In an effort to expand credit, government officials are discussing easing up on the penalties given to lenders that make mistakes on mortgage applications.
In an effort to expand credit, Federal Housing Administration (FHA) officials are discussing easing up on the harsh penalties given to lenders that make mistakes on mortgage applications.
According to the Wall Street Journal, because lenders must certify that FHA-backed mortgages they originate have no errors, when mistakes are found, the Justice Department has sometimes pursued damages under a Civil War-era law known as the False Claims Act that lets the government recover triple damages.
Last year, U.S. Bank agreed to pay the United States $200 million to resolve allegations of shoddy mortgage originating and underwriting. U.S. Bank agreed to the settlement in order to end a probe into alleged violations of the False Claims Act. The government contended that the lender knowingly originated and underwrote loans insured by the FHA that didn’t meet requirements.
Following the housing bust, lenders became hesitant about lending because they had to repurchase billions of dollars of bad mortgages they sold to the government and private investors. Errors of these loans ranged from small mistakes to one that affected the riskiness of the mortgages.
Lenders are now afraid if they loosen their standards, the same thing will happen again. The result is the tightest credit market Americans have seen in 16 years.
The challenge in front of FHA officials now is to what extent does the agency change the provisions. Enforcement attorneys argue that weakening the provision cedes too much ground to lenders’ lobbying efforts, while other officials believe not making any changes could keep loans out of the hands of creditworthy borrowers, according to the Wall Street Journal.
