Trump administration eases risks for banks on false lending claims

[October 29, 2019]  By Pete Schroeder

WASHINGTON (Reuters) - The Trump administration said on Monday it would try to entice banks to offer more mortgages to low-income borrowers by reducing reliance on a Civil War-era law the Obama administration used in the wake of the subprime mortgage crisis to build bad-lending cases against big banks.

The U.S. Housing and Urban Development (HUD) and Justice Departments announced they had struck an agreement wherein HUD would handle most enforcement of any violations of the 1863 False Claims Act, which the Justice Department had used to extract billions of dollars from banks.

The government is now trying to encourage more banks to offer loans to borrowers eligible for insurance from the Federal Housing Administration (FHA).

The FHA provides mortgage insurance on loans created by approved lenders, helping borrowers with less money for down payments or lower credit scores qualify for home loans.

After the subprime mortgage crisis, former President Barack Obama's Justice Department frequently won multibillion-dollar settlements from big banks using the False Claims Act to build cases. The government argued that banks improperly certified home mortgages as eligible for FHA insurance, leaving the government to pay out insurance when they defaulted.

The specter of those settlements drove away many large lenders from offering FHA-eligible loans. Now, banks originate less than 14% of FHA-insured mortgages, down from 45% in 2010, the government said on Monday.

For Sale signs stand in front of houses in a neighborhood in Davenport, Florida, U.S., June 29, 2016. Photo taken June 29, 2016. REUTERS/Phelan Ebenhack

In its announcement, HUD said the change was meant to address "uncertain and unanticipated...liability" for banks.

Under the new arrangement, HUD will take primary responsibility for policing whether banks are adhering to FHA standards, while the Justice Department will serve more often in a consulting role. The housing regulator would still be able to refer cases to the Justice Department for prosecution where there is a "material violation of HUD requirements."

(Reporting by Pete Schroeder; Editing by David Gregorio)

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