Final Civil Action: Bank of America, Charlotte, NC Settled Allegations of Failing To Comply With HUD's FHA Underwriting Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                  U.S. DEPARTMENT OF
                                    HOUSING AND URBAN DEVELOPMENT
                                            OFFICE OF INSPECTOR GENERAL

                                              September 30, 2014

                                                                                       MEMORANDUM NO:

TO:              Dane M. Narode
                 Associate General Counsel, Office of Program Enforcement, CACC

FROM:            Gerald Kirkland
                 Regional Inspector General for Audit, 6AGA

SUBJECT:         Final Civil Action: Bank of America, Charlotte, NC Settled Allegations of
                 Failing To Comply With HUD’s FHA Underwriting Requirements


Our office assisted the U.S. Department of Justice (DOJ), U.S. Attorney’s Office, Eastern
District of New York, in conducting an investigation of Bank of America’s origination of
mortgage loans insured by the Federal Housing Administration (FHA) from May 1, 2009, 1
through March 31, 2012.


Bank of America, headquartered in Charlotte, NC, is a mortgage lender that participates in the
U.S. Department of Housing and Urban Development’s (HUD) direct endorsement program.
Subject to the requirements of the program, Bank of America is authorized to originate mortgage
loans that are insured by FHA, an agency within HUD. In exchange for having the authority to
originate and underwrite FHA-insured loans, Bank of America was obligated to determine
whether prospective borrowers met certain requirements established by HUD to qualify for

    The United States fully released Bank of America with respect to all claims for relief concerning the origination
    and underwriting of FHA-insured mortgage loans that went to claim before January 1, 2012, and which were
    “secured by a one- to four-family residential property either that was insured by FHA on or before
    April 30, 2009, or for which the terms and conditions of the mortgage loan were approved by an FHA direct
    endorsement underwriter on or before April 30, 2009.” Consent Judgment, United States of America v. Bank of
    America Corp. et al. (No. 12 0361, DC, April, 4, 2012).
insurance. It also had to certify to HUD that its borrowers met those requirements. Additionally,
it had to provide annual certifications that it complied with HUD requirements when
underwriting and approving loans for FHA insurance. Bank of America has participated in the
FHA program since 1993 and became a direct endorsement lender in 1999.

                                   RESULTS OF INVESTIGATION

On August 20, 2014, Bank of America entered into a settlement agreement to pay $16.65 billion,
of which $9.65 billion 2 resolved pending and potential legal claims. Of the $9.65 billion, Bank
of America agreed to pay $800 million to settle its submission of claims through December 31,
2013, for FHA loans it originated on or after May 1, 2009. Of the $800 million attributable to
FHA’s direct endorsement lender program, the FHA insurance fund was to receive $437.6
million, with the remaining $362.4 million going to other Federal agencies. 3 Further, as a term
of the agreement to remediate harms resulting from its alleged unlawful conduct, Bank of
America agreed to provide $7 billion in consumer relief.
According to the agreement, Bank of America routinely approved loans for FHA insurance that
did not meet applicable underwriting requirements and were, therefore, ineligible for FHA
insurance during the period May 1, 2009, through March 31, 2012. FHA insured the loans based
on per loan certifications submitted by Bank of America that it had complied with FHA
requirements. The review of samples of FHA loans originated by Bank of America showed
unacceptable rates of material underwriting defects. As a result of Bank of America’s conduct,
FHA insured loans that were not eligible for insurance and that FHA would not have otherwise
insured. Consequently, when borrowers defaulted on the loans, FHA incurred substantial losses.
As part of the agreement, Bank of America acknowledged that it engaged in the following types
of conduct:

    •   It did not establish income stability,
    •   It did not verify income,
    •   It inaccurately evaluated borrower’s previous mortgage or rental payment history,
    •   It did not account for a major derogatory on borrower’s credit,
    •   It did not verify and document earnest money,
    •   It did not verify and document checking and savings account information,
    •   It did not document gift funds and verify wire transfers of those funds,
    •   It did not document and verify borrower’s investment in the property,
    •   It underreported borrower liabilities,
    •   It did not always present adequate compensating factors when borrower exceeded HUD-
        established income-to-debt ratios, and
    •   It sometimes incorrectly calculated income for purposes of such ratios.

    Of this amount, $5.02 billion was to be paid as a civil monetary penalty.
    DOJ will remit to the FHA insurance fund that portion of a False Claims Act recovery that equals single
    damages (that is, FHA’s actual damages) to compensate FHA for its losses. DOJ remits the balance of the
    damages into the general fund of the U.S. Treasury as miscellaneous receipts. DOJ will retain up to 3 percent
    of the total amount recovered based on 28 U.S.C. (United States Code) section 527.


We recommend that HUD’s Office of General Counsel, Office of Program Enforcement,

1A.   Allow us to post $437,646,483 to HUD’s Audit Resolution and Corrective Actions
      Tracking System as ineligible costs.