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  • Writer's pictureKeith Gantenbein

Foreclosure Lawsuit May Initiate New FHA/HUD Crisis

foreclosure lawsuit

In what some are saying is an innovative lawsuit, a group has filed a lawsuit in Ohio, alleging lenders who failed to take required mitigation steps prior to foreclosing on mortgages guaranteed by the Federal Housing Administration (FHA) under the authority of the U.S. Department of Housing and Urban Development (HUD) have violated the False Claims Act.

When a borrower defaults on an FHA-guaranteed mortgage, the FHA reimburses the lending bank for the losses. A condition of every loan is the lender must take certain steps before foreclosing on the loan. The lawsuit alleges U.S. Bank collected such payments without satisfying the FHA requirement that the bank must take required steps to work with the homeowner in an attempt to mitigate loss. If the lender fails to take the required steps, and continues to receive money from the government agency, based on the representation it did or would take the required steps, that allegedly creates the basis for the False Claims Act action.

The False Claims Act (31 U.S.C.§§ 3729-3733) is also called the Lincoln Law. An American federal law, the act imposes liability on persons and companies (typically federal contractors) who defraud governmental programs. The Act is the government’s primary tool to combat and fight fraud against the government.

The U.S. Justice Department (DOJ) has refused to intervene in the action thus far. It’s not clear if the DOJ will step in at a later date if multiple, similar cases are filed in other states. The DOJ’s reluctance at this particular time may be due, in part at not wanting to bring another wave of mortgage related lawsuits against lenders. However, if consumers begin filing complaints with the Consumer Financial Protection Bureau (CFPB), the DOJ may have to revisit the issue and take action. In most legal circles, there is a conclusion that generally, when the DOJ declines to intervene, the case is dismissed 90% of the time.

The Ohio lawsuit stemmed from a homeowner, Hayward Ferrell, who had a $105,000 mortgage loan guaranteed by the F.H.A. A toolmaker, he fell behind in his payments while trying to work as much overtime as he could to catch up. U.S. Bank, a division of U.S. Bancorp, one of the largest banks in the country, foreclosed on his house. Hayward stated his bank would not meet with him to try to work out a plan to make the loan easier to pay, and the bank never told him he might lose his home.

Currently FHA guarantees around 12% of the home mortgages in the U.S. totally nearly $1.2 trillion worth of loans. The government wants to encourage mortgage lending to borrowers who may not easily qualify for loans. Some consumer advocates are concerned the government, fearful of discouraging these lenders from participating in the program, may begin dropping legal actions against the lenders, or may soften the rules to hold them accountable.

If you are facing foreclosure, or need foreclosure help, contact The Gantenbein Law Firm at 303-618-2122. Or, visit our foreclosure defense web page. For information on other areas of law we practice, visit the Gantenbein Law Firm website.

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