HUD Failed To Enforce the Terms of a Settlement Agreement With Fifth Third Bank Because It Did Not Record Indemnified Loans in Its Tracking System

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-09-28.

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 28, 2018
                                                                                                     MEMORANDUM NO:

TO:                Gisele Roget, Deputy Assistant Secretary for Single Family Housing, HU

FROM:              Christeen Thomas
                   Director, Joint Civil Fraud Division, GAW

SUBJECT:           HUD Failed To Enforce the Terms of a Settlement Agreement With Fifth Third
                   Bank Because It Did Not Record Indemnified Loans in Its Tracking System


The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), worked with HUD’s Office of Lender Activities and Program Compliance, Office of
Single Family Housing, to resolve outstanding matters related to two September 2015
agreements with Fifth Third Bank (FTB) and its principal subsidiary, Fifth Third Bancorp, an
Ohio-based bank holding company.

FTB entered into a stipulation agreement with the Federal Government in September 2015 and
agreed to indemnify 1 HUD for all losses sustained at any time for 920 Federal Housing
Administration (FHA)-insured mortgage loans. FTB then entered into an indemnification
agreement with HUD in the same month for the 920 loans. FTB is an FHA-approved mortgage
lender with its principal place of business located in Cincinnati, OH.


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

    Indemnification is when the lender agrees to either abstain from filing an insurance claim or reimburse FHA if a
    future holder of the mortgage files an insurance claim and FHA suffers a financial loss.
                                                       Joint Civil Fraud Division
                                       400 State Avenue, Suite 501, Kansas City, KS 66101
                                  Visit the Office of Inspector General website at www.hudoig.gov.
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. FTB has participated in the FHA
program since 1935 and became a direct endorsement lender in 1989.

FTB made a voluntary disclosure to the Government and identified residential mortgage loans
that FTB had originated and certified to HUD as eligible for FHA insurance, but the loans were
materially defective. 2 A finding is deemed material if disclosure of the finding would have
altered the lender’s decision to approve the loan or to seek endorsement from FHA for insurance
of the mortgage loan. FTB disclosed 1,439 materially defective loans that were originated
between 2003 and 2013. HUD had paid claims on 519 of those loans. The Government was
awarded more than $84.9 million for these ineligible claims. Also, FTB agreed to indemnify
HUD for all losses for the remaining 920 FHA-insured mortgage loans.

In January 2017, FTB voluntarily disclosed an additional 381 loans that were materially
defective. HUD’s Quality Assurance Division conducted a review of those loans, which resulted
in an additional indemnification agreement. The Quality Assurance Division evaluates lenders’
portfolios to identify compliance and performance issues that may put the mortgage insurance
fund at risk. FTB agreed to indemnify HUD for all losses sustained through and up to 5 years
from the date of the agreement for the 381 FHA-insured loans. We compared the 381 loans from
the 2017 agreement to the 920 FHA-insured loans identified in the September 2015 stipulation
agreement. The 381 loans from the 2017 indemnification agreement were all included in the
2015 stipulation agreement; therefore, FTB voluntarily disclosed a group of materially defective
loans that it had disclosed 2 years earlier.

HUD officials provided us with a 2015 settlement agreement between FTB and HUD, which
included the indemnification of the 920 loans. Office of Lender Activities and Program
Compliance officials informed us that in October 2015, HUD staff attempted to upload the 920
life-of-loan indemnifications into the FHA Connection 3 system, which is used to originate and
service FHA loans. However, HUD was unsuccessful because FTB voluntarily terminated FHA
insurance on many of the loans, causing them to be noncompliant with FHA Connection’s
indemnification processing function. Therefore, HUD’s Quality Assurance Division reviewed
the same loans that were in the stipulation agreement from 2015, resulting in the indemnification
agreement of 2017. Additionally, HUD would not have billed FTB for losses on the loans
because the loans were not properly identified in HUD’s systems as having been indemnified by

                                     RESULTS OF INVESTIGATION

HUD failed to properly record the required indemnifications in its FHA Connection system;
therefore, it did not hold FTB accountable to the terms of the settlement agreement. FTB and
HUD entered into a settlement agreement on September 28, 2015. FTB agreed to indemnify

    A loan has a material defect if HUD would not have endorsed the loan for FHA insurance had it been aware of the
    FHA Connection is an interactive system on the internet that gives approved FHA lenders and other HUD-
    approved business partners real-time access to data residing in a number of HUD FHA systems.

HUD for all losses and expenses sustained by HUD at any time related to the 920 FHA-insured
loans in the stipulation agreement. However, two of the FHA-insured loans were conveyed to
HUD with losses totaling $123,922. FTB had not paid the amount of HUD’s loss on these loans
as required. In addition, FTB was paid loss mitigation claims for 15 loans for which the FHA
insurance had been terminated. FTB needs to repay HUD $187,777 for these claims. HUD’s
failure to record the indemnifications in FHA Connection exposed the FHA insurance fund to
potential losses of more than $47.4 million. 4 HUD officials worked with us to quantify FTB’s
ineligible claims and explained the measures it would take to ensure enforcement of the 2015
settlement agreement. The following recommendations include the measures HUD agreed to


We recommend that HUD’s Office of Single Family Housing

1A.       Require FTB to reimburse HUD $311,699 for 2 loans for which HUD incurred losses
          when it sold the properties and 15 loans for which FHA insurance had been terminated
          and HUD had paid loss mitigation claims to FTB.
1B.       Record in FHA Connection the remaining indemnified loans, avoiding $47,433,895 in
          estimated losses. The estimated loss is based on the loss severity rate of 46 percent of the
          total unpaid principal balance of $103,117,164.
1C.       Develop and implement controls to ensure that indemnification agreements that result
          from U.S. Department of Justice settlements have been properly recorded in FHA
1D.       Take appropriate administrative action against FTB for violations of the settlement

    HUD calculated that FHA loses an average of 46 percent of the unpaid principal balance when it sells a
    foreclosed-upon property. The 46 percent loss rate is based on HUD’s Single Family Acquired Asset
    Management System’s computation as of June 30, 2018.