Taylor Bean Suspended From Making FHA Loans

By JAMES R. HAGERTY and LINGLING WEI

The Federal Housing Administration suspended Taylor, Bean & Whitaker Mortgage Corp. from making loans insured by the federal agency, and raised questions about the company's business practices and financial disclosures.

The move, coming a day after federal investigators raided Taylor Bean headquarters in Ocala, Fla., could hamper the company's operations and deal a setback to hundreds of mortgage brokers and community banks that originate loans through Taylor Bean.

The Department of Housing and Urban Development, which oversees the FHA, said it took action against Taylor Bean because the company failed to submit a required annual financial report and to disclose "certain irregular transactions that raised concerns of fraud." Officials declined to provide details about the possible fraud. Taylor Bean has 30 days to appeal the suspension, which took effect immediately.

HUD also proposed to bar two Taylor Bean executives -- Paul R. Allen, chief executive officer, and Ray Bowman, president -- from any dealings with the U.S. government for 18 months. The department said Mr. Allen submitted false or misleading information to Ginnie Mae concerning a delay in submitting financial reports. It said Mr. Bowman submitted two false certifications regarding information lenders are required to verify each year. Neither Mr. Allen nor Mr. Bowman could be reached for comment. They have 30 days to contest the proposed penalty.

Taylor Bean's headquarters in Ocala, Fla., were raided Monday by federal investigators. The company is the 12th-largest mortgage lender in the U.S.

In an email response, Lee B. Farkas, chairman of Taylor Bean, said he was unaware of the FHA action. He didn't return repeated requests for comment.

FHA officials said Taylor Bean, which originated and purchased nearly $30 billion in mortgages last year, is the largest lender ever to be suspended from FHA lending. The company is private, but Taylor Bean was the 12th-largest U.S. mortgage lender in the first six months of this year, according to Inside Mortgage Finance, a trade publication. Though Taylor Bean makes most of its home loans through independent brokers and smaller mortgage banks, the Florida lender also owns a small savings-and-loan company, Platinum Bancshares Inc., of Rolling Meadows, Ill., acquired last year.

Among originators of FHA loans, Taylor Bean was the third largest in June, with a market share of 3.3%, according to the publication. Only Bank of America Corp. and Wells Fargo & Co. were larger.

The crackdown on Taylor Bean comes as the FHA is straining to cope with an increase in the number of loans it backs and rising delinquencies on those loans.

"Today, we suspend one company but there is a very clear message that should be heard throughout the FHA lending world: Operate within our standards or we won't do business with you," said HUD Secretary Shaun Donovan. In an interview this year, Mr. Donovan didn't rule out the possibility that the FHA eventually may have to seek money from Congress for the first time to cover losses on defaults. The number of loans delinquent more than 90 days or more backed by the FHA rose in May to 7.42% from 6.47% a year earlier.

Ginnie Mae, a government agency that guarantees payments to holders of securities backed by FHA loans, said Taylor Bean will no longer be allowed to issue securities backed by Ginnie.

On Monday, federal agents raided the Florida offices of Colonial BancGroup Inc. and Taylor Bean. The special inspector general for the Troubled Asset Relief Program said its agents had executed search warrants at the two offices in conjunction with the Federal Bureau of Investigation and the inspector general for HUD. A spokeswoman for the TARP watchdog said the warrants were sealed and she couldn't provide details about the probe.

Taylor Bean had proposed to lead a group of investors that were to provide $300 million of capital to Colonial, allowing the Montgomery, Ala., bank to become eligible for a $550 million federal bailout. But Colonial said Friday that the proposed rescue fell through. Also on Friday, Colonial reported a loss of $606 million for the second quarter and said there is "substantial doubt about Colonial's ability to continue as a going concern." Taylor Bean has depended on short-term "warehouse" loans from Colonial. Warehouse lenders are big banks and others that make short-term loans to mortgage banks.

HUD officials and the TARP watchdog teamed up in the federal investigation when they found they both had concerns about Taylor Bean and Colonial. HUD said Taylor Bean had failed to disclose to the FHA investigations into its business practices by state authorities. In July, Taylor Bean signed an agreement with 14 states requiring it to pay fines totaling $9 million for alleged improper lending practices, including alterations of information about borrowers' incomes and assets to allow loans to be approved.

A person involved in the federal probe said Taylor Bean had told Ginnie Mae that a delay in filing was due to the planned investment in Colonial. Later, however, Ginnie Mae discovered that Taylor Bean hadn't disclosed that its independent auditor, Deloitte LLP, had resigned because of "irregular transactions" that raised concerns about fraud. A spokesman at Deloitte declined to comment.

Colonial's financial problems have stirred worry in the mortgage market because the bank is one of the nation's largest providers of short-term credit to small, independent mortgage banks. These mortgage lenders have found it hard to obtain the short-term loans they need to allow them to fund home mortgages. If Colonial exits the warehouse-lending business, that would be "devastating" for many mortgage banks, said Scott Stern, chief executive officer of Lenders One, a St. Louis cooperative that provides services to about 135 mortgage banks across the U.S.

James Lockhart, director of the Federal Housing Finance Agency, said in an interview Monday that he expects an announcement this month that Fannie Mae and Freddie Mac will provide support to "warehouse" lenders. Mr. Lockhart said the aid would involve the use of commitments by Fannie and Freddie to purchase loans that serve as collateral for warehouse lines of credit.

Partly because of a plunge in the number of providers of warehouse credit lines, small mortgage banks have found it more difficult to compete with big banks in making home loans. The top three mortgage lenders accounted for 52% of the market in the first quarter, up from 40% a year earlier, according to Inside Mortgage Finance.

If small mortgage lenders continue to abandon the business, "it will mean fewer choices for the consumer and higher mortgage rates," said Glen Corso, a spokesman for the Warehouse Lending Project, a group of about 35 mortgage banks pushing for federal aid to encourage more warehouse lending.

An increase in FHA lending has raised concerns in Congress and elsewhere that the agency will lose large amounts of money through mortgage defaults. FHA officials depicted the crackdown on Taylor Bean as a sign they are being vigilant.

Taylor Bean hasn't been an approved lender by Fannie Mae for more than five years. Colonial had a loss of $880.5 million in 2008, hurt by its exposure to Florida's real-estate collapse. When the bank said on Dec. 2 that it had preliminary approval for as much as $536 million in federal aid, it didn't tell investors it needed to raise $300 million privately to secure the government funds. That disclosure came on Jan. 27.

Write to James R. Hagerty at bob.hagerty@wsj.com and Lingling Wei at lingling.wei@dowjones.com