oversight

Final Civil Action: SunTrust Mortgage, Inc., Settled Allegations of Failing To Comply With HUD's FHA Loan Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-12-09.

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




                                            December 9, 2014
                                                                                             MEMORANDUM NO:
                                                                                                  2015-PH-1802


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

               //signed//
FROM:          David E. Kasperowicz
               Regional Inspector General for Audit, Philadelphia Region, 3AGA

SUBJECT:       Final Civil Action: SunTrust Mortgage, Inc., Settled Allegations of Failing To
               Comply With HUD’s FHA Loan Requirements


                                           INTRODUCTION

The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), assisted the U.S. Department of Justice (DOJ) in conducting an investigation of SunTrust
Mortgage, Inc.’s underwriting practices for Federal Housing Administration (FHA)-insured
loans.

                                            BACKGROUND

The FHA program is a component of HUD. The program 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.

SunTrust, based in Richmond, VA, has participated in the FHA program as a direct endorsement
lender since 1984. The direct endorsement lender program authorizes private-sector mortgage
lenders to approve mortgage loans for insurance by FHA. Lenders approved for the program
must follow FHA requirements and provide annual and per loan certifications that the lender
complied with these requirements when underwriting and approving loans for FHA insurance.

                               RESULTS OF INVESTIGATION

On June 17, 2014, DOJ and the Consumer Financial Protection Bureau, along with 49 State
attorneys general and the District of Columbia’s attorney general, filed suit against SunTrust for

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                                       100 Penn Square East, Philadelphia, PA 19107-3380
                               Visit the Office of Inspector General Web site at www.hudoig.gov.
misconduct related to the origination and servicing of single-family residential mortgages, based
in part on OIG’s review of the underwriting of FHA loans. 1 The United States, the Bureau, the
State attorneys general, and the District of Columbia’s attorney general sought damages and civil
penalties under the False Claims Act; State law; the Consumer Financial Protection Act of 2010;
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989; and common law.
The lawsuit alleged that during the period January 2006 through March 2012, SunTrust
knowingly failed to comply with HUD regulations and requirements of the direct endorsement
lender program governing the origination and underwriting of FHA-insured loans. FHA insured
loans based on annual and per loan certifications submitted by SunTrust that it had complied
with FHA requirements. When the borrowers defaulted on the loans, FHA incurred substantial
losses.

On the same day, June 17, 2014, SunTrust entered into a settlement agreement to pay $968
million to end the lawsuit, which the United States, the Bureau, the State attorneys general, and
the District of Columbia’s attorney general approved. Of the settlement total, $418 million was
attributable to FHA’s direct endorsement lender program. The FHA insurance fund was to
receive $300 million of the $418 million before incurring related costs, and the remaining $118
million was to be remitted to other Federal entities. 2

As part of the settlement, SunTrust admitted certain conduct, including but not limited to

      •   Endorsing for FHA insurance certain loans that did not meet underwriting requirements
          and, therefore, were not eligible for FHA insurance under the direct endorsement lender
          program. As a result of SunTrust’s conduct, FHA insured certain loans endorsed by
          SunTrust that were not eligible for FHA mortgage insurance and that FHA would not
          otherwise have insured. FHA incurred losses when it paid insurance claims on those
          loans.

      •   Self-reporting to FHA fewer loans than required, based on SunTrust’s internal quality
          control reports between January 2009 and March 2012, which identified loans with
          material underwriting deficiencies.

On September 30, 2014, the United States District Court for the District of Columbia entered the
consent judgment, which made SunTrust liable to pay the $418 million attributable to FHA’s
direct endorsement lender program.

                                            RECOMMENDATION

We recommend that HUD’s Office of General Counsel, Office of Program Enforcement,
1
    DOJ filed the lawsuit, on behalf of HUD, FHA, the U.S. Department of Veterans Affairs, the U.S Department of
    Agriculture, and the United States Trustee Program, in connection with SunTrust’s residential mortgage lending
    business. This memorandum addresses only the results directly related to HUD’s FHA program.
2
    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 will retain up to 3 percent of the total
    amount recovered under 28 U.S.C. (United States Code) Part 527. The FHA fund will retain single damages less
    the DOJ-retained portion. DOJ will remit the balance of the damages to the general fund of the U.S. Treasury as
    miscellaneous receipts.

                                                          2
1A.   Allow HUD OIG to post the $300 million recovery to HUD’s Audit Resolution and
      Corrective Actions Tracking System as ineligible costs.




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