The federal effort to eliminate troubling lenders from the Federal Housing Administration mortgage program got an important boost this week from the 4th U.S. Circuit Court of Appeals in Richmond, Va.
The court upheld the move last year by the U.S. Department of Housing and Urban Development to bar a Maryland business from making FHA-backed loans in the Baltimore-Washington area because of a high default rate on those mortgages.
Capitol Mortgage Bankers Inc. of Millersville was one of 27 lenders to be barred in the first round of a new attempt by HUD to reduce the rising foreclosure rate on mortgages insured by the Federal Housing Administration.
Capitol successfully challenged that action in U.S. District Court in Baltimore. Judge Marvin J. Garbis ruled in the fall that HUD had exceeded its authority and had not accorded Capitol due process when it banned the company.
HUD appealed the decision to the appellate court in Richmond, and the appeal was heard by Judges Francis P. Murnaghan, William W. Wilkins Jr., and Karen J. Williams.
The Garbis decision was overturned Wednesday in an unpublished opinion that read: "HUD's treatment of Capitol was fair and reasonable."
It added, "The government's interest in prompt termination of lenders who threaten the FHA insurance program is considerable"
"We're thrilled with that," said Matt Franklin, a top official at the Federal Housing Administration, a HUD agency. "We think justice was done."
Jay Dressel, former chairman of Capitol, said yesterday that he was "totally disgusted."
"All we did was what HUD wanted us to do. We were the No. 1 lender in Baltimore, and our main primary customer was first-time homebuyers, and they were minorities."
Critics claim that Capitol is one of the companies that has financed property flipping in Baltimore, and that it took advantage of low-income, first-time homebuyers.
Although the unpublished decision is not a binding precedent, backers of HUD's action hope it will help to curb what is known as "predatory lending," a term that refers to high-interest, high-fee loans which often are made to low-income borrowers with scarred credit.
"This gives HUD the ability to move more swiftly when it senses something is going on with a lender who has a high default rate," said Denis J. Murphy, an attorney with Civil Justice, which filed a brief supporting HUD on behalf of five organizations.
"This is a victory for the people," said Norma Washington, chairwoman of the Baltimore branch of the Association of Community Organizations for Reform Now.
In moving against Capitol last year, HUD cited loans that the firm had made in the 24 months ending March 31, 1999.
HUD said that 13.2 percent of those mortgages in the Baltimore area had gone into default or foreclosure, compared with a rate of 2.95 percent for all lenders in the area. In the Washington area, Capitol's rate was 9 percent, compared with 2.48 percent for all lenders.
Since banning Capitol and 25 other lenders, HUD has gone after another 32, Franklin said. One of them, American Skycorp Inc. of Timonium, challenged HUD in federal court in Baltimore and won a stay from Judge William M. Nickerson.
Nickerson has not issued a final decision in that case, and it is unclear how the appeals court ruling will affect his pending action.