The HUD inspector general wants the Federal Housing Administration to ban corporate officers from the FHA program if they have left a company that has not met its obligations to indemnify the government for delinquent loans.
"We recommend that FHA seek legislative and program rule changes to prevent lenders and corporate officers with unsatisfied indemnification agreements from reentering the FHA program as the same or a new lender," according to a HUD Office of Inspector General report released Friday.
The OIG paper focuses on seven firms that had $7.3 million in outstanding indemnification obligations when their status as an FHA-approved lender was terminated.
OIG auditors found that 12 corporate officers of those firms were able to reenter the FHA program through another lender's shop -- or by starting a new company.
Four executives at First Magnus Financial Corp., Tucson, which closed in 2007 and eventually filed for bankruptcy, launched a new Arizona-based company -- Stone Water Mortgage -- in February 2008 that also made FHA-insured loans. When First Magnus failed FHA was left with 111 loans that had unresolved indemnification agreements. FHA incurred a $5.9 million loss on those loans. Stone Water closed in September 2009.
The HUD IG concludes that FHA needs new legal authority to prevent such corporate officials from reentering the FHA program.
FHA acting deputy assistant secretary Deborah Holston acknowledges that the agency cannot block such executives unless it can prove the individual is personally responsible for the loan losses.
In response to the OIG's findings, FHA is seeking a legal opinion from the HUD general counsel to see if new legislation can be enacted that does not require such a high standard of proof.
Under such a law, HUD would not have to prove any "knowledge or culpability" on the part of an individual being excluded from the FHA program, Holston says in a written response to the OIG report. Instead, FHA could determine that an individual was merely a corporate officer at the time and "committed a knowing and material violation of FHA requirements."
