Home lenders are finding that when you write mortgages for the Federal Housing Administration, the devil is in the details.
Just ask the lender that was fined $1,000 for failing to check the credit of a homebuyer's spouse. Or the company that had to pay $3,000 because it did not verify child-support payments a loan applicant had claimed as income. Or the one that got hit with a $3,500 penalty and six months' probation for displaying a government seal on its Web site.
The Department of Housing and Urban Development, which runs FHA, has stepped up such enforcement actions in the last year. And with FHA now guaranteeing roughly 30% of all originations, raising the agency's public profile and its risk, many in the industry expect a further, and dramatic, increase.
"They are taking a much harder line and are less forgiving of errors," said Phillip Schulman, a partner at K&L Gates LLP. "Many lenders will find themselves on the outside looking in at a time when FHA is the only game in town."
Lemar Wooley, a spokesman for HUD, said that in the first nine months of the current fiscal year, the department has acted against 111 lenders, compared with 95 in all of the previous fiscal year, which ended Sept. 30.
Aside from the embarrassment of an enforcement action, HUD can make a lender indemnify the FHA against losses on a loan if the agency finds its underwriting guidelines were violated.
Brian Chappelle, a partner in the consulting firm Potomac Partners and former HUD official, said the agency is forcing lenders to indemnify it for "technical fouls" even when the reason for a default is a job loss or house price declines.
"They're acting like an insurance company," he said. "They don't want to pay a claim."
To be sure, HUD's inspector general, Kenneth Donohue, has criticized the agency's ability to police FHA lenders.
Despite a perception that FHA "is asleep at the switch," Chappelle said, the notion is disputable.
"The reality is, lenders have significant skin in the game," he said. "If a loan doesn't perform, they have to buy it back" by eating the loss.
Some lenders have been fined for failing one of the most crucial FHA requirements doing quality-control audits on 10% of loans within 90 days of their closing.
Robert Warnock, a principal at Mortgage Compliance Advisors LLC, a quality-control auditor in Salt Lake City, said HUD also is cracking down on lenders that charge illegal fees, particularly broker fees or excessive processing fees.
"Some of these lenders have not followed the rules for years," Warnock said, "and they're out of hand."
Craig Christensen, also a principal at Mortgage Compliance Advisors, said HUD is acting against errors it used to let slide.
For example, in 2006, HUD began requiring FHA-approved lenders to use full-time employees, rather than contractors, for crucial loan functions. The rule was not vigorously enforced at first, but now "HUD wants employees on the W-2," he said. "Lenders don't want to do it because it costs them, but more are getting fined or sanctioned."
One problem is that many lenders are originating FHA loans for the first time; some large banking companies have not originated FHA loans in years.
"If HUD is going to guarantee the mortgage lender 100%, they expect strict adherence to rules and regulations," said K&L Gates' Schulman.
HUD routinely audits lenders every 18 months to examine compliance and to ferret out those that account for the bulk of poor-performing loans.
Last month the agency suspended three lenders from FHA loan originating for major violations, including massive defaults and failing to notify the agency of enforcement actions by other agencies.
In May, HUD withdrew FHA approval for 102 lenders and fined another 24, including five that employed executives who had been indicted or workers whom HUD had previously barred.
Schulman described a case in which HUD found that a borrower's pay stub varied from previous ones by two cents and the agency complained that the underwriter should have found out why to test for possible fraud.
No minimum credit score is required to qualify for an FHA-insured loan. But many lenders started tightening credit last year, requiring a minimum 620 FICO score, which Potomac Partners' Chappelle said has helped raise FHA's overall credit scores.
Before the housing market imploded in July 2007, roughly half of all FHA loans had FICO scores below 620. By this February, 13% had FICO scores below 620, though the agency has not changed its guidelines, he said.
Auditors agree that plenty of cracks remain in the system.
Warnock of Mortgage Compliance Advisors said he recently saw a loan get approved when the borrower had a 600 FICO score and 21 collection notices on the credit report, for which the lender did not request an explanation.
"What HUD really needs to do is enforce on the front end and have consequences for underwriters," Warnock said. "We're still seeing stuff getting through that shouldn't."