QUESTION
We have been told by our Executive Management that we are being reviewed by HUD’s Mortgagee Review Board. Based on their description, it all sounds kind of scary! What some of us want to know is what this Board does? What happens there? And what kinds of actions can they take against us?
ANSWER
The Mortgagee Review Board (“MRB” or “Board”) goes all the way back to the 1970s. It was established by the Department of Housing and Urban Development Reform Act of 1989 (“Act”). By statute, the Board has certain powers and procedures. [Pub. L. No. 101-235, 103 Stat. 1987 (1989). Section 142 of the Act made the MRB a statutorily authorized entity.]
The Board is empowered to initiate the issuance of a letter of reprimand, the probation, suspension or withdrawal of any mortgagee found to be engaging in activities in violation of Federal Housing Administration requirements or the nondiscrimination requirements of the Equal Credit Opportunity Act [15 USC 1691 et seq.], the Fair Housing Act [42 USC 3601 et seq.], or Executive Order 11063.
The MRB consists of the Assistant Secretary of Housing - Federal Housing Commissioner the General Counsel of the Department the President of the Government National Mortgage Association the Assistant Secretary for Administration the Assistant Secretary for Fair Housing Enforcement (in cases involving violations of nondiscrimination requirements) and the Chief Financial Officer of the Department or their designees. [12 USC § 1708(c)(2)]
The Board’s powers are extensive. It can initiate administrative actions against mortgagees and lenders; indeed, it is able to exercise all of HUD’s vast functions with respect to administrative actions against such entities.
In addition to a host of such actions, the MRB can also impose civil monetary penalties. [24 CFR § 25.2(b); 12 USC § 1735f-14]
The Board issues a written notice to the mortgagee at least 30 days prior to taking any action against the mortgagee. The mortgagee must reply in writing to the Board within 30 days. But if the mortgagee fails to reply during such period, the Board may make a determination without considering any comments of the mortgagee. So, timing is crucial and every day counts! [12 USC § 1708(c)(4)(A)] Within 30 days of receiving the notice, if the mortgagee requests a hearing, the Board holds a hearing on the record regarding the violations within 30 days of receiving the request. But if a mortgagee fails to request a hearing within that 30-day period, the right of the mortgagee to a hearing is considered waived. [12 USC § 1708(c)(4)(B)]
In any case in which the notification of the Board does not result in a hearing (including any settlement by the Board and a mortgagee), any information regarding the nature of the violation and the resolution of the action is available to the public. [12 USC § 1708(c)(4)(C)]
The MRB can take swift action, even pre-emptive action. For instance, it can issue a Cease and Desist Order. Upon the Board’s requests, if HUD determines that there is reasonable cause to believe that a mortgagee is violating, has violated, or is about to violate, a law, rule or regulation or any condition imposed in writing by HUD or the Board, and that such violation could result in significant cost to the Federal Government or the public, HUD’s Secretary may issue a temporary order requiring the mortgagee to cease and desist from any such violation and to take affirmative action to prevent such violation or a continuation of such violation pending completion of proceedings of the Board with respect to such violation. [12 USC § 1708(c)(6)]
Administrative actions run the gamut from a letter of reprimand, to probation, to suspension, or withdrawal – the last of which means total termination of FHA-approved mortgagee or lender status. Even the effects of a letter of reprimand or probation can be devastating to a financial institution’s relationships with investors, warehouse banks, many other third parties, and various service providers.
Suspension in itself is often a precursor to a doomed outcome because it prohibits a mortgagee or lender from originating any FHA-insured mortgage loans during the period of the suspension. Under such circumstances as a suspension, many financial institutions lose their loan originators to competitors. A withdrawal is difficult to overcome because it terminates a lender’s approved status. Only after complying with a very extensive set of reapplication procedures can a lender be reinstated. [12 USC § 1708(c)(3)(A-D)]
Often, settlement agreements are entered into involving the kinds of issues that are dispositive in a potential change of status. [12 USC § 1735f-14(f); 12 USC § 1708(c)(3)(E)] However, the MRB can also impose civil monetary penalties, which is currently set to $9,468 per violation/per day – and each day that a violation continues constitutes a separate violation! [24 CFR § 30.35(c)(1); 24 CFR § 30.35(b)]
At present, civil monetary penalties are limited to $1,893,610 for all violations committed during any one-year period. And if the violation involves a failure to engage in certain loss mitigation requirements, the penalty is three times (sic) the amount of the total mortgage insurance benefits claimed by the mortgagee with respect to any mortgage for which the mortgagee failed to engage in such loss mitigation actions.
Most financial institutions could not weather such a financial beating! It is possible to appeal an administrative action or civil monetary penalty within HUD, by means of the mortgagee requesting a hearing before an Administrative Law Judge.
There is a list of violations that create grounds for administrative actions. This list is set forth at 24 CFR 25.6 ("Violations creating grounds for Administrative Action"). It is an extensive list, covering many violations, too many to mention in this answer. But suffice it to say that the list covers numerous violations of any statute, regulation, or other requirement pertaining to the FHA-insured mortgage loan program. HUD publishes its Administrative Actions periodically in the Federal Register.
Hopefully, your Executive Management has retained competent risk management support, such as we provide at Lenders Compliance Group, as well as experienced legal counsel familiar with how to handle such engagements. The appropriate and responsible managerial response to receiving a notice from the Mortgagee Review Board should be a triune strategy, involving the collaborative efforts of the financial institution, the risk management firm, and the legal team.
Jonathan Foxx
Managing Director
Lenders Compliance Group
Contact us at Compliance@LendersComplianceGroup.com
