June 12, Docket No. FR-6030-N-01 Reducing Regulatory Burden; Enforcing the Regulatory Reform Agenda Under Executive Order 13777

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1 Regulations Division Office of General Counsel Department of Housing and Urban Development th Street, S.W. Room Washington, D.C Re: Docket No. FR-6030-N-01 Reducing Regulatory Burden; Enforcing the Regulatory Reform Agenda Under Executive Order To Whom It May Concern: The Consumer Mortgage Coalition (CMC), a mortgage industry trade association, is very pleased to have the opportunity to submit recommendations to the Department of Housing and Urban Development (HUD) to streamline and clarify the rules governing the mortgage industry over which the Department has jurisdiction. FHA Reforms The FHA mortgage insurance program is critical to providing affordable home ownership opportunities for first time home buyers and low-to-moderate income families. FHA has recently implemented numerous policy and procedural changes that jeopardize the mission of the FHA program and place the needs of these low-to-moderate income families at risk. FHA lenders have been burdened with complex and convoluted compliance obligations while an increasing amount of financial risk associated with distressed properties has been transferred away from the insurance program to lenders. FHA needs immediate reform to address these recent missteps, restore integrity to the program, and modernize the program to ensure its long term success. Many of the recent policy changes have stemmed from recommendations in reports issued by HUD s Office of Inspector General ( IG ), which is the agency charged with auditing HUD s performance with the goal of reducing losses to the insurance fund. The HUD IG recommendations often do not consider all aspects of the FHA program and will not have the intended result of reducing losses to the insurance fund but instead could devastate the program the fund was created to support. In response to recent FHA actions, a number of lenders have significantly curtailed their participation in the FHA program and drastically reduced their origination of FHA 600 Cameron Street, Alexandria, VA Telephone: (202) Fax: (202)

2 Page 2 of 7 insured loans. Movement away from FHA insured mortgages will jeopardize the viability of the FHA and Ginnie Mae programs. Long term lender participation in the FHA program is critical to maintaining the integrity of the U.S. housing finance system. We recommend that HUD rescind recent changes to the FHA program that threaten to harm the program and the consumers it was created to help. FHA must work with its industry partners to develop alternatives that will minimize losses to the fund while safeguarding the program and its mission. Priority issues that need to be addressed immediately include the following: FHA Should Pay Insurance Claims as Required Since early 2015, FHA has been denying servicer requests to approve property preservation expenses that are necessary to place properties in the condition FHA requires before conveyance to HUD. The denial of such requests improperly shifts the financial burden of repairing properties from FHA to the lender when these expenses should be covered under the FHA insurance policy. FHA s procedural shift has forced lenders to incur these expenses a precondition to collecting the FHA insurance is that the property must be placed in conveyance condition. FHA lacks both statutory and regulatory authority to deny these expense requests and should cease doing so immediately. In HUD s proposal to amend its FHA regulations in July 2015, HUD sought to establish authority to deny property preservation expenses in certain cases. However, the proposed rulemaking was withdrawn in October 2015 after the public comment period, and the regulatory authority granted to FHA has never been changed. FHA continues to deny property preservation expenses as if the rulemaking were finalized even in the face of a recent HUD IG audit report that stated that FHA does not have authority to deny expenses in this manner. FHA Should Repeal Loss Mitigation Changes That Harm Consumers and the Program In August 2016, FHA published new loss mitigation requirements via Mortgagee Letter that increase the application burden and documentation burden on distressed consumers who need assistance. In fact, these changes run contrary to guiding principles for the future of loss mitigation published by HUD, FHFA, and the CFPB in response to the expiration of the HAMP program. Interestingly, FHA s press release of these policy changes described them as streamlining the application process. On the contrary, these changes accomplish the opposite: increased application burden and increased documentation burden, both of which will surely result in fewer loss mitigation plans and more foreclosure losses. The new requirements include:

3 Page 3 of 7 Requiring borrowers to provide additional documentation of their financial hardship, which is unnecessary and duplicative of other loss mitigation documentation requirements. Borrowers are already required to document their income. Requiring documentation of all borrowers monthly living expenses with supporting documentation when the existing mortgage payment is less than 31% of monthly gross income. This includes documenting expenses for food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous living expenses, even though these items are not relevant to whether the borrower qualifies for loss mitigation. Requiring income documentation for borrowers who do not occupy the property, such as after a divorce. This is a change in FHA policy that will reduce loss mitigation and increase foreclosures. These requirements add no real benefit in determining whether a borrower should qualify for loss mitigation assistance under FHA s current program. They will result in fewer borrowers qualifying for loss mitigation assistance, which will increase foreclosure losses and thus losses to the insurance fund. FHA should withdraw these new requirements and work with the industry to reform its loss mitigation program to make it less burdensome and more readily available to consumers. FHA Should Drop Rulemaking to Establish a Claim Deadline and Terminate Insurance HUD s July 2015 proposal to amend FHA regulations included a provision that would have established a finite deadline to file an FHA insurance claim with loss of insurance as the penalty for missing the prescribed deadline. The proposed deadline was arbitrary and unfair and would have dramatically decreased lender participation in the program. Notwithstanding this fact, in a recent audit report, HUD s IG recommended that FHA revisit this proposal and amend its regulations to deny claims after a filing deadline. FHA should not revisit this proposal for several basic reasons: First and foremost, a statutory obligation exists for FHA to pay insurance claims in the event of default. Cancellation of insurance on a significant percentage of defaulted loans based upon an arbitrary deadline that is outside the servicer s control will destroy the value of FHA loan servicing and undermine the viability of the FHA program. The policy recommendation is a knee-jerk reaction to the perception that FHA servicers do not administer FHA s default timelines consistently or appropriately. In reality, the root cause is a steady increase in time to foreclose and convey FHA insured properties. This is due, in part, to strenuous FHA rules and regulations

4 Page 4 of 7 that require the completion of property repairs before conveying a property to HUD. There are more reasonable changes that can be made to the program that will reduce costs to the insurance fund while improving the program overall. Some examples include: Eliminating need for unnecessary property repairs that do not improve FHA s financial position upon REO sale. Consistent interpretation and enforcement of property condition rules. Currently, FHA interpretations vary by region. Revising foreclosure deadlines to reflect the actual judicial and regulatory climate governing foreclosure and conveyance of properties. Implementing immediate conveyance to FHA following foreclosure sale, a model that works very well for VA guaranteed loans. FHA policy-makers and HUD s IG appear to have lost sight of the mission of the FHA insurance fund. The HUD IG appears to believe that FHA is a regulator rather than an insurer. Rather than imposing more bureaucracy on FHA lenders, FHA should implement common-sense reforms that continue to modernize the program in the face of an evolving housing market and ensure that low-to-moderate income Americans have continued access to affordable housing finance. Exercise Reasonable Enforcement Authority The CMC recommends that HUD and the Justice Department review all pending False Claims Act cases that could harm Federal Housing Administration (FHA) lending. There have been several False Claims Act cases against FHA lenders that have forced costly settlements over minor errors. The costs of these cases has been so high that lenders have pulled back from FHA lending. This is harmful because many first-time home buyers and lower-income homeowners rely on FHA financing. If FHA is to continue to support affordable housing finance, False Claims Act cases will need to be limited to cases of serious violations. Repeal and Redesign the Impermissible HUD Fair Housing Act Regulations HUD finalized a regulation in 2013 that created a problematic basis for disparate impact, or disparate effect, discrimination claims. There are at least two pending lawsuits challenging this regulation. In addition, in June 2015 in a separate Inclusive Communities case, the Supreme Court ruled that disparate impact claims under the Fair Housing Act are cognizable but are subject to limitations. 1 As the regulation predates this Supreme Court decision, the regulation is not consistent with the decision. The 1 Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, U.S. (2015).

5 Page 5 of 7 regulation is also inconsistent with an earlier Supreme Court decision 2 concerning discrimination in employment under a law that was similar to the anti-discrimination provisions in the Fair Housing Act. In one challenge to HUD s regulation in the D.C. District Court, 3 in November 2014, the court vacated the regulation, finding disparate impact claims beyond the Fair Housing Act. That was appealed, and in September 2015, the Circuit Court remanded the case to the District Court in light of the Inclusive Communities Supreme Court decision. The District Court had scheduled oral argument on cross-motions for summary judgment, but in February 2017, HUD requested time for its new leadership to become familiar with the issues before the case is argued. The case is stayed pending a status conference, currently scheduled for July In a separate challenge to HUD s regulation in Illinois District Court, 4 in September 2014, the court granted summary judgment to an insurance trade association plaintiff s claims that the regulation was arbitrary and capricious, and granted summary judgment to HUD on the regulation s burden-shifting framework. 5 In October 2016, HUD issued a supplemental explanation of its regulation. In March 2017, the plaintiff filed a motion for leave to amend its complaint, arguing that HUD s amended explanation is arbitrary and capricious, and to take account of the supplemental explanation and of the limitations on disparate-impact claims in the Inclusive Communities case. In April, 2017, HUD opposed the motion to amend, arguing that the court no longer has jurisdiction, time to appeal has run, and that HUD s October 2016 supplemental explanation is sufficient. HUD s Regulation and Supreme Court Decisions Disparate impact represents the theory that improper discrimination exists when there is a disparate impact on a class, in the absence of an intent to discriminate. The issue is not whether discrimination is acceptable. The mortgage industry strongly believes improper discrimination is abhorrent in every case. Rather, the question is whether HUD can create liability in the absence of discrimination. The regulation will do just that. HUD s regulation predates the Supreme Court s 2015 Inclusive Communities decision, but the regulation is nevertheless improper under the standards of that decision and of the Wards Cove case. The required limitations on disparate impact liability include: 2 Wards Cove Packing Co., Inc., et al. v. Atonio, 490 U.S. 642 (1989). 3 American Insurance Association, et al. v. HUD, No (D.D.C). 4 PCIAA v. HUD, No (N.D.Ill). 5 PCIAA v. HUD, 66 F. Supp. 3d 1018 (N.D.Ill. 2014).

6 Page 6 of 7 A plaintiff relying on a statistical disparity must identify a specific policy or practice causing the disparity. The challenged practice must have a significantly disparate impact. The burden of proof remains with the plaintiff. The challenged practice need not be essential or indispensable to the defendant. Any alternative practice must be equally effective in achieving legitimate goals. The regulation sets out the burdens of proof in three steps: First, under the regulation, a plaintiff must show that a housing practice caused or predictably will cause a discriminatory effect. 6 HUD stated that it may be appropriate to challenge the decision-making process as a whole. 7 This does not require the plaintiff to identify a specific policy or practice causing disparate impact. Nor does it require the plaintiff to show a significantly disparate impact. HUD decided not to codify a significance requirement[.] 8 At that point, the burden shifts to the defendant who must prov[e] that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent or defendant. 9 This impermissibly shifts the burden to the defendant. It also impermissibly requires the practice to be necessary. Even if the defendant somehow meets its burden, the regulation gives the plaintiff an opportunity to prevail by proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect. 10 HUD does not believe the rule s language needs to be further revised to state that the less discriminatory alternative must be equally effective, or at least as effective in servicing the defendant s interests. 11 In short, this regulation could require mortgage lenders to underwrite loans, and servicers to service them, using standards that have the least possible disparate impact, regardless of the effects on loan quality or loan performance. The standards by which mortgage lenders, mortgage servicers, and mortgage investors might be liable for disparate impacts of their mortgage practices are significant, and affect every mortgage practice in this country. In light of the differences between 6 24 C.F.R (c)(1) Fed. Reg , (Feb. 15, 2013) Fed. Reg , (Feb. 15, 2013) C.F.R (c)(2) (emphasis added) C.F.R (c)(3) Fed. Reg , (Feb. 15, 2013).

7 Page 7 of 7 Supreme Court decisions and the requirements of HUD s regulation, this regulation needs to be removed and redesigned, at a minimum, to be permissible. 12 Again, we appreciate the opportunity to submit our recommendations to the Department, and look forward to working with the Department on these issues. Sincerely, Anne C. Canfield Executive Director 12 The CFPB has stated that it recognizes disparate impact as a basis for liability under the Equal Credit Opportunity Act ( ECOA ) (CFPB Bulletin ). The CFPB s ECOA standards should also be reviewed for consistency with Supreme Court requirements.