First Tennessee, N.A. Settled Allegations of Failing To Comply With HUD's Federal Housing Administration Loan Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-29.

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 29, 2015
                                                                                            MEMORANDUM NO:

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

FROM:         Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:      Final Civil Action: First Tennessee Settled Allegations of Failing To Comply
              With HUD’s Federal Housing Administration Loan Requirements


The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General,
assisted the U.S. Department of Justice, Washington, DC, and the U.S. Attorney’s Office,
Northern District of Georgia, in conducting a review of First Tennessee Bank, N.A. First
Tennessee has its principal place of business in Memphis, TN and is a wholly owned subsidiary
of First Horizon Financial Corporation.


The Federal Housing Administration (FHA) is a component of HUD. It provides mortgage
insurance for a person to purchase or refinance a principal residence. The mortgage loan is
funded by a lending institution, such as a mortgage company or bank, and the mortgage is
insured by FHA.

HUD’s direct endorsement program authorizes private-sector mortgage lenders to approve
mortgage loans for FHA insurance. Lenders approved for the program must follow various FHA
requirements, including providing annual and per loan certifications that the lender complied
with these requirements when underwriting and approving loans for FHA insurance.

First Tennessee became an FHA-approved direct endorsement lender in 1984. As a direct
endorsement lender, First Tennessee was authorized by HUD to originate and underwrite

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mortgage loans on HUD’s behalf, including determining a borrower’s creditworthiness and
whether the proposed loan met all applicable requirements. When a borrower defaults on an
FHA-insured loan underwritten and endorsed by a direct endorsement lender, such as First
Tennessee, the lender (or its representative) has the option of submitting a claim to HUD to
compensate the lender for any loss sustained as a result of the default. Therefore, once a
mortgage loan is endorsed for FHA insurance, HUD insures the risk of the borrower’s defaulting
on that mortgage, which is realized if an insurance claim is submitted.

                                           RESULTS OF REVIEW

On June 1, 2015, First Tennessee entered into a settlement agreement with the Federal
Government to pay $212.5 million to avoid the delay, uncertainty, inconvenience, and expense
of lengthy litigation of certain civil claims the Government contended that it had against First
Tennessee. The settlement agreement was neither an admission of liability by First Tennessee
nor a concession by the United States that its claims were not well founded.

As part of the settlement, First Tennessee agreed that it engaged in certain conduct in connection
with its origination, underwriting, and quality control of certain single-family residential
mortgage loans insured by FHA. 1 First Tennessee further agreed that it certified these loans for
FHA mortgage insurance under the direct endorsement program; however, these loans did not
meet certain HUD requirements and therefore were not eligible for FHA insurance.

As a result of First Tennessee’s conduct, HUD insured hundreds of loans approved by First
Tennessee that were not eligible for FHA mortgage insurance under the direct endorsement
program and that HUD would not otherwise have insured. HUD incurred substantial losses
when it paid insurance claims on the loans covered by the settlement agreement.

Of the total settlement, FHA received $142 million in July 2015, and other Federal entities were
to receive the remaining $70.5 million.


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

1A.        Ensure that HUD records the $142 million settlement to recognize funds due and returned
           as an ineligible cost.

    Loans covered in the settlement agreement included loans originated between January 1, 2006, and December 31,
     2008, that resulted in claims submitted to HUD on or before April 2, 2015, excluding home equity conversion
     mortgages under 12 U.S.C (United States Code) 1715z-20 and streamline refinances under 12 U.S.C. 1715n(a)(7).