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Lender Under Fire for FHA Mortgage Practices

courtroomGuild Mortgage Company faces federal charges of improper origination and underwriting practices on its FHA-backed loans. The suit was filed by the U.S. District Court for the District of Columbia and announced by HUD and the U.S. Department of Justice this morning.

According to the suit, Guild Mortgage, a San Diego-based mortgage lender, knowingly submitted insurance claims for hundreds of improperly underwritten FHA loans. These claims have cost HUD tens of millions of dollars and, because of the high number of additional loans currently in default, it could cost the agency even more.

“The Federal Housing Administration’s insurance program is meant to encourage lenders to expand opportunity for homeownership by providing financing to prospective buyers who otherwise might not be able to enter the housing market,” said U.S. Attorney Channing D. Phillips for the District of Columbia. “To ensure that prospective homebuyers realize the dream of long term homeownership, the program has strict rules and is not a license for lenders to carelessly subject federal dollars to risk. This lawsuit is designed to help the FHA—and American taxpayers—recoup tens of millions of dollars in losses attributable to a lender accused of improperly underwriting FHA-insured mortgages and committing the government’s guarantee to mortgages that failed to comply with program rules.”

The suit further alleges that Guild ignored FHA rules and falsely certified compliance in order to gain profit from its FHA products. The HUD announcement offered this example: “Guild allegedly allowed underwriters to waive compliance with FHA requirements when underwriting a loan.  Additionally, Guild used unqualified junior-underwriters who did not have a DE certification to waive mandatory conditions on higher risk loans where HUD required underwriting only by highly trained DE underwriters.”

The lawsuit also claims Guild ignored quality, which resulted in a 20-percent defect rate on its FHA-backed loans and a “qualified” or “unsatisfactory” rating on nearly 40 percent of its 125 branch audits. According to HUD, a “qualified” rating means the company has “knowledge of procedures and controls; however, they appear to be inefficient,” while an “unsatisfactory” one means “serious concerns were noted: lack of knowledge, procedures, and/or controls in branch.”

According to the suit, significant defects like fraud and misrepresentation were found on many of Guild’s FHA loans between 2006 and 2011, however the company did not calculate or distribute this error rate--or any of its quality control findings—to management. Thus, Guild failed to address the issues in any timely or effective manner.

Helen R. Kanovsky, general counsel for HUD, said the Guild suit should serve as a warning to others with questionable lending practices.

"FHA relies on the honesty and integrity of those lenders participating in our program,” Kanovsky said.  “The action we take today should send a clear message that we will not tolerate the abuse of our programs or of the families who should benefit from them."

Mary Ann McGarry, President and CEO of Guild Mortgage responded to the suit initiated against the company by the Department of Justice by stating to MReport that the company does intend to fight the allegations.

"We are extremely disappointed that the Department of Justice has elected to pursue this action. Guild has a proud record of making FHA loans since 1961 and we welcome the opportunity to set the record straight and correct the numerous misstatements in the government's complaint," she said. "The government's action is unwarranted and without merit. The implication that any default on an FHA loan by a borrower represents wrongdoing by the lender is not justified. For more than five decades Guild has responsibly underwritten fixed rate and fully documented loans in accordance with FHA requirements."
She went on to say that the enforcement environment that lenders face today "threatens to limit opportunities for home ownership and hurts the housing market." It is also what McGarry calls, "contrary to the mission of HUD and the FHA program to help the underserved—a Guild tradition since its founding in 1960."
"It is unfortunate that lenders such as Guild have been placed in this untenable position where any minor error could result in substantial financial penalties," McGarry stated. "To help families with low and moderate incomes, we need to expand home buying opportunities, not shrink them. Sadly, if this punitive environment continues, the cost of lending will continue to increase for FHA borrowers and only the wealthy will be able to buy homes."
"Although we disagree with the allegations and intend to defend ourselves vigorously, we will continue to serve the FHA and first-time homebuyers, which we have served for more than 50 years," she said.

About Author: Aly J. Yale

Aly J. Yale is a freelance writer and editor based in Fort Worth, Texas. She has worked for various newspapers, magazines, and publications across the nation, including The Dallas Morning News and Addison Magazine. She has also worked with both the Five Star Institute and REO Red Book, as well as various other mortgage industry clients on content strategy, blogging, marketing, and more.

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