direct Endorsement underwriter already has approved the borrower.
The MRB may limit the geographical extent of the withdrawal or limit its scope (e.g., to either single-family or multifamily activities). Upon the expiration of the period of withdrawal, the lender may file a new application for approval.
The MRB also can initiate civil money penalty actions against lenders for a number of program violations that are set forth in the Code of Federal Regulations at 24 C.F.R. [section] 30.35. The maximum penalty is $7,500 for each violation, up to a limit of $1,375,000 for all violations committed during any one-year period.
A potentially higher limit--three times the amount of the total mortgage insurance benefits claimed--applies to lenders that fail to engage in loss mitigation.
The MRB files a complaint that is adjudicated by a HUD administrative law judge (ALJ), who makes the ultimate decision about whether to impose a penalty. The board frequently seeks civil money penalties, and they can be quite substantial; in the past year, it has obtained penalties of $674,000, $512,500, $413,500 and $277,500 in individual cases. And in another case, the MRB obtained an administrative payment of $700,000.
In determining whether and how severely to sanction a lender, the board considers, among other factors, the seriousness and extent of the violations, the degree of lender responsibility for the occurrences and any other mitigating or aggravating facts. Where the board is considering withdrawing a lender's approval, it also considers whether the violations were egregious or willful--which would mandate permanent withdrawal.
Sanctions imposed by the MRB against a lender are published in the Federal Register. In addition, if the board suspends or withdraws the approval of a lender, HUD notifies other federal agencies that may also deal with that lender, such as the Department of Veterans Affairs (VA), Fannie Mae, Freddie Mac, the Rural Housing Service (RHS), the Comptroller of the Currency, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). (The OTS will be abolished in July 2011, and its duties will be assumed by the Office of the Comptroller of the Currency (OCC) and the FDIC.)
How does the MRB operate?
The procedures governing the operations of the MRB appear in the Code of Federal Regulations at 24 C.F.R. part 25. The board can issue a letter of reprimand without first issuing a notice of violation to the lender or providing any subsequent hearing.
Where more serious sanctions are contemplated, the regulations provide more procedural protections for the lender. A notice of violation is sent to the lender, which sets forth the specific violations that have been alleged and directs the lender to reply in writing within 30 days. (In exceptional cases, the MRB may suspend a lender without providing prior notice if it determines that immediate action is required to protect the financial interests of HUD or the public).
If the lender fails to reply within the 30-day period after receiving a notice of violation, the case moves forward based on the record assembled by HUD, and the board can decide it on that basis. If the lender submits a response, the Departmental Enforcement Center staff--some of whom are attorneys--reviews it and passes it on to the board. Lenders do not physically appear before the MRB to present their case.
The lender's response to the MRB must not exceed 15 double-spaced, typewritten pages. It must include an executive summary, a statement of the facts, an argument and a conclusion. The response must address the seriousness and extent of the violations, the degree of lender responsibility for the occurrences, and any other mitigating or aggravating facts.
If the MRB is considering withdrawing the lender's approval, the response must also address whether the violations were egregious or willful. A more lengthy submission, including documents and other exhibits, may be simultaneously submitted to the board for review. For example, if an alleged violation(s) involves a number of loan files, a detailed discussion of those files, attaching the relevant documents, may be included in a submission that accompanies the 15-page response.
HUD staff reviews and evaluates the lender's response, and may modify the referral package for the MRB based on this evaluation. Then an "options meeting" is conducted by senior MRB and HUD staff, who make the final decision on case referral and the penalty amounts to be recommended for each violation.
Following this meeting, the Office of General Counsel for Program Compliance can entertain offers of settlement from the lender and negotiate on behalf of the board. If the negotiations result in an offer that, as determined by MRB staff, warrants board consideration, the settlement provisions will be presented to the board for ruling and resolution.
In many settlements, the lender agrees to pay HUD either a civil money penalty or an "administrative payment." This payment may or may not involve an admission of liability or fault by the lender.
In addition, lenders often agree to indemnify HUD for any losses to the FHA insurance fund resulting from a claim filed on specific loans originated in violation of FHA requirements. Settlements may also include provisions for repayment of sums of money wrongfully or incorrectly paid to the lender by a borrower, seller or the FHA; collection of money wrongfully or incorrectly paid by the lender to a third party; or an agreement not to engage in certain activities.
The MRB secretary prepares and presents to the board a written case history, including MRB staff-recommended sanctions. The MRB, after discussion, decides cases by majority vote.
In most cases where the lender and MRB staff have negotiated a settlement, the board accepts the staff recommendations without material change. Absent a settlement, the MRB makes its decision based on its evaluation of the materials submitted by HUD and the lender's response (if any).
The MRB promptly notifies the lender in writing if it decides to issue a letter of reprimand, to place a lender on probation, or to suspend or withdraw a lender's approval. The MRB's notice to the lender must describe the nature and duration of the sanction it is imposing (probation, suspension or withdrawal of approval), specify the violations on which the sanction is based, and set forth the findings of the board. The notice also must advise the lender of its administrative appeal rights.
Appeal of an MRB decision within HUD
A lender that is placed on probation, suspended or has its approval withdrawn by the MRB is entitled to challenge the sanction through a hearing on the record before an ALJ. The lender must request this hearing within 30 days after receiving notice of the MRB's action. A request for a hearing does not, however, delay the administrative sanction imposed by the board. If the lender does not request a hearing, the board's action becomes final.
A hearing before the ALJ is de novo, which means the ALJ considers the alleged violations from scratch and makes an independent decision.
The lender has the right to appear and present evidence at the hearing, to present and cross-examine witnesses, to present oral arguments as permitted by the ALJ, and to submit written briefs and proposed findings of fact and conclusions of law after the hearing, as permitted by the ALJ. The lender also has the right to obtain discovery from HUD before the hearing. But the lender cannot obtain discovery of information that does not pertain to it, such as information about other lenders. Nor can the lender take the deposition of a member of the MRB or present a board member as a witness.
The hearing is usually held in Washington, D.C., unless the lender can show that this location would cause it undue hardship. The hearing occurs within 30 days of the lender's request, unless the lender moves for an extension of time and demonstrates good cause for the extension.
Within 60 days after the hearing (or the submission of post-hearing briefs), the ALJ issues a decision that contains findings of fact, conclusion of law and the relief granted. If no appeal is filed with the HUD secretary, the ALJ's decision becomes the final agency action.
Either party may file an appeal with the HUD secretary within 30 days after the issuance of the ALJ's decision. The appeal is decided by the HUD secretary or (more likely) a designee based on written briefs. There is no right to appear personally to argue the appeal.
The secretary may affirm, modify, reduce, reverse, compromise, remand or settle any relief granted in the ALJ's decision. The secretary's decision is the final agency action. If the secretary does not act upon the appeal within 90 days, then the ALJ's determination becomes the final agency action.
Judicial review of HUD's action
A lender can seek judicial review of the final agency action by HUD. (An appeal to the secretary is a prerequisite to seeking such review.) Judicial review of an administrative sanction, such as suspension or withdrawal of approval, is conducted by a federal district court pursuant to the Administrative Procedure Act. In contrast, judicial review of a civil money penalty is conducted by the appropriate federal circuit court.
In either event, the court's review of the agency action is limited in nature; the court will reverse the agency's decision only if the agency's factual findings are not supported by substantial evidence or the decision is otherwise arbitrary, capricious, an abuse of discretion or not in accordance with law. Likewise, the size of the sanction is largely within the agency's discretion; the reviewing court may overturn it only if it is unwarranted in law or unjustified in fact.
Defending an MRB action
The great majority of notices of violation issued by the MRB are resolved by the MRB, and those are usually resolved through a settlement agreement. Only a minority are litigated through a hearing before an ALJ, and fewer still are appealed to the secretary.
While judicial review is available in theory, in practice it is very difficult to persuade a court that HUD's decision is so flawed that it should be overturned. Thus, the lender should attempt to resolve the matter at the MRB if at all possible.
The defenses or arguments that can be advanced by a lender will vary from one case to another. In some cases, there may be a factual dispute(s) about whether the lender engaged in the alleged misconduct or about the degree of its responsibility for the occurrences. Or there may be an issue about whether the lender deliberately ignored or recklessly disregarded HUD requirements. In a few cases, there may be a legal dispute about whether the conduct at issue violated the applicable HUD requirements. Or the lender may have a good-faith defense based on reliance on the advice of counsel or reliance on advice obtained from HUD.
In many cases (perhaps most), there will be no significant factual or legal disputes about whether a violation occurred. Rather, the lender's defense will be based on mitigation, extenuation and/or rehabilitation.
The starting point of a defense, in virtually every case, is to determine whether the alleged violation(s) occurred, the extent and consequences of such violation(s), and why the violation(s) occurred. Was the cause innocent error, lax supervision, flawed quality-control processes, or one or more bad apples in the organization? If there were bad apples, were any of them supervisors or managers? How long have they worked for the lender? Were any warning signs ignored by senior management?
The next step is to determine what corrective actions, if any, should be taken, and to implement them or prepare to do so. Corrective actions will be both prospective and retrospective.
The prospective actions are designed to prevent recurrence of the violation(s), while the retrospective ones are designed to remedy the past violations by indemnifying the FHA or making other victims whole.
For most lenders, the top priority will be to avoid suspension or withdrawal of approval, which may amount to an economic death penalty. Thus, the lender may prefer to pay a civil money penalty or administrative payment, and/or to make a generous indemnification proposal to HUD. In some cases, the avoidance of substantial penalties may be a lender's top priority. Inability to pay is a potential defense to an action seeking civil money penalties.
If a settlement with the MRB cannot be reached, then the matter will be resolved through a hearing before an ALJ. In most litigated cases, the decision of the ALJ will be the final word--either because the lender does not appeal it or because the HUD secretary will affirm it on appeal. But an appeal to the secretary is not always an exercise in futility; in some cases the secretary has revised or modified an ALJ's decision. In one case, for example, the secretary's designee decreased a civil money penalty from more than $104,000 to just more than $33,000 based on the respondent's inability to pay the amount assessed by the ALJ.
The most important thing to remember is a lender that receives a notice of violation from the MRB must treat it as a serious matter with short deadlines and significant consequences. To achieve the best resolution possible, it is vital to mount a prompt, vigorous and knowledgeable defense.
It's also critical to put a premium on investigating the case and developing potential defenses as early as possible. Thus, if a lender undergoes a HUD review or audit that may result in a referral to the MRB, it would be prudent to consult with counsel at that point.
Steven D. Gordon is a partner at Holland & Knight LLP in Washington, D.C., and practices in the areas of white-collar crime and complex civil litigation, including appeals. Stephen D. Niles is a partner in Holland & Knight's Real Estate Group in Washington, D.C., and co-chair of the firm's National Affordable Housing Team. His practice focuses on multifamily housing and community development matters, as well as public-private partnerships in various real estate projects. They can be reached at firstname.lastname@example.org and email@example.com.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Beware the Mortgagee Review Board: The Federal Housing Administration Has a Powerful Enforcement Arm That Sanctions Lenders That Don't Follow FHA's Rules. Smart Lenders Will Take All Necessary Precautions to Avoid MRB Sanctions. Contributors: Gordon, Steven D. - Author, Niles, Stephen D. - Author. Magazine title: Mortgage Banking. Volume: 71. Issue: 5 Publication date: February 2011. Page number: 92+. © 2009 Mortgage Bankers Association of America. COPYRIGHT 2011 Gale Group.
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