Lawmakers Raise Concerns About FHA Lending Proposal

Sen. Sherrod Brown (D-Ohio), the Banking Committee's senior Democrat, Rep. Maxine Waters (D-California), the senior Democrat on Financial Services, and Sen. Elizabeth Warren (D-Massachusetts) collectively wrote a letter to the leaders of HUD and the Office of Management and Budget (OMB), highlighting their concerns about the FHA proposal.

"We are concerned that the proposed changes, the most significant of which were not described in the notice, would make it easier for lenders who have engaged in illegal behavior to obtain FHA insurance-insurance that is ultimately provided by American taxpayers," the lawmakers wrote. "These changes are significant and result in a change of policy rather than a simplification of an outdated form."

The HUD proposal, released on May 15, 2015, would eliminate the requirement that FHA lenders certify on each loan application that they are not, or have not recently been, subject to certain charges or penalties.

The lawmakers letter requested that HUD provide a thorough explanation for the proposal to lower the lending standards and offer the public a chance to comment on whether or not they deem the changes appropriate.

"We are particularly troubled by the timing of this proposed change and the lack of transparency around it," the lawmakers noted. "HUD's proposed changes appear to effectively waive a contractual obligation for obtaining FHA insurance for a mortgage and allow HUD to turn a blind eye to these and other criminal violations-putting homebuyers and taxpayers at additional risk."

After millions of Americans lost their homes to foreclosure during the 2008 financial crisis, it was clear that greater scrutiny of mortgage lenders was necessary. To help address the problem, Congress passed a 2009 law that gave HUD additional tools to police lenders that use FHA's government backstop, which this recent HUD proposal appears to undermine by holding lenders less accountable at the time of origination.

In their letter, the lawmakers questioned the timing of HUD's proposal to change the standards. Just days before HUD announced the changes, the New York Times and other media organizations reported that five of the world's biggest banks were preparing to agree to plead guilty to criminal antitrust violations for rigging foreign exchange rates.

The lawmakers also use two major FHA lenders, JPMorgan Chase and Citigroup to describe the current and possible future loan certification requirements. Under current loan certification conditions, these banks would not be allowed to obtain FHA insurance once their criminal plea agreements take effect. However, under HUD's proposed changes, with OMB's approval, Chase and Citigroup would still be eligible for FHA insurance and the taxpayer-backed guarantee, despite their criminal activity.

"HUD may have good reasons for proposing these changes at this time, but its Federal Register notice fails to even describe the changes to the certifications on illegal conduct-let alone offer rationale for them, the letter stated. "We believe this failure to provide adequate notice is inappropriate given the substantial policy impact of the changes HUD is proposing. At a time when FHA is taking steps to restore confidence in the housing market, the public deserves an opportunity to review and comment on HUD's reasons for proposing these significant changes."

Click here to view a copy of the lawmakers' letter.