U. S. Department of Housing and Urban Development 

Office of Inspector General 

Evaluation of Mortgagee Review Board 

Enforcement Actions 

May 2009 

IED-09-003
Executive Summary 

The Office of Inspector General, Inspections and Evaluations Division, conducts 

independent, objective examinations of U.S. Department of Housing and Urban 

Development (HUD) activities, programs, operations, and organizational issues. 

 In response to a request from Senator Charles Grassley, Ranking Member, Senate 

Committee on Finance, we conducted an evaluation of Mortgagee Review Board 

(MRB/Board) enforcement actions as part of HUD’s oversight of Federal Housing 

Administration (FHA) single-family mortgage lenders. Senator Grassley asked us to 

update a review of the MRB by the Government Accountability Office (GAO) in its 2004 

report on FHA risk management. The evaluation focused on MRB rulings in fiscal year 

(FY) 2008 and the 10 specific questions that were asked in his letter. Our objectives 

were to identify the facts related to those questions and provide an independent 

assessment of the MRB’s effectiveness in deterring abuse in FHA mortgage lending. 

 The MRB was established by statute in 1989 as an enforcement body at HUD 

authorized to take administrative sanctions against FHA approved lenders. These include 

letters of reprimand, probations and suspensions, withdrawals, and entering into 

settlement agreements with lenders. It is also authorized to impose civil money penalties 

against lenders for a set of violations specified in the regulations at 24 C.F.R. § 30.35. A 

description of and the cause for each administrative action taken by the Board is required, 

under 24 C.F.R. § 25.10, to be published in the Federal Register at least quarterly. The 

MRB’s annual report indicated it ruled on 94 single-family lender referrals in FY 2008, 

65 of which were administrative cases of noncompliance with FHA annual recertification 

requirements. 

We reviewed 25 referrals (no administrative cases) to the MRB during FY 2008 

for rulings on violations of FHA single-family regulations and policy. 

The MRB's sanctions directly affected only a small number of lenders out of a 

possible 12,461 FHA approved single-family lenders. The violations for which the MRB 

cited lenders rarely warranted withdrawal of FHA lending authority. The sanctions and 

fines obtained against lenders were frequently mitigated. Elapsed time to complete 

Board action was slow, taking an average of 6.4 months following notice to the lender, 

and was prolonged by case development or settlement negotiations in many instances. 

The MRB’s public visibility was also greatly reduced because the results of its rulings 

were not published in the Federal Register in FY 2008 as required or otherwise 

disseminated on HUD’s Web site. 

The MRB will remain marginal as an effective sanctioning body unless its 

enforcement actions include a much larger caseload. Its effectiveness will depend on 

FHA dedicating more resources to quality assurance monitoring and referring a greater 

number of targeted lenders to the MRB for sanctioning. A referral to the Board should 
iii 

elicit the expectation of a maximum sanction that reach in a significant way to 

problematic lenders and serve as a strong deterrent to abusive practices. Imposed 

penalties should be viewed as of real financial consequence to the violating lender, rather 

than as a negotiable administrative cost of doing FHA mortgage business. For greater 

public impact and higher industry visibility, Board decisions and the adverse 

consequences of violating FHA lending standards must be timely disseminated through 

the Federal Register, the Department’s and trade association Web sites. 

If you have questions about this report, please contact Lester Davis, Deputy 

Assistant Inspector General for Investigations, at 202-402-0390. 
iv 

Table of Contents 

 

• Introduction .................................................................................................... 1 

• Scope and Methodology ................................................................................ 2 

• Answers to Ten Questions Requested for Review ......................................... 2 

• Observations: The MRB’s Effectiveness as an Enforcement Body .............. 9 

• Conclusion ..................................................................................................... 14 
1 

Introduction 

Mortgagee Review Board 

Established by the U.S. Department of Housing and Urban Development (HUD) 

Reform Act of 1989 (12 U.S.C. (United States Code) § 1708) and guided by the Code of 

Federal Regulations (24 C.F.R. Part 25), the mission of the Mortgagee Review Board 

(MRB/Board) is to protect the Federal Housing Administration (FHA) and its mortgage 

insurance funds from fraud and program abuse and to encourage compliance by FHAapproved lenders. 24 C.F.R. Part 25.4 specifically provides for Board membership. The 

voting members of the Board are the Assistant Secretary for Housing-Federal Housing 

Commissioner (Chairperson), General Counsel, the President of the Government 

National Mortgage Association (Ginnie Mae), the Assistant Secretary for Administration, 

the Chief Financial Officer, and the Director of the Departmental Enforcement Center. 

The Assistant Secretary for Fair Housing and Equal Opportunity is a member who may 

vote only on cases involving fair housing and equal opportunity issues. HUD’s Inspector 

General and the Director, Office of Lender Activities and Program Compliance, serve as 

nonvoting advisors to the Board. 

The Board rules on cases against FHA-approved single-family lenders where 

there is evidence of serious violations relating to loan origination, servicing activity and 

failure to comply with FHA operational guidelines. The Board can impose civil money 

penalties and administrative sanctions against FHA lenders who knowingly and 

materially violate FHA program statutes, regulations, and handbook requirements. The 

MRB has authority to enforce the provisions of the Fair Housing Act, the Equal Credit 

Opportunity Act, the Home Mortgage Disclosure Act, and Executive Order 11063 as it 

applies to the origination or servicing of FHA-insured single-family and multifamily 

loans. 

MRB enforcement actions are required to be reported in the Federal Register (24 

C.F.R. § 25.10). The Board also advises the U.S. Department of Veterans Affairs, 

Freddie Mac, Fannie Mae, Ginnie Mae, and the U.S. Department of Agriculture’s Rural 

Housing Service of the Board’s administrative actions (24 C.F.R. § 25.12). 

In FY 2008 the MRB placed three lenders on probation, suspended two others and 

withdrew FHA lending authority from four lenders, as the result of referrals from 

Departmental reviews.1

 Other sanctions included the imposition of $137,000 in civil 

money penalties and $602,431 in administrative fees. The Board also accepted offers to 

indemnify high risk loans during settlement negotiations. Official public notice of FY 

2008 enforcement actions has not yet been published in the Federal Register, as required, 

or otherwise communicated to the mortgage banking community and the general public 

through HUD’s Web site. 

 

1

 Probation allows the lender to continue to originate FHA loans, suspension stops the lender temporarily, 

and withdrawal is final. 
2 

FHA Statistics 

FHA experienced a substantial increase in single-family mortgage loan volumes 

in FY 2008. Single-family insurance endorsements totaled 1,199,624 or an increase of 

125 percent over FY 2007. The increased loan volumes have continued in FY 2009. 

Between October 1, 2008 and March 31, 2009, FHA reported total endorsements of 

867,716 versus 406,833 during the same period one year earlier, or an increase of 113 

percent. As the endorsements have climbed along with FHA’s market share of mortgage 

loans nationally, FHA insurance exposure and accompanying risks have also risen. FHA 

single-family insurance in force now stands at $577.8 billion representing 4.9 million 

insured loans as of March 2009. 

Scope and Methodology 

To answer the questions posed, we obtained and reviewed documents related to 

FY 2008 MRB enforcement decisions, mapped the referral and negotiation process, and 

recorded and analyzed relevant data. We interviewed the Secretary of the Board; the 

Associate Counsel for Program Enforcement; and FHA oversight staff at headquarters 

and the Philadelphia Homeownership Center. The Office of Lender Activities and 

Program Compliance provided a summary statement addressing the ten questions, and we 

confirmed the source and reliability of the document. We also independently obtained 

related data and other information concerning MRB activities, reviewed referral 

documents and the case files. Our sample consisted of 25 FHA single-family referrals 

(no administrative cases) to the MRB during FY 2008 for rulings on violations of FHA 

regulations and policy. 

We conducted the inspection in accordance with the Quality Standards for 

Inspections published by the President’s Council on Integrity and Efficiency. 

Answers to the Ten Questions Requested for Review 

The MRB met in five sessions during fiscal year 2008. Documentation of those 

hearings and related information collected from the Office of Single Family Housing, 

Office of Lender Activities and Program Compliance, Office of General Counsel, and the 

Secretary of the Board formed the basis of our evaluation and response to the 10 

questions set out in the incoming letter of request. 

Question 1: How many mortgagees are reviewed by the MRB annually? 

The number of referrals to the MRB has varied from year to year. We identified 

222 case referrals acted on by the Board from FY 2004 through FY 2008. A breakdown 

by year shows a declining caseload referral paralleling the decline in FHA loan volumes 

during the subprime loan bubble. Board minutes recorded rulings on 53 referrals in FY 

2004; 36 referrals in FY 2005; 21 referrals in FY 2006; 18 referrals in FY 2007; and 94 

referrals in FY 2008. 
3 

We examined 25 cases from FY 2008. These cases involved lenders that were 

referred primarily as the result of Homeownership Center quality assurance monitoring. 

The Board also ruled on 65 cases2

 in which mortgagees or loan correspondents failed to 

comply with annual recertification requirements. 

As a point of clarification, the MRB does not review mortgagees, monitor, or 

audit FHA lender performance. It only rules on referrals typically based on monitoring 

reviews or audits conducted through the Office of Housing, GNMA, the Office of 

General Counsel, and the Office of Inspector General. For each referral, the Board 

considers civil administrative actions, as it determines appropriate, against the lenders for 

violations of regulatory and FHA program policy. 

Question 2: How often does the Board meet, and how often are mortgagee reviews 

conducted by the Board? 

There is no required minimum number of Board meetings. From FY 2004 to FY 

2008 the Board met 23 times. The Board met in five sessions in FY 2008. Again the 

MRB does not review mortgagees, monitor or audit FHA lender performance. 

Question 3: What are the policies and procedures for overseeing these mortgagees, 

and are they implemented in a consistent, effective, and efficient manner? 

Board guidance and procedures are set out at 12 U.S.C. § 1708; 24 C.F.R. Part 25; 

and HUD Handbook 4060.2, REV-2. The authorities provided in the statute and 

regulations empower the MRB to impose sanctions on lenders for 32 specific violations 

listed at 24 C.F.R. § 25.9 (2008). The Board can take administrative actions against 

mortgagees including withdrawal, suspension, probation, letters of reprimand, and “cease 

and desist” notices. The Board also has the power to impose civil money penalties3

 as 

well as enter into settlement agreements. 

The Referral Process 

 Board enforcement actions flow from a step-by-step process, starting with a 

notice of violation to the lender and ending with an MRB ruling. 

 

Step 1. Notice of Violation. 

The Notice of Violation (Notice) is an official document from the MRB Secretary 

advising lenders that HUD has obtained evidence of irregularities in the lender’s FHA 

 

2

 Until FY 2008 when a HUD Administrative Law Judge decision became effective, the MRB did not 

entertain or rule on cases of non-payment of annual lender fees or other administrative non-compliance 

issues. 

3

 Civil money penalties are penalties or fines which HUD may impose against a mortgagee or loan 

correspondent for “knowing and material” violations of certain FHA regulatory and program requirements. 

Civil money penalties are currently capped at $7,500 per violation and can be imposed by following the 

procedures specified in 24 C.F.R. Part 30. 
4 

loan origination or loan servicing practices. This document is typically drafted by the 

HOC Quality Assurance Division (QAD) staff that prepares the referral packages for 

submission to the Secretary of the MRB. Before issuance it is also reviewed by OGC 

Program Enforcement for legal sufficiency and by the Office of Lender Activities and 

Program Compliance. The notice lists specific violations related to individual loan 

originations and sets forth the maximum penalties related to each violation. Lenders are 

given 30 days to provide a written response. 

Step 2. Lender Response to the Notice of Violation and MRB staff evaluation. 

If the lender provides a formal written response to the Notice, MRB staff and the 

HOC QAD review and evaluate the response and modify the referral package based on 

the evaluation. The referral package, as modified, is then again reviewed by OGC for 

legal sufficiency. 

Step 3. Options Meeting. 

This meeting is conducted as a conference call between the MRB Secretary and 

staff, OGC attorneys, the Director of Headquarters Office of Lender Activities and 

Program Compliance, and the four HOC QAD Directors. Collectively, these staff makes 

final decisions on case referrals and the penalty amounts to be recommended for each 

violation (the discussions usually involve more than one lender referral package).

Step 4. Settlement Negotiations. 

 Following the Options Meeting, the Office of General Counsel for Program 

Compliance can entertain offers of settlement from the lenders, and negotiate on behalf of 

the Board. If the negotiations result in an offer that, as determined by MRB staff, 

warrants Board consideration, the settlement provisions will be presented to the Board for 

ruling and resolution. 

Step 5. Board Ruling. 

The MRB Secretary prepares and presents a written case history including MRB 

staff recommended sanctions (typically a civil money penalty), an administrative fine, or, 

if the irregularity warrants, suspension or withdrawal of FHA lending authority. The 

Board then, after discussion, decides or rules by majority vote on the case and 

recommended sanctions. 

 
5 

Board Sanctions 

The Board does not follow a written formula or matrix to determine the type of 

sanction or penalty. However, each violation cited in the referral documents carries a 

staff-recommended penalty amount.4 A civil money penalty for not performing quality 

control reviews, for example, could warrant the maximum sanction of $7,500. Not 

observing FHA third-party restrictions on loan originations could carry a $1,000 per loan 

penalty. Misleading advertising to solicit FHA “brokered” business could bring a $3,500 

penalty and a 6-month suspension. Our document review found consistency in the staff 

recommendations, on a violation by violation basis, for 15 of the 25 referrals without a 

negotiated settlement. 

For the 10 referrals in which the lender and MRB staff negotiated a settlement, 

the Board accepted the staff recommendations, without material change, in most cases. 

As explained to us by Board staff, OGC Office of Program Enforcement staff negotiates 

settlements that include agreements to indemnify HUD on some number of mortgages 

and to impose civil money penalties or administrative fines. Settlement actions also 

include agreed to corrective actions that commit the lender to comply with FHA 

requirements. This commitment can be revisited by the MRB later if the lender defaults 

on terms of the settlement agreement. Our review of documentation supporting the 10 

settlement agreements indicated that staff followed a thorough, consistent, and reasoned 

review process. 

 Sanctions against individual lenders can be effective especially for lenders who 

engage in egregious and repeated violations of FHA origination standards. It can mean 

removal and suspension of FHA lending authority. This was evident in the lenders’ 

formal responses to notices of violations in FY 2008 and documentation of ensuing 

settlement negotiations. However, the MRB ruled on so few referrals that, as an 

enforcement body, its overall deterrent effect on FHA mortgage lending was de minimis, 

especially when viewed from the perspective that FHA loan volumes exceeded 1 million 

endorsements in FY 2008. 

Question 4: How many penalties have been assessed over the years, against whom, and 

how much money was collected? Does the Board settle cases for less than the penalty 

amount? If so, what are the implications of that action(s)? 

Penalties Assessed 

According to FHA staff, the MRB assessed monetary sanctions totaling $28.26 

million from FY 2004 through FY 2008 against FHA lenders. However, the sanctions 

included negotiated settlements of $3.2 million with KB Homes Corporation and $16.8 

million with ABN AMRO Corporation. 

 

4

 Staff-recommend adjustments upward or downward based on these additional factors: the history of prior 

offenses, the ability to pay the penalty, the injury to the public, any benefits received by the violator, the 

extent of potential benefit to other persons, the deterrence to future violators, the degree of the violator’s 

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7 

Question 5: Are there mortgagees who violate applicable law on more than one 

occasion; if so, who are they, and please review what action the Board takes with repeat 

offenders? 

There are instances in which a mortgagee has come before the Board on more 

than one occasion. 

According to staff, the Board takes into account its prior actions when ruling on 

FHA lenders that have been referred for repeat violations. Case documentation showed 

that the Board moved swiftly, for example, to remove one lender for originating five 

loans based on falsified bank statements and others for failure to indemnify or pay 

penalties as agreed. More examples of quick action involve cases of non-performance 

with provisions of settlement agreements and non-payment of MRB imposed civil money 

penalties and administrative fees. 

Question 6: What are the sources of the Board’s referrals? 

The Board responds to referrals from the Office of Housing, Homeownership 

Centers, which are within the QAD, the Office of Lender Activities and Program 

Compliance, Ginnie Mae, and the Office of General Counsel for Program Enforcement, 

and the Office of Inspector General. 

Question 7: Are there FHA mortgagees that have never been reviewed? What 

happens to other mortgagees with issues that do not make it to review by the MRB? 

Are violations being settled early?

The vast majority of FHA approved lenders are not reviewed by the MRB. From 

FY 2004 to FY 2008 the MRB ruled on 157 lender referrals, excluding the 65 

administrative rulings, out of a possible 12,461 FHA approved single-family lenders. 

During the same period 2,958 mortgagees and loan correspondents were reviewed by 

FHA’s Quality Assurance Division. FHA follows a risk-based selection process in 

selecting its monitoring targets and, therefore, focuses primarily on poor performers who 

are mortgagees that represent the highest potential for loss exposure to the insurance 

fund. Additionally, about 4 percent of new loan originations are chosen for technical 

(underwriting and appraisals) review by Homeownership and contractor staff. HUD’s 

default servicing system also requires all lenders to report loan performance monthly. 

QAD Lender Targeting and Findings Resolution 

Before the start of each fiscal year, QAD staff prepares an annual lender targeting 

plan. The plan is generated by analyzing and evaluating high levels of lender defaults 

and claims, insurance processing, loan type, and volume spikes. As stated, the QAD 

conducted 2,958 lender monitoring reviews from FY 2004 through FY 2008. 

HUD’s QAD staff resolves most violations identified during on-site lender 

monitoring without referral to the MRB. Remedies to the on-site monitoring findings 

included developing policies or procedures to ensure against similar future deficiencies, 
8 

paying down the principal balance of overinsured loans, refunding inappropriate fees, and 

indemnifying HUD for potential future losses. According to staff, indemnification may 

be sought when a lender fails to comply with HUD’s policies and procedures and this 

noncompliance subjects the FHA insurance fund to unreasonably high risk of loss. This 

is done in cases where the QAD determines that the findings do not merit referral to the 

MRB. If the lender agrees to execute the indemnification agreement(s) and the violations 

do not merit an MRB referral, the violations are resolved without escalating to the MRB. 

Other HUD Monitoring and Deterrence 

All FHA-approved lenders are subject to “oversight” through HUD’s automated 

quality control systems. Automated monitoring is conducted at least quarterly through 

the use of one or more oversight or risk management tools available to HUD. For 

example, the QAD performs a quarterly analysis of the default and claim rate for each 

lender branch (approximately 27,000 branches) through Credit Watch monitoring, 

comparing it with average rates for all lenders located in each HUD field office 

jurisdiction. Those lenders with a relative compare ratio of greater than 200 percent are 

subject to proposed termination. The default rates of these lenders are published on the 

Internet (https://entp.hud.gov/sfnw/public/) and thereby serve as a source of information 

by which other lenders and interested parties can judge a lender’s performance. 

Question 8: Does the Board maintain a database or other mechanism to track its reviews, 

actions, and other processes? 

The MRB currently uses both the Approval/Recertification/Review Tracking 

System (ARRTS) and Microsoft Excel to track Board cases and actions but is 

transitioning to the sole use of the ARRTS system. The QAD uses ARRTS to track 

lender reviews. Documents related to these reviews are stored in the Quality Assurance 

Document Library. 

Question 9: On average, how long does it take from the time a violation is noticed to the 

time action is taken against a lender? During this period, is the lender limited in its 

operation? 

For the 25 cases for FY 2008 that we reviewed, the MRB met and ruled on the 

violations within an average of 6.4 months following notice of the violation. According 

to the Board Secretary, the lender is not limited in its operation if a mortgagee has been 

issued a notice of violation because HUD is not permitted by law and regulation to take 

adverse action without affording due process.5

HUD officials acknowledged that the MRB referral process can be time 

consuming. We mapped the process to reflect staff descriptions and case file records. 

Once a response to a notice of violation is received, the referring office and the Office of 

General Counsel for Program Enforcement determine whether factual or legal issues are 

present that would weaken HUD’s findings. This deliberative process is followed 

 

5

 12 U.S.C. § 1708 and 24 C.F.R. § 25.6. 
9 

routinely and, as explained to us, is an important step to ensure that HUD is in a legally 

defensible position and that the lender is being afforded its required due process. A 

meeting is held for the MRB staff to determine the level of sanctions to be recommended 

for consideration. As GAO noted in its 2004 report, some processing delays occur in 

cases where the Office of Inspector General requests that the MRB withhold action in 

support of a criminal investigation. MRB rulings may also be delayed due to a 

bankruptcy filing by the mortgagee. Board action may be terminated if the lender is no 

longer in business. 

Question 10: How many mortgagees are on probation as a result of the Board’s 

action(s), and how is the probation monitored? 

Currently three lenders are on probation as a result of FY 2008 MRB enforcement 

actions. Probation generally lasts for 6 months to 1 year. The reason for the probation 

determines how it is monitored and by which office. Usually probation is monitored by 

QAD, either in headquarters or in the appropriate Homeownership Center, and tracked in 

ARRTS. The Board also withdrew FHA authority from four lenders, excluding the 

administrative terminations for failure to recertify, and suspended two lenders in FY 

2008. 

Observations on the MRB's Effectiveness as an Enforcement Body 

1. Few lenders were referred to the MRB, and mostly for violations that did not 

warrant removal of FHA lending authority. 

Factual Matters

 

We reviewed 25 cases where the Board sanctioned FHA single-family lenders for 

violations of FHA mortgage lending regulations (24 C.F.R. Part 25). Referred primarily 

as the result of Homeownership Center quality assurance monitoring, these lenders were 

formally cited for violations of FHA underwriting standards, programmatic policy, and, 

in two instances cited below, for material misrepresentations and falsehoods. The Board 

removed FHA loan origination authority from four lenders, and imposed civil money 

penalties or administrative fines on the other offenders. Examples of the violations and 

recommended penalties included: 

Technical, underwriting deficiencies 

Failure to calculate the maximum mortgage 

amount properly, resulting in an 

overinsured mortgage 

Penalty = $3,000 per loan 

Failure to properly verify source of funds 

for earnest money deposits and gift funds 

Penalty = $3,000 per loan 

Failure to include a nonpurchasing spouse 

in the credit analysis 

 Penalty = $3,000 
10 

Technical, programmatic policy

Failure to perform quality control review of 

early loan defaults 

Penalty = $3,500 to $6,500 

Failure to comply with FHA restrictions on 

identity-of-interest business relationships in 

the origination process 

Penalty = $5,000 per loan 

Material, misrepresentations and falsehoods 

Submitted falsified documentation to the 

sponsoring lender to obtain FHA insurance 

Penalty = $3,000 

Submitted a false certification on 

application for FHA lending authority 

Penalty = $7,500 per loan 

With the exception of falsified documentation and material misrepresentation, the 

violations ruled on by the Board differ little from typical findings identified during a 

QAD on-site monitoring review. Such violations also do not always constitute an 

unacceptable increase in insurance risk, especially when viewed within the context of the 

cited lender’s overall FHA portfolio performance. 

Evaluation

We believe the Board should be focusing on lenders whose irregular loan 

origination and servicing practices represent a significant risk to the FHA insurance fund. 

2. Civil Money Penalties were frequently mitigated to administrative fines.

Factual Matters

The MRB is authorized at Section 536 of the National Housing Act (12 U.S.C 

§1735(f)-14) to impose civil money penalties. However, as a matter of practice in FY 

2008 and prior years, the Board frequently agreed to recharacterize the civil money 

penalty as an administrative fine. This condition occurred for 10 of the 25 lenders 

referred to the Board in FY 2008, and, in some cases, reflected a settlement offer from 

the lender to make payment without an admission of fault or liability. Administrative 

fees, like civil money penalties, are subject to public disclosure in the Federal Register 

but do not carry the penalty implications of misconduct or irregularity. Additionally, by 

negotiating for an administrative fee instead of a civil money penalty, the lender can 

avoid state regulatory reporting and disclosure in annual financial statements. 

 Example #1: W.R. Starkey Mortgage, LLP, Plano, TX (WRS) 

 WRS was cited for seven violations of FHA requirements. These violations 

included understating proposed housing payments in qualifying borrowers for FHA new 

construction loans (six mortgages), approving one borrower who had delinquent Federal 

debt, failing to ensure that Construction-Permanent Mortgage Program requirements were 

met (54 mortgages), and allowing documents in the processing/underwriting of loans to 

pass through a prohibited third party (14 mortgages). MRB staff proposed civil money 
11 

penalties in the amount of $143,500. WRS offered to settle the matter by making an 

administrative payment to HUD of $144,431 and indemnifying for insurance losses on 

seven loans. The MRB accepted the settlement offer. 

 Example #2: AAA Worldwide Financial Company, Addison, TX (AAA) 

 AAA was cited for nine violations of FHA requirements. These violations 

included failing to implement an adequate quality assurance plan, not remitting mortgage 

insurance premiums in a timely manner (472 mortgages), late endorsement submissions 

(376 mortgages), and other underwriting deficiencies. The MRB proposed civil money 

penalties in the amount of $115,500. AAA offered to settle the matter by indemnifying 

HUD on five mortgages, buying down five mortgages in the total amount of $40,126, 

refunding $2,217 to one borrower, and making an administrative payment in the amount 

of $115,500. The MRB accepted the settlement offer. 

Evaluation

 Congress established the MRB as an enforcement authority holding sole power6 

to impose civil money penalties on lenders that violate regulations and guidelines in 

originating and servicing FHA insured mortgages. The MRB should be more 

consistently assertive in enforcing its enforcement mandate, especially in cases where 

lenders are found to have deliberately violated FHA regulations and requirements. 

Instead, the MRB has followed a pattern of mitigation, compromise, and willingness to 

accept lender offers of settlement that can diminish the Board’s stature and its 

effectiveness. 

 In the cited examples, the MRB, in response to staff recommendations, accepted 

the lenders’ settlement offers if the civil money penalties were paid as administrative fee. 

In both cases the lenders had substantial net worth and ability to pay the negotiated 

amount of the settlements, including indemnifying FHA for the highest risk loans. At a 

minimum, by paying an administrative fee, these two lenders avoided the negative 

consequence of a publicly reported irregularity in the Federal Register and potential 

disclosure to State regulatory authorities. The effect of reducing the civil money 

penalties to administrative fees diminished the impact of the MRB’s enforcement power 

and its overall deterrent influence. 

3. The MRB referral process was slow to deter or stop noncompliant lending 

practices.

Factual Matters

The Government Accountability Office (GAO)7 in 2004 criticized the length of 

time that the Board took to review cases and impose sanctions against lenders or took to 

 

6

 Absent fraud against the Federal government, such as provided for in Program Fraud Civil Remedies Act. 

(5 C.F.R § Part 185). 

7

 GAO’s findings (GAO-05-13, November 12, 2004).
12 

enter into settlement agreements with them. From a sample of 32 cases, GAO found that 

it took an average of 6.7 months to withdraw lenders’ FHA approval (10 lenders) 

following Notice of Violation and an average of 11.1 months to negotiate settlement 

agreements. 

We analyzed the timeliness of 25 case referrals to the Board. It took an average 

of 6.4 months from the Notice of Violation to Board ruling in these 25 cases. Four of 

these cases resulted in withdrawal of FHA lending authority (average elapsed time was 

8.4 months from Notice of Violation to withdrawal of FHA lending authority). Ten cases 

included agreed to settlements that resulted from MRB staff negotiations. For these 

cases, the average elapsed time was 8.8 months. 

To explain the referral process in greater detail, we provide a timeline of a recent 

decision to remove FHA lending authority from a New Jersey mortgage company. The 

timeline records the year-long effort required to complete a monitoring review of loan 

cases, prepare case histories and referral documents, recommend sanctions, and present 

for MRB ruling. MRB action in this case was recommended based on suspected fraud in 

the loan documents prepared for FHA insurance requirements and, for the branch office 

in question, a claim and default rate of 22 percent (82 of 368 loans). 

Quality assurance monitoring at lender 01/23/2008 

Post monitoring case preparation complete 04/07/2008 

Notice of violation to lender 05/09/2008 

Referral of potential fraud cases to OIG 05/21/2008 

Referral of potential fraud cases to OIG 07/31/2008 

Credit Watch suspension (NJ branch office) 08/12/2008 

Notice of violation - response from lender 09/20/2008 

Office of General Counsel completed review of 

Lender’s response 12/03/2008 

 MRB ruling and removal 01/16/2009 

The MRB “Notice of Administrative Action/Immediate Withdrawal for a Period 

of Five Years” also imposed a civil money penalty of $151,500 and advised that the 

lender would receive a copy of HUD’s complaint with respect to the proposed civil 

money penalty. 

Evaluation

Our review found little difference from GAO's 2004 observations on the 

timeliness of MRB rulings. However, as outlined in the statute, case referrals to the 

Board do involve serious matters of irregularity and abuse in FHA lending. We recognize 

that FHA has an obligation to thoroughly investigate these allegations and determine 

legal sufficiency before any action is taken. We do believe that this process should be 

streamlined and a "sense of urgency" should be established to minimize additional 

damage and loss to FHA. The deterrent effect of the decisions of the MRB has been 

diminished by its current practices. 
13 

4. The message from MRB rulings was not published in the Federal Register or 

otherwise disseminated on HUD’s Web site in FY 2008. 

24 C.F.R. Part 25.12 provides that the Secretary shall publish, in the Federal 

Register, a description of and the cause for each administrative action taken by the Board 

against a mortgagee. 

Factual Matters

Official public notice of MRB enforcement actions during FY 2008 has neither 

been published in the Federal Register nor otherwise communicated to the mortgage 

banking community and the general public through HUD’s Web site. For FY 2004 

through FY 2007 the Board published the summary results of its rulings in five notices in 

the Federal Register. 

Evaluation

Decisions of the MRB need to receive quick and widespread public exposure, as 

contemplated by the regulations. Offenders levied with civil monetary penalties and/or 

punitive judgments, such as suspension and removal, are periodically cited in the Federal 

Register (none cited in FY 2008). However, disclosing adverse publicity about 

noncompliant lending practices in this official Federal publication cannot be expected to 

reach potential FHA consumers. HUD’s Web site, www.hud.gov, offers advice and 

counsel to potential homebuyers and recently announced an initiative to encourage 

borrowers to seek housing counseling services as the number of foreclosure rescue scams 

increase in response to the Nation’s housing crisis. The Web site, however, has made no 

mention of MRB findings in FY 2008. Industry advocates, such as the Mortgage Bankers 

Association (MBA), provide consumers with current data on loan originations, defaults, 

and foreclosures and actively advise the Congress on housing finance policy to 

discourage predatory lending. However, the MBA and others depend on HUD public 

disclosure of Board rulings before reporting the findings in their trade journals. 

5. Board Workload Increased in FY 2008 

Factual Matters

During FY 2008 Board workload increased due to the need to deliberate and vote 

on sanctions and on proposed settlement agreements involving mortgagees that were noncompliant with annual FHA renewal requirements. These renewal requirements included 

payment of annual fees, submission of informational verification reports and, in cases 

where lenders are non-supervised, submission of acceptable audited financial statements. 

Previously, such matters had been administratively handled by FHA program staff. This 

change in procedures resulted from a recommended decision issued by a HUD 

Administrative Law Judge (ALJ) in November 2007 and later upheld by a HUD hearing 

officer. In order to bring its procedures into compliance with this ruling, HUD thereafter 
14 

began submitting all cases involving mortgagees’ failure to meet recertification 

requirements to the Board. In January of 2009, FHA issued Mortgagee Letter 09-01 

which officially instituted the revised policies and procedures. 

Board workload and that of its staff at OGC Office of Program Enforcement 

increased substantially due to this change. Cases involving recertification matters 

increased from zero in 2007 to 65 cases in 2008. Although the Board itself could and did 

consider these cases in groups at its meetings, each case had to be individually prepared 

for submission by the Board and DEC staffs. Many included cases where the mortgagees 

had failed to recertify; and, either had no interest in further participation in FHA 

programs or had already agreed to settle with HUD by paying the required fees and/or 

submitting the required reports. 

Evaluation

HUD should propose legislative changes that would reverse the adverse workload 

impact of the HUD Administrative Law Judge’s recommended decision. Procedural 

changes requiring the MRB to rule on each referral involving lenders who failed to meet 

recertification requirements are threatening to overwhelm the Board and its small staff 

assigned to prepare cases. Although the Board ruled on 65 recertification cases in FY 

2008, there was a backlog of 520 similar cases at year end. 

 

Conclusion 

 The statutory mission of the Mortgagee Review Board is to protect FHA and its 

mortgage insurance funds from fraud and program abuse and to deter noncompliance and 

mortgage lending irregularities. However, as pointed out in our review, the MRB ruled on 

few cases and often after a lengthy referral process. It sanctioned mostly technical 

violations of FHA policy. It imposed penalties, but most were without substantive 

financial consequence to the lenders. It imposed the strongest sanction of withdrawal 

mostly on routine cases of failure to recertify. 

 Unless its enforcement rulings include a much larger referral caseload, the MRB 

will remain marginal as an effective sanctioning body. To fully meet its statutory 

mandate, a stronger MRB will require greater willingness by FHA to dedicate more 

resources to quality assurance monitoring and to refer a greater number of targeted 

lenders to the Board for ultimate settlement of monitoring and audit findings. Referrals 

should also carry the expectation of maximum sanctions that reach in a significant way to 

problematic lenders and serve as a strong deterrent to abusive practices. Imposed 

penalties should be viewed as of real financial consequence to the violating lender, rather 

than as a negotiable administrative cost of doing FHA mortgage business. And, for 

greater public impact and higher industry visibility, Board decisions and the adverse 

consequences of violating FHA lending standards must be timely disseminated through 

the Federal Register and HUD’s Web site.