July 14, 2015

Brown, Waters, and Warren: FHA Lending Proposal Gives Wall Street Banks Free Pass at Taxpayers' Expense

WASHINGTON, D.C. - Leading Democrats on the Senate Banking and House Financial Services Committees today urged the Obama Administration to reconsider a proposal that would make it easier for lenders that have engaged in criminal behavior to keep accessing taxpayer-backed mortgage insurance.

Sen. Sherrod Brown (D-OH), the Banking Committee's senior Democrat, Rep. Maxine Waters (D-CA), the senior Democrat on Financial Services, and Sen. Elizabeth Warren (D-MA) outlined their concerns in a letter to the leaders of the Department of Housing and Urban Development (HUD) and the Office of Management and Budget (OMB).

HUD's proposal would eliminate the requirement that lenders approved by the Federal Housing Administration (FHA) certify on each loan application that they are not, or have not recently been, subject to certain charges or penalties. In their letter, the lawmakers called on HUD to provide a thorough explanation for its proposal to lower the lending standards and give the public an opportunity to comment on whether the changes are appropriate.

"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. "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.

Under the current loan certification requirements, the lawmakers wrote, those big banks - including two major FHA lenders, JPMorgan Chase and Citigroup - would be barred from obtaining FHA insurance once their criminal plea agreements take effect. But under the change that HUD has proposed, with OMB's approval, those banks would remain eligible for FHA insurance - and the taxpayer-backed guarantee that comes with it - despite their criminal convictions.

A copy of the letter is available here.