HUD Plans Crackdown on Abusive Lending

The U.S. Department of Housing and Urban Development announced Friday a wide-ranging initiative to crack down on predatory lending practices involving government-backed home loans.

The plan aims to protect new home buyers seeking Federal Housing Administration-insured mortgages and to compensate borrowers who have fallen prey to abusive practices in FHA programs.

The FHA provides mortgage insurance to encourage lenders to provide financing to people who might not otherwise qualify for a home loan. It insured 1.3 million mortgages last year.

The new plan will cap the points and fees FHA-approved lenders can charge borrowers, create databases to identify and track unscrupulous appraisers, lenders and mortgage brokers, and seek to have them barred from the agency’s programs.

For borrowers already locked into an inflated mortgage based on a fraudulent appraisal of the value of their home, the FHA will move to force the lender to write down the loan to its true market value. If a lender refuses, the agency will intervene directly to cancel the insurance, take possession of the deed and resell to the owner at the fair market price.

In cases where fraudulent appraisals or underwriting have led borrowers to default on loans, the FHA will intervene to help them repair their credit records. It will also pay for financial counseling for borrowers at risk of default.

Finally, the agency will deny insurance for properties it suspects have been “flipped,” bought at a knockdown price, often after a foreclosure, and quickly re-offered for much more after a few cosmetic improvements and a crooked appraisal.

Some parts of the plan, which was based on the findings of a special HUD task force in Baltimore, will be rolled out across the country immediately. Other parts will be tested and refined in a few cities before being implemented nationally.

The initiative comes amid an increasing focus in Washington on the growing problem of abusive mortgage lending practices.

The Federal Reserve and other banking regulators are studying the issue, and HUD and the Treasury Department plan to release a report this summer with recommendations on how to fight the problem in the conventional mortgage market.