BB&T Reserves $85M for Potential Fine on FHA Loans - Analyst Blog
Winston-Salem, NC-based BB&T Corporation (BBT) has recorded a contingent charge of $85 million in its latest SEC filing. The charge pertains to a potential fine that BB&T might have to pay to the Federal Housing Administration (“FHA”).
Notably, BB&T’s FHA loan origination process is subjected to an audit survey by the Office of Inspector General, U.S. Department of Housing and Urban Development (“HUD OIG”).
The case dates back to Jun 2014, when BB&T’s FHA-insured loan origination process had come under the scrutiny of the HUD OIG for evaluation of its compliance with the necessary quality control process.
Reportedly, the company received two subpoenas from the Justice Department in November and December last year, seeking additional information related to the audit. However, BB&T has not been charged of any misconduct to date.
But matters similar to these have either resulted in a cash settlement or other actions. Thus, in anticipation of a potential charge (ranging from $25–$110 million) related to the loss that FHA might incur on defaulted losses, the company decided to set aside a reserve.
Subsequently, a reserve of $85 million was created in the second quarter of 2014. It was included in ‘Other expenses’ for 2014, which increased 9% year over year to $884 million.
This is not the first time that a bank has been subjected to probe associated with the FHA loans. The Justice Department had levied a $200 million penalty on U.S. Bancorp (USB) for repeatedly submitting unqualified loans to the concerned program in Jun 2014; while Wells Fargo & Co. (WFC) was accused of engagement in reckless origination and underwriting of FHA mortgage loans by the U.S. government in 2012.
Nonetheless, we appreciate BB&T’s conservative measures. Though the charge has adversely impacted the company’s 2014 results, it is expected to bring relief from legacy issues in the long run.
BB&T currently carries a Zacks Rank #3 (Hold). Signature Group Holdings, Inc. (SGGHU) is a better-ranked stock in the finance space sporting a Zacks Rank #1 (Strong Buy).
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