U. S. Department of Housing and Urban Development Washington, D.C, 20410-8000 August 23, 1991 OFFICE OF THE ASSISTANT SECRETARY FOR TI-409 HOUSING-FEDERAL HOUSING COMMISSIONER MEMORANDUM FOR: ALL TITLE I LENDING INSTITUTIONS Attn: Installment Loan Department SUBJECT: Imposition of Civil Money Penalties Against Title I Lenders, Dealers and Loan Correspondents Under the Department of HUD Reform Act of 1989 On May 22, 1991, the Department published a final rule that provides for the imposition of civil money penalties against Title I lenders, and against dealers and loan correspondents involved in the origination of Title I property improvement loans. These new regulations implement sections 107 and 134 of the Department of Housing and Urban Development Reform Act of 1989 (the HUD Reform Act). Attached is a copy of the final rule, which became effective on June 21, 1991. Background The HUD Reform Act was signed into law on December 15, 1989. Section 107 of the Act added a new section 536 to the National Housing Act, authorizing the imposition of civil money penalties against Title I lenders who violate the Department's program requirements. Section 134 of the Act amends section 2(b) of the National Housing Act to authorize similar penalties against dealers and loan brokers (as defined by the Secretary) who submit false information in connection with the origination of Title I property improvement loans. In § 30.10 of the implementing regulations, the term loan broker is defined as "a loan correspondent, which is a financial institution approved by the Secretary to originate Title I direct loans for sale or transfer to a sponsoring financial institution which holds a valid Title I contract of insurance and is not under suspension." Therefore, the term loan correspondent is used throughout this letter. The regulations provide that the Department may impose a civil money penalty whenever an approved Title I lender knowingly and materially violates relevant program statutes, regulations, or handbook requirements. A civil money penalty may also be imposed against any dealer or loan correspondent who knowingly _____________________________________________________________________ 2 submits false information to the Department or to an approved Title I lender in connection with a property improvement loan insured under Title I. Civil money penalties may be imposed in addition to other administrative sanctions or other civil or criminal penalties. Examples of Violations by Lenders A civil money penalty may be imposed by the Department against any Title I lender for knowing and material violations of program requirements, which include the following: o Failing to comply with any agreement, certification or condition of approval established by the Department in connection with an application for approval as a Title I lender or an application for approval of a branch office. o Failing to comply with the Department's requirements concerning approval and supervision of dealers, or approving a dealer who has been suspended, debarred, or otherwise denied participation in the Department's programs. o Transferring a Title I insured loan to a lender not holding a valid Title I contract of insurance with the Department. o Submitting false information or false certifications to the Department in connection with any Title I loan transaction. o Hiring or retaining an individual as an officer, director, principal, employee or agent whose duties involve programs administered by the Department, while that individual is under suspension or debarment or has otherwise been denied participation in the Department's programs. o Using escrow funds for any purpose other than that for which they were received. o Failing to remit, or timely remit, loan insurance charges, late charges or interest penalties. o Violating any other provision of Title I of the National Housing Act or any implementing regulation or handbook. _____________________________________________________________________ 3 Examples of Violations by Dealers or Loan Correspondents A civil money penalty may be imposed by the Department against any dealer or loan correspondent who knowingly submits false information to the Department or to a Title I lender in connection with the origination of property improvement loans. Violations may include but are not limited to the following: o Falsifying information on an application for dealer approval or reapproval submitted to a lender. o Falsifying statements on a HUD credit application, improvement contract, note, security instrument, completion certificate, or other loan document. o Failing to sign the credit application when the dealer assisted the borrower in completing the application. o Falsely certifying to a lender that the loan proceeds have been or will be spent on eligible improvements. o Falsely certifying to a lender that the property improvements have been completed. o Falsely certifying that a borrower has not been given or promised any cash payment, rebate, cash bonus, or anything of more than nominal value as an inducement to enter into a loan transaction. o Making a false representation to a lender with respect to the creditworthiness of a borrower or the eligibility of the improvements for which a loan is sought. Housing Civil Penalties Panel and Mortgagee Review Board The regulations establish a Housing Civil Penalties Panel (HCPP) that is responsible for reviewing recommendations for and proposing the imposition of civil money penalties against Title I lenders, dealers and loan correspondents. The HCPP is composed of the following members or their designees: the Assistant Secretary for Housing-Federal Housing Commissioner as Chairman; the Deputy Assistant Secretary for Operations; the Deputy Assistant Secretary for Multifamily Programs; and the Deputy Assistant Secretary for Single Family Housing. The HCPP also includes the Assistant Secretary for Fair Housing and Equal Opportunity (or his or her designee) for cases that involve violations of the Department's nondiscrimination _____________________________________________________________________ 4 requirements. A designee of the General Counsel serves in an advisory non-voting capacity to the HCPP. The Department's Mortgagee Review Board (MRB) is also authorized to impose civil money penalties against Title I lenders. However, the MRB will propose civil money penalties only in conjunction with other administrative sanctions that the MRB is authorized to impose under 24 CFR Part 25. Amount of Penalty The maximum amount of a civil money penalty shall be $5,000 for each violation, except that the maximum penalty for all violations by any lender, dealer or loan correspondent may not exceed $1 million during any one-year period. For continuing violations, each day that the violation continues shall constitute a separate violation subject to a $5,000 penalty. Although the final rule became effective on June 21, 1991, the Department may impose civil money penalties for violations occurring anytime after the date of enactment of the HUD Reform Act, which was December 15, 1989. Factors in Determining the Amount of Penalty In deciding the amount of penalty to be proposed, the HCPP or the MRB will consider the gravity of the offense, any history of prior offenses (including those that occurred before the date of enactment of the HUD Reform Act), the violator's ability to pay the penalty, injury to the public because of the violation, any benefits received by the violator, the potential benefit to other persons, imposition of a penalty as a deterrent to future violations, and the degree of the violator's culpability. Notice of Intent to Seek a Penalty When the Department intends to seek a civil money penalty, it will issue a written notice to the lender, dealer or loan correspondent from whom the penalty is sought. This notice will inform the lender, dealer or loan correspondent that the Department is considering the imposition of a civil money penalty, state the specific violations that are alleged, specify the amount of the civil money penalty that will be recommended, and provide an opportunity for the lender, dealer or loan correspondent to submit a written response within 30 days of receipt of the notice. Failure to respond to this notice will result in the matter being referred to the HCPP or the MRB without any further notification to the lender, dealer or loan correspondent. _____________________________________________________________________ 5 Opportunity for a Hearing Before a civil money penalty can be imposed, the lender, dealer or loan correspondent from whom the penalty is sought will be given an opportunity for a hearing before an Administrative Law Judge. If a hearing is not requested, the Administrative Law Judge will issue a default judgment. Unless the lender, dealer or loan correspondent can show that extraordinary circumstances prevented it from making a hearing request, the determination of the HCPP or the MRB for the imposition of a civil money penalty will become final and binding. Settlement Agreements A lender, dealer or loan correspondent may enter into a settlement agreement with the Department at any time before the Administrative Law Judge issues a decision on imposition of a civil money penalty. Failure to comply with the terms of the settlement agreement shall be sufficient cause for the Department to pursue administrative sanctions or other remedies in law or equity against the lender, dealer or loan correspondent. For Further Information If you have any questions about this letter, please write to William G. Heyman, Director, Office of Lender Activities and Land Sales Registration, 451 Seventh Street, S.W., Washington, D.C. 20410 or call (202) 708-1824. Sincerely yours, Arthur J. Hill Assistant Secretary for Housing-Federal Housing Commissioner Attachment