Joint Letter to FHA on the Proposed Lender Annual Certification Statements

To whom it may concern:

The Housing Policy Council, the Mortgage Bankers Association, the American Bankers Association, and the Bank Policy Institute are jointly writing in response to the U.S. Department of Housing and Urban Development’s (“HUD” or “Department”) request for comments on the proposed amendments to Federal Housing Administration (“FHA”) annual and loan-level certification language, as well as the Defect Taxonomy, that HUD published on May 9, 2019. This letter focuses on the annual certifications. We expect to submit a second letter with comments on the proposed loan-level certifications and Defect Taxonomy on or before June 30, 2019. We appreciate HUD’s extension of the deadline to provide comments on these two additional proposals.

Importantly, we want to thank the Department for restarting the critical policyconversation regarding the role of the annual and loan-level certifications, as well as theDefect Taxonomy, in FHA’s own risk management and enforcement regime. We share inHUD’s view that creating an environment in which lenders can operate within the FHAprogram with clarity and certainty regarding both FHA requirements and the potential penalties for noncompliance is critical to lenders’ participation in this program. To accomplishthis goal, FHA should strike a balance that encourages responsible lenders to participate inthe FHA single-family insurance program, while at the same time protects the FHA MutualMortgage Insurance Fund. We believe that implementation of a coordinated andcomplementary annual certification, loan-level certification, and Defect Taxonomy that meetsFHA’s goals and lenders’ needs is a good first step to achieve this objective.

We greatly appreciate FHA’s efforts thus far to enact reforms intended to provide theclarity and certainty necessary to increase lender participation in the FHA program. To meetthese objectives, as we will discuss in more detail below and in our forthcoming letter, webelieve all three elements need to be further amended in ways that complement each otherand reduce, rather than create layers of, potential liability under the False Claims Act.

For the reasons explained below, we strongly believe FHA will be best positioned toachieve the twin goals of optimizing program participation and maximizing compliance byeither rescinding the annual certification requirement or replacing the current annualcertifications with a certification that reinforces the obligation of each mortgagee to establishand operate in accordance with a corporate risk management plan, an approach that wouldmore meaningfully foster compliance by each mortgagee with FHA requirements.

Again, we thank you for the opportunity to comment on these documents, and we lookforward to continuing this dialogue with HUD representatives in furtherance of our sharedcrucial objectives.

Background on the Annual Recertification Process

The risks associated with originating FHA-insured loans have increased significantlyover the last several years with the Department of Justice’s reliance on loan-level and annualcompliance certifications to pursue lenders for treble damages under the False Claims Actbased upon alleged defects in FHA loans. The annual certifications currently require themortgagee to attest to compliance with certain regulatory and Handbook provisions regardingits operations and adherence to FHA requirements using broad statements of absolutecompliance without any qualifiers. These statements hold lenders to an impossible-to-meetstandard of strict adherence to all program requirements, which is subject to a threat ofliability under the False Claims Act. This regulatory framework has caused many lenders toretreat from the FHA program.

In order to maximize participation in the FHA program, thereby expanding access tocredit for FHA borrowers, FHA must take steps to eliminate the causes of unnecessary riskand at times frivolous litigation. For lenders to resume participation, revisions are needed tothe annual certifications to reflect the subjective realities of all mortgage lending, includingFHA lending, and to assure lenders that they will be held accountable only for errors thatdirectly impact the FHA Mutual Mortgage Insurance Fund. We understand that FHA’sultimate, underlying purpose for the annual certifications is to ensure mortgagees comply withpolicies and procedures on a day-to-day basis as part of a well-designed compliancemanagement system for the FHA program. We also understand that it is not FHA’s intent touse the certification to subject mortgagees to the risk of liability under the False Claims Actfor subsequently-identified inaccuracies that either represent immaterial variances from FHA requirements or are based on facts that the signer of the certification could not reasonablyhave known at the time of signing the certification. With this as a guidepost, and to assist inoptimizing participation in the FHA program, which will, in turn, expand access to credit forFHA borrowers, we recommend approaching the annual certifications anew.

Mortgagees accept full responsibility for conducting their operations in accordancewith FHA’s operational, origination, and servicing requirements and facing HUD’sadministrative enforcement penalties in the event that mortgagees do not meet thatresponsibility. Mortgagees cannot, however, face the threat of treble damages under theFalse Claims Act by attesting to overly broad annual certification statements of strictadherence to program requirements, regardless of the impact on the FHA Mutual MortgageInsurance Fund. Penalties must be appropriately calibrated to wrongdoing to create theclarity and certainty that HUD is striving to achieve, and that lenders need to foster increasedprogram participation.

Concerns with the Proposed Annual Certification Statements

As noted in the comparison document that HUD released on May 9, 2019, theproposed annual certification language would eliminate redundancy by reducing the numberof certifications required of mortgagees and amending the annual certification language toreference general certifications of compliance with the requirements set forth in 24 C.F.R. §202.5, but remove references to FHA Handbook sections. The proposed annual certificationswould also delete the existing Certification Statement #5, as this provision was brought overto the annual certifications from the loan-level certification during a previous revision. Whilewe appreciate and support the Department’s efforts to eliminate redundancy and streamlinethe certification language, the proposed amendments do not accomplish the primary goal ofaddressing the above-described unnecessary False Claims Act risk that lenders are exposedto as a result of overbroad certification statements. The proposed amendments change thecertification language itself, but do not concurrently streamline the annual certificationprocess or the operational impact of the overbroad certification statements.

Specifically, the proposed annual certifications would continue to require FHA-approved mortgagees to certify to strict compliance with “all HUD regulations andrequirements necessary to maintain the Mortgagee’s FHA approval as codified in 24 CFR §202.5.” The referenced regulatory section contains broad compliance requirements thatinclude, among other things, compliance with all servicing regulations, HUD’s Quality Controlrequirements, and the full range of ineligibility criteria, which includes that the lender did notengage in any practices that did not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility. Thus, despite the proposed certifications’ reference to compliance with regulations and requirements necessary to maintain the mortgagee’s FHA approval, mortgagees would continue to be required to certify to strict compliance with the full set of each and every discrete FHA requirement. Importantly, any instance of a variance from any referenced FHA requirement would render this certification inaccurate, without regard to whether that non-adherence impacted the mortgagee’s ability to participate in the FHA program or impacted the FHA Mutual Mortgage Insurance Fund. Given the breadth and detail of these FHA requirements, no corporate officer can know with complete certainty that a mortgagee has met all of these standards, even though HUD has qualified this certification with the signer’s knowledge after a reasonable investigation. As a result, no mortgagee would be able to meaningfully complete the certification.

The proposed annual certifications would continue to present many of the same issuesas the current certifications. As you know, because the certifications’ overarching standardscan seldom, if ever, be met with perfection, most lenders choose to submit “Unable to Certify”responses along with necessary qualifiers. Often, these qualifiers take the form ofreferencing the mortgagee’s quality control and risk management processes utilized toidentify, resolve, and, when required, report instances of noncompliance with FHArequirements. To the extent a mortgagee describes its general systems and processes forcompliance in an “Unable to Certify” statement, HUD generally requests additional supportinginformation regarding instances of noncompliance. If the mortgagee cannot identify anyspecific instances of noncompliance, HUD will force the mortgagee to check the certificationbox in order to move through the recertification process, despite the mortgagee’s attempt toavoid making a broad certification of compliance. As a result, the annual recertificationprocess is unnecessarily burdensome and expensive for both mortgagees and HUD. TheDepartment’s most recent proposed amendments to these statements also will not close thecircular loop within the Lender Electronic Assessment Portal (“LEAP”) reporting system thatrequires lenders to re-certify to statements previously deemed as “Unable to Certify” withqualifiers already approved by HUD but not reflected in the system.

As a result, the proposed annual certification language does not adequately addressthe mortgage industry’s valid concerns regarding use of the annual certification statements asthe basis for pursuing draconian penalties under the False Claims Act. As you know, theFalse Claims Act is an important tool for the federal government and qui tam relators toimpose liability on persons or entities who defraud governmental programs; however, as afraud prevention statute with significant penalties, it should be used as was intended – only tocombat actual fraud, not minor divergence from agency program requirements that do notamount to a fraudulent scheme or otherwise negatively impact government funds. Using theannual certification to support a False Claims Act case would be wrong, as both its languageand HUD’s stated position limits the scope of the certification to general program operations,not to loan-level origination, servicing or claims issues. For this reason, any certifications inthe FHA program should include language that is narrowly tailored to cover only actualfraudulent acts or schemes against the government, rather than instances of noncompliance that do not rise to the level of fraud that materially impacts the FHA Mutual MortgageInsurance Fund.

Unfortunately, as currently drafted, the proposed amendments to the annualcertification statements could permit any variance from the broad regulatory provisionsreferenced in the certifications to be evidence to assert that the annual certificationstatements constituted a “false statement” under the False Claims Act, regardless of theimpact on the mortgagee’s ability to participate in the FHA program and/or the FHA MutualMortgage Insurance Fund. As a result, to the disappointment of the industry, even if a lendermaintains a robust system of internal controls that is, in large measure, effective, one-offerrors could become the foundation for a False Claims Act allegation. Consequently, theproposed amendments will not give lenders the assurance needed to expand their programparticipation. We understand that this outcome does not reflect FHA’s intent.

Recommendations for Annual Certification Process and Statements

In light of these concerns, we strongly urge the Department to consider using thisopportunity to revise its regulations to remove the annual certification requirement andinstead rely on the existing oversight and enforcement regime. In the alternative, werecommend that HUD amend the annual certification language to require a certification that alender maintains policies, procedures, and internal controls that are reasonably designed toassure compliance in all material respects with FHA regulations, as part of an FHAcompliance management system. HUD can hold lenders strictly accountable under such acertification; however, the certification would not include statements to which an individualcorporate officer could not attest, even after a reasonable investigation of the mortgagee’soperations.

Amend the Regulations to Remove the Annual Certification Requirement

FHA regulations contain both general approval and specific eligibility requirementsdependent on an entity’s organizational structure, which all FHA-approved entities mustmeet, and continue to meet, to maintain FHA approval notwithstanding the act of annualcertification. Nothing in the National Housing Act, however, requires a mortgagee to makeany specific certifications to the Department regarding the mortgagee’s eligibility to participatein the FHA program. Similarly, the regulations do not require that applicants and approvedmortgagees certify their compliance with all eligibility criteria.

HUD regulations require that the application for approval and each recertification mustbe made “on a form prescribed by the Secretary.” While the mortgagee must consent tocomply with the general approval requirements set forth in Section 202 of the regulations aspart of the application process, the regulations set forth only one specific requirementregarding the contents of the application and annual recertification forms. Specifically,Section 202.5(m) requires that, upon approval and with each annual certification, themortgagee “must submit a certification that it has not been refused a license and has not been sanctioned by any state or states in which it will originate insured mortgages or Title Iloans.” We are not aware of any additional regulatory provision regarding initial approval orannual recertification that requires the approval or recertification form to include additionalspecific language or certifications. Rather, certifications were left to the more specific loan-level process, which will be the subject of our second letter.

Given this regulatory framework and HUD’s enforcement authority, rather than attemptto hold lenders accountable for each and every operational, lending, and servicingrequirement identified in 24 C.F.R. § 202.5, we believe that HUD should amend itsregulations to remove the requirement that FHA lenders make annual certifications to HUD.The current required certification regarding license refusals and state sanctions are businesschanges that HUD obligates a mortgagee to report to FHA within mere days of occurrence,and HUD actively enforces this reporting requirement. If mortgagees are already obligated toreport these specific events to HUD, a certification regarding the absence of such eventswould appear to have little utility to the Department and should be removed from theregulations. If, as we understand to be the case, FHA’s goal for the certifications is to incentlenders to conduct reasonable reviews designed to ensure compliance, that incentive alreadyexists as a result of loan-level certifications. Alternatively, HUD could simply impose anindependent obligation on an approved lender to conduct annual reviews without requiringthe submission of a certification.

Amend the Annual Certification Language to Reflect a Reasonable CorporateGovernance Standard

As discussed, HUD does not need annual certification statements to hold mortgageesaccountable for adherence to FHA requirements. HUD has the requisite authority to enforceFHA’s operational, lending, and servicing requirements either internally or by referral to theDepartment of Justice when appropriate. If, however, HUD continues to require an annualcertification statement, we strongly recommend amending the proposed language to requirea certification regarding the existence of procedures reasonably designed to ensure materialcompliance and a reporting function to alert HUD to instances of material noncompliance.

As discussed above, a mortgagee, regardless of size, cannot know if there are anyvariances from the full array of FHA requirements referenced in the proposed annualcertification statements. As a matter of corporate governance, a mortgagee cannot signcertifications that it knows or should know may not be true and should not ask its officers andemployees to do so either. It is not in HUD’s or the lender’s best interest to have flawedcertifications to which no person can reasonably attest. Approved mortgagees are requiredto comply with requirements regardless of whether they certify to such, and FHA may use itsenforcement powers and administrative remedies to address alleged violations of FHArequirements. Certifications cannot be used as a guaranty or warranty of perfect and strictadherence to FHA general program requirements, irrespective of materiality or as anindependent basis for sanctions absent intentional and material fraud. To do so is unfair,exposes lenders to undue risks, and results in a lack of full lender participation in the FHAprogram to the detriment of borrowers.

Rather than require a mortgagee’s corporate officer to certify to perfect compliancewith any portion of FHA regulations and requirements, the annual certification instead couldbe limited to certifying the existence of policies and procedures that are reasonably designed to ensure material compliance. Such a certification would drive a mortgagee to investigateand identify areas of material noncompliance and ensure that it maintains a robust riskmanagement program, such that a corporate officer would be able to confidently sign thecertification. We recommend the following language for the annual certification:

"I certify that, to the best of my knowledge and after conducting a reasonableinvestigation, the Mortgagee maintains policies, procedures, and internalcontrols that are reasonably designed to assure compliance in all materialrespects with the general regulations and program requirements of HUD-FHAthat are applicable to the Mortgagee's continued approval and operations,including those contained in HUD Handbook 4000.1 regarding the Mortgagee’sobligation to make all reports pursuant to HUD Quality Control requirements."

We believe such a certification would meet HUD’s goal of fostering compliance to protectFHA and homebuyers and allow it to take action against mortgagees that fail to reportmaterial noncompliance and/or maintain a robust quality control process using its availableadministrative enforcement authority. This certification, which would require mortgagees todesign and implement a comprehensive compliance management system to ensureadherence to FHA requirements, would align HUD with the approaches of other federalagencies responsible for lender oversight, including the Consumer Financial ProtectionBureau and the prudential regulators. At the same time, it would help to increase lenderparticipation in the FHA program, which would benefit FHA and homeowners, as well.

Conclusion

We thank the Department for the opportunity to offer comments on the proposedamendments to the annual certifications announced by HUD on May 9, 2019. We wouldwelcome the opportunity to meet with HUD representatives to discuss the proposedamendments to the annual certifications and the recommendations set forth in this letter inmore detail. If you have any questions regarding our recommendations, please feel free tocontact MBA’s Fran Mordi, AVP for Tax, Accounting, and Financial Management, at (202)557-2860 and HPC’s Meg Burns, SVP for Mortgage Policy at 202-589-1926

Thank you for your consideration.

Sincerely,

Housing Policy Council
Mortgage Bankers Association
American Bankers Association
Bank Policy Institute