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Judge Rules in Favor of DPA Firm

Nehemiah v. HUD

March 4, 2008


A federal judge has ordered the U.S. Department of Housing and Urban Development hold off on implementing a rule banning seller funded downpayment assistance.

U.S. District Judge Lawrence K. Karlton has ruled in favor of Nehemiah Corporation of America in its lawsuit against HUD Secretary Alphonso Jackson and the agency in a lawsuit filed in the U.S. District Court for the Eastern District of California.

HUD had finalized a rule on Oct. 1, 2007, prohibiting DPA funded by a home seller or anyone that financially benefits from the transaction or is reimbursed directly or indirectly by the seller. HUD's position was that FHA loans with seller-funded DPA have risk of default that is two to three times greater. The agency said loans with DPA were involved in nearly a third of its real estate owned portfolio.

That rule was slated to go into effect on March 31, 2008.

Nehemiah's lawsuit, filed by Weiner Brodsky Sidman Kider PC, sought judicial review of the rule, as well as declaratory and injunctive relief.

AmeriDream Inc., another DPA firm, also sued HUD. In that lawsuit, Genesis Foundation Inc. and Home Downpayment Gift Foundation Inc. successfully intervened as plaintiffs.

Nehemiah alleged in its lawsuit that HUD violated the Administrative Procedures Act by adopting the rule barring DPA on loans insured by the Federal Housing Administration. The organization asserted that the defendants acted arbitrarily and capriciously in issuing the rule.

"In particular, Nehemiah claims that HUD failed to provide a reasoned analysis for the departure from its previous policy, ignored reasonable alternatives to the final rule, relied on data that it never produced for public comment, and prejudged the merits of the final rule," the order stated.

Nehemiah began exploiting a loophole in HUD's ban on seller funded DPA in the 1990s by developing a transaction where a charity would make a gift to the borrower with the understanding that the seller would make a donation to the charity once the loan closed, the judge wrote. HUD's ban didn't apply in these transactions because the seller's donation was used to fund a future transaction.

HUD had argued that in addition to suffering more defaults on loans with seller funded DPA, borrowers wound up paying more for the property as the price was inflated to accommodate the seller's donation. And because FHA financing is more prevalent in depreciating markets, losses on defaulted loans are compounded.

The order noted that HUD did not acknowledge a change in its position.

"Put differently, while HUD may have set forth good reasons for the rule's adoption, it did not adequately explain why it was changing its mind," the judge wrote. "Accordingly, while HUD provided substantive analysis to support the rule, it failed to acknowledge its previous position, thereby violating the APA."

HUD also neglected to consider any reasonable recommended alternatives -- such as raising premiums on loans with DPA or disclosing DPA to appraisers -- in violation of its duties under APA, the court found.

A Bloomberg news story was cited where Jackson indicated during the public comment period the rule would go into effect regardless of critical comments. In his order, the judge noted this was "troubling."

The judge granted a summary judgment in favor of Nehemiah. He also set aside the final rule and remanded HUD for further action in line with the order, though Jackson has been disqualified from participating in the remanded proceedings.

Mitchel H. Kider, managing partner at Weiner Brodsky, explained that if HUD desires to promulgate another downpayment assistance rule, it would have to start from scratch.

"We are confident that had HUD gone through proper APA rulemaking, the proposed rule would not have been finalized," Kider stated.

"We are thrilled with the Court's decision," Nehemiah said in an announcement. "This is a major and conclusive judgment, leaving no uncertainty that downpayment assistance is a life line to the families that Nehemiah serves."


HUD Forced to Delay DPA Rule
A federal judge has determined that the U.S. Department of Housing and Urban Development cannot selectively grant waivers to its rule disallowing seller-funded downpayment assistance on loans insured by the Federal Housing Administration, and has ordered the agency to temporarily halt implementation of the regulation. The move clears the way for all DPA firms to continue offering their services to FHA borrowers for an additional four months.

DPA Fight Goes On
The U.S. Department of Housing and Urban Development has granted AmeriDream Inc. another four months to continue providing seller assisted downpayments on government-insured loans. The move provides more time for the two parties to battle in court.

AmeriDream, Nehemiah Sue HUD
A final ruling on seller-assisted downpayments by the U.S. Department of Housing and Urban Development has prompted organizations dependent on such programs to file lawsuits against the agency.

The U.S. Department of Housing and Urban Development has said no to seller funded downpayment assistance on federally insured loans.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

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