In expanding its note sale pilot program, the Department of Housing and Urban Development (HUD) is imposing new certification requirements on servicers that are willing to assign defaulted Federal Housing Administration (FHA) loans for the upcoming sales. 

According to a new K&L Gates report, the additional certifications “could materially increase a servicer’s risk of liability under the False Claims Act (FCA).” 

Under the FCA, the government can purse treble damages for losses sustained by HUD and civil penalties of up to $11,000 per transaction if the certifications are not accurate.

In September, HUD plans to auction off 5,000 defaulted mortgages that are in the process of foreclosure (and stripped of FHA insurance) to investors at significant discounts.  

Qualified investors must be willing to hold the loans for at least six months before foreclosing.  This requirement is intended to provide winning bidders time to restructure the loans and give occupants one more chance to stay in their homes.

“But questions remain as to how successful the program will be, given the additional certifications required of the servicing mortgagees assigning loans to HUD,” K&L Gates says in a new ‘Legal Insight” report.  

Under the pilot program, servicers had to certify that they exhausted all loss mitigation options before assigning the mortgage to HUD. 

But HUD has upped the certification requirements for the September sale, according to K&L Gates’ attorneys Krista Cooley and Emily Booth.

“For a servicer to sell a pool of loans, it will have to identify severely delinquent loans that are free of any loan origination or servicing deficiencies so that it can truthfully certify that the loans comply with applicable FHA loan origination, servicing and loss mitigation requirements under threat of being charged with making false statements and/or false claims to HUD,” the July 30 report says.  

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