Final Civil Action - Borrower Settled Allegations of Not Complying With the Primary Residence Requirement of the Federal Housing Administration Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-03-27.

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

                                               March 27, 2015
                                                                                              MEMORANDUM NO:

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

FROM:          Kimberly Randall
               Director, Joint Civil Fraud Division, GAW

SUBJECT:       Final Civil Action: Borrower Settled Allegations of Not Complying With the
               Primary Residence Requirement of the Federal Housing Administration Program


The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), conducted a civil investigation of an alleged loan origination fraud scheme involving a
cash-out refinance loan that was insured by the Federal Housing Administration (FHA). The
investigation began with a referral from HUD’s Quality Assurance Division at the Santa Ana
Homeownership Center. An FHA-approved lender had reported to the Division that the subject
borrower had closed on an FHA-insured cash-out refinance loan and allegedly moved out of the
property 1 month later, violating HUD occupancy requirements.


FHA provides mortgage insurance on loans made by FHA-approved lenders to creditworthy
borrowers to purchase or refinance one- to four-unit properties. This program allows borrowers to
qualify for mortgages using less strict underwriting guidelines. Borrowers must occupy the
properties as their primary residence for at least 1 year. Borrowers certify to their intent to occupy
the property when signing the uniform residential loan application and an addendum to the loan
application. FHA permits cash-out refinance transactions only on owner-occupied principal

                                                     Joint Civil Fraud Division
                                       400 State Avenue, Suite 501, Kansas City, KS 66101
                                Visit the Office of Inspector General Web site at www.hudoig.gov.
                              RESULTS OF INVESTIGATION

HUD alleged that the borrower falsely certified to HUD in her refinance application documents
that she would occupy the subject property as her primary residence. However, she allegedly
used the proceeds from her FHA-insured cash-out refinance for a downpayment on another
home, which she purchased 1 month after closing the refinance loan and moved into soon
thereafter. The borrower initially rented out the property with the FHA-insured loan but later
evicted the tenants and defaulted on the loan. FHA incurred a loss when it paid an insurance
claim to the lender and sold the property.

HUD further alleged that the borrower was liable for the false claim for FHA mortgage insurance
under the Program Fraud Civil Remedies Act, 31 U.S.C. (United States Code) 3801-3812, and its
implementing regulations at 24 CFR (Code of Federal Regulations) Part 28.

The borrower denied that she had violated the Act or HUD regulations. However, on February
11, 2015, she settled with HUD for $15,000 to avoid further expense and administrative
proceedings and to reach a satisfactory resolution of the matter. The agreement did not
constitute an admission of liability or fault on the part of HUD or the borrower.


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

lA.    Allow HUD OIG to record the $15,000 settlement in HUD’s Audit Resolution and
       Corrective Action Tracking System as an ineligible cost.