The $1.2 million in fines HUD slapped against 13 mortgage lenders for irregular lending practices may seems mild if HUD enforces a "death penalty' provision in the Government-Sponsored Enterprises Act.
The GSE Act, passed last October, allows the Office of Federal Housing Enterprise Oversight "to take certain administrative actions against lenders who have violated certain statutes," said MikesFerrell, senior staff vice president and legislative counsel for the Mortgage Bankers Association of America. This includes barring them from dealing with Fannie Mae and Freddie Mac. That could prove deadly for some lenders, depending on how Aida Alvarez. oversight office director, enforces the rule. A secondary market sentence could prove fatal to many of these businesses-1 25 have already been penalized by the review board in 1993 - because they're so heavily reliant on Fannie and Freddie to move their mortgage producls. Based on calculations using figures from the MBA's national delinquency survey, FHA-type business equals about 25% of the secondary market volume.
Whether enforcement will happen sooner, later or not at all, isn't immediately clear. An OFHEO spokeswoman said the office was looking at the situation to determine what actions, if any, would be appropriate. But Ferrell said the provision exists and, for now, there was no reason to believe it wouldn't be enforced.
The Department of Housing and Urban Development reported Aug. 30 that the fines were levied. The 13 lenders cited by the mortgage review board were first-time offenders that committed infractions such as overinsuring mortgages, failing to comply with FHA reporting requirements of the Home Mortgage Disclosure Act and conducting improper loan origination practices. (See chart.) Each agreed to either a financial settlement or to implement a corrective action plan.
A HUD spokesman said the department hoped the penalties clearly signal that practices such as these won't be tolerated. But while indemnifying HUD for violations could be seen as a slap on the wrist, the prospect of being removed from dealing in the secondary market would be more like severing both arms.
Deterrence of irregular lending practices prior to the new rule came from the review board, which issued regulations, as well as penalties that could prohibit lenders from FHA business.
"That meant death to a lot of companies," Ferrell said, "and it was the way [HUD] controlled their economic viability."
While the review board can discipline lenders dealing with FHA-type business, regulating infractions not of that realm is outside of the board's jurisdiction. However, that is not the case with OFHEO, which can remove lenders from Fannie and Freddie's huge list of companies it can deal with.