A mortgage banker that claims to be among the 10 biggest originators of Federal Housing Administration loans agreed to a more than $3 million settlement with the Department of Housing and Urban Development. At issue are “sham” joint ventures that allegedly allowed non-approved branch offices to originate FHA-insured loans.
The settlement was announced Tuesday by Prospect Mortgage LLC.
According to the Sherman Oaks, Calif.-based company, the agreement resolved issues raised by HUD over the structure and operation of Prospect’s joint ventures with real estate firms and other real estate industry firms.
In addition to the joint ventures, HUD was also concerned about the use of a limited liability corporation structure for FHA lending, according to Prospect.
Prospect Chief Executive Officer Ron Bergum noted in the statement said that while the “Series LLC model” is still being used by many of its competitors, “we respect the change in direction signaled by HUD.”
HUD was a little more harsh in its assessment of the arrangement — calling the joint ventures “sham affiliated business arrangements” created to pay improper kickbacks or referral fees in violation of FHA guidelines and the Real Estate Settlement Procedures Act, according to a statement Wednesday from the housing agency.
“Prospect operated as a ‘series limited liability company,’ a business structure unauthorized by FHA, and … used this business structure to create hundreds of sham joint ventures with real estate brokers, mortgage brokers, mortgage lenders, servicers and other settlement service providers and to share profits for the referral of real estate settlement services,” HUD alleged in its statement. “Through these affiliated business arrangements, Prospect allowed non-approved branch offices to originate FHA-insured mortgages in violation of FHA’s guidelines.”
The settlement cost the company $3.1 million.
Prospect noted in its news release that the settlement was only related to its structure and not its operations.
“HUD did not raise concerns regarding the loan quality or lending practices of Prospect, which ranks as one of the nation’s top-10 FHA originating lenders and surpasses the industry’s loan quality average as evidenced by its low compare score,” Prospect’s news release stated.
But an audit conducted by HUD’s Office of Inspector General in Atlanta found that Prospect has not always complied with FHA underwriting and quality-control requirements. The audit was undertaken because of Prospect’s high underwriter default activity in the Atlanta region.
The report, released Monday, said that 23 of 33 loans reviewed were not properly underwritten. Among the deficiencies were improper documentation or assessment of borrowers’ credit, income, debts, cash assets and compensating factors. The company also failed to implement adequate quality controls for underwriters in two branches with high defaults.
The 25 loans reportedly put the FHA insurance fund at risk for $0.6 million.
“We attribute the violations to a failure by Prospect and its managers to ensure that it implemented and complied with HUD’s underwriting and quality control requirements for loans primarily originated at two branch offices which had high default rates,” the inspector general said in the report.
The report recommended that administrative action be taken by HUD against Prospect and that the company be required to reimburse HUDÂ for any losses on the 25 loans during the next five years.
Another report from the inspector general found similar deficiencies — though on just one loan of five audited — for a Prospect branch in the Philadelphia region. That report was issued in June 2010.
