Back to top

Image: Bigstock

Regions Financial to Pay $52.4M in a Settlement with DOJ

Read MoreHide Full Article

Regions Bank, a subsidiary of Regions Financial Corporation (RF - Free Report) , announced that it has agreed to pay $52.4 million to the U.S. Department of Justice (DOJ) to resolve the allegations of violating the False Claims Act. The company was accused of falsely certifying that mortgage loans, insured by the Federal Housing Administration (FHA), were underwritten according to and complied with the requirements of the U.S. Department of Housing and Urban Development (HUD).

As part of the settlement, Regions Bank acknowledged that between Jan 1, 2006 to Dec 31, 2011, it certified certain mortgages for FHA insurance that did not meet the HUD’s underwriting requirements. However, the bank did not admit liability, in order to avoid potential future litigation.

Allegations

Since Jan 2006, Regions Bank has been a direct endorsement lender (DEL) in the FHA’s insurance program.  Under the program, if a DEL approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to the HUD for any losses resulting from the default. 

However, for a mortgage loan to qualify for FHA insurance, it must be underwritten according to certain guidelines issued by HUD.  The FHA does not review the loan for compliance, but instead relies on the DEL to certify compliance.

In this case, the HUD insured hundreds of loans approved by the bank and had to suffer substantial losses when it paid insurance claims due to the bank’s faulty underwriting process. Furthermore, Regions Bank failed to follow the rules to make sure that the borrowers met the required standards, as part of its quality control process.

In addition, the bank allegedly did not take appropriate steps to deal with the loans which were found to be deficient, either in the underwriting process or when they became due. Further, the bank did not follow the appropriate self-reporting requirements in finding fraud, serious violations or other deficiencies with its loans.

Financial Impact

At the end of the second quarter of 2016, Regions Bank established and disclosed reserves for the entire settlement amount. Therefore, this agreement will not have a material impact on the bank’s financial condition or results of operations. Further, the bank’s insurers have agreed to reimburse approximately $47 million of the settlement amount. The insurance recovery will be recognized in the third quarter of 2016.

Conclusion

FHA insurance and various other federally funded programs exist to make home ownership more affordable and available to lower income borrowers, and borrowers suffering from financial hardship.  These programs incentivize lenders to giveloans to potentially riskier borrowers because the federal government essentially guarantees the loan and will reimburse the owner for losses associated with default. HUD and FHA have issued regulations and guidance that lenders are required to follow to protect the government.  Unfortunately, in Feb 2016, Wells Fargo & Company (WFC - Free Report) agreed to pay $1.2 billion to the DOJ, in a settlement over similar claims.

However, in the current regulatory scenario, banks should now start being more cautious about its activities and abide by the regulations as far as possible. Further, as Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department's Civil Division, said, “Mortgage lenders that participate in the FHA insurance program must follow the requirements intended to safeguard its integrity and to protect homeowners. We will continue to hold responsible lenders that knowingly violate these important requirements.”

Currently, Regions Financialcarries a Zacks Rank #3 (Hold).

Stocks that Warrant a Look

A couple of better-ranked Southeast bank stocks include Hancock Holding Company and Southern National Bancorp of Virginia Inc. , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Wells Fargo & Company (WFC) - free report >>

Regions Financial Corporation (RF) - free report >>

Published in