Federal court blocks HUD guidance on down payment assistance

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HUD Secretary Ben Carson
Federal court blocks HUD guidance on down payment assistance


WASHINGTON — A federal judge has dealt a blow to efforts by the Department of Housing and Urban Development to restrict nonprofit housing funds from offering down payment assistance, according to people familiar with the matter.

In April, Federal Housing Administration chief Brian Montgomery issued an industry letter stating that nonprofits must prove they operate only within their geographic area. Funds wishing to have a broader reach must get permission from each local government authority where it backs loans.

But Judge David Neffer of the U.S. District Court in Utah has granted an injunction further delaying implementation of the letter, according to people following the case. His decision appears to bolster claims by a Native American tribe operating a national down payment assistance program that Montgomery’s letter ran afoul of the Administrative Procedure Act.

The Utah-based Chenoa Fund, run by the Cedar Band of Paiutes, and the National Homebuyers Fund say the FHA letter would put them both out of business. In April, the Utah tribe sued HUD, alleging that the department tried to avoid scrutiny when it imposed new restrictions outside a formal rulemaking process.

HUD had delayed implementation of the letter until next week, but Neffer’s ruling casts further doubt on whether the policy will go into effect.

Neffer issued the ruling from the bench, and the written ruling is expected shortly, according to the people familiar with the case. The Chenoa Fund’s lawsuit has yet to be decided.

“We are pleased with the district court’s attentive and thoughtful approach at the hearing on our motion for a preliminary injunction against the HUD Mortgagee Letter,” said Helgi Walker, the lead counsel for the Chenoa Fund. “We are extremely gratified that the court orally indicated it would grant our motion, and we look forward to reviewing the forthcoming opinion.”

At a recent hearing, HUD Secretary Ben Carson indicated he was not aware of the data that was used to inform the decision to issue the mortgagee letter. When a lawmaker said such data was necessary, Carson responded, “I agree with you, actually.”

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Both the National Homebuyers Fund and the Chenoa Fund have argued that the HUD guidance would make it extraordinarily difficult for a down payment assistance program to operate on a national level, and would leave consumers with fewer options.

HUD and the FHA declined to comment.

The letter noted data showing higher delinquency rates for FHA loans backed by down payment assistance programs like those offered by the two funds. The guidance “supported a rule that’s already on the books,” a HUD spokesperson said at the time.

But according to those familiar with Neffer’s decision, he appeared to view it as likely that the Chenoa Fund would prove in court that HUD’s mortgagee letter would demonstrate irreparable harm, that HUD acted capriciously in violation of the APA and that the department ignored an executive order that requires federal agencies to consult with Native American tribes on regulations that could impact them.

Under his ruling, the letter will stay under wraps pending the outcome of the litigation.

Yet HUD could still try to appeal the injunction, hoping that another judge will let the mortgagee letter stand, or continue with the trial. HUD could also decide to withdraw the mortgagee letter entirely, and possibly propose the new restrictive policy through a notice and comment rulemaking process.

The ruling was “embarrassing” for HUD, said Craig Ferguson, vice president of the National Homebuyers Fund.

“The best thing for HUD to do is not only withdraw the rule but to also clarify that until HUD releases a study of actual mortgage performance among these types of loans and lenders … they should clarify that all qualifying nonprofits and … [instruments] of government are eligible to provide loans.”

HUD Secretary Ben Carson even admitted that he was not aware of the data that was used to inform the decision to issue the mortgagee letter during his testimony in May in front of the House Financial Services Committee.

“If you do not collect the appropriate data to judge the success of a DPA program, then perhaps we should collect that data before moving forward with this policy,” Rep. Ben McAdams, D-Utah, said at the hearing.

“I agree with you, actually,” Carson responded.

Hannah Lang

Hannah Lang is a Washington-based reporter who writes about federal mortgage policy and the U.S. housing finance system for American Banker and National Mortgage News.


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