HUD Owes Millions in Unrefunded Mortgage Insurance Premiums, Class Action Alleges

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A proposed class action lawsuit alleges the United States Department of Housing and Urban Development (HUD) has denied thousands of homeowners mortgage insurance premium refunds owed upon the early termination of their Federal Housing Administration (FHA)-insured mortgages. 

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The 27-page complaint says that although HUD regulations require unearned mortgage insurance premiums to be refunded when a mortgage is terminated early, the department has instead kept hundreds of millions of dollars from homeowners by “using tactics that range from failing to identify eligible borrowers to imposing unnecessary bureaucratic hurdles.” Among other “failures,” the suit says, HUD has not automatically issued refunds as required by law, relied on “inefficient communication methods” with borrowers, and failed to recognize borrowers’ legal representation. 

According to the lawsuit, the Office of Inspector General has confirmed the issues regarding HUD’s handling of mortgage insurance premium refunds, as a 2022 audit “exposed a systematic lack of adequate controls and procedures” to ensure that refunds were properly tracked, monitored and issued. The audit came in the wake of a bevy of complaints that alleged HUD “was trying to make it difficult for Borrowers to obtain refunds or discourage them from pursuing the refunds,” the complaint relays. 

The Office of Inspector General found that HUD did not emphasize reviewing or monitoring the mortgage insurance premium refund process “to identify weaknesses” and focused instead on only sending refund applications and issuing refunds to those who requested and returned the applications by mail, the case adds. 

“This lawsuit is not just about reclaiming unearned premiums; it is a fight for transparency, accountability, and fairness,” the filing states. “The federal agency’s failure to uphold its duties has deprived thousands of homeowners of substantial refunds.” 

The case relays that one of HUD’s goals is to increase access to affordable housing, including by requiring certain homeowners, often first-time buyers or those who cannot put 20 percent down, to pay mortgage insurance premiums as a financing condition. When an FHA-insured mortgage is terminated early, within seven years of the purchase or refinancing of a property, this results in an overpayment by the borrower of the mortgage insurance premium, and HUD is required to automatically refund the unearned premium, the suit stresses. 

Instead, the lawsuit says, HUD, upon request from a borrower, will mail an “Application for Premium Refund or Distributive Share Payment” form, or a HUD-27050-B form. The suit states that this refund application is “partially completed” by HUD with the borrower’s personal, mortgage and refund details and must be filled out by the borrower, notarized (if the refund exceeds $2,000) and submitted to HUD with proof of identity, address and ownership. 

Once HUD receives the completed application, the agency is required to refund the unearned mortgage insurance premiums, yet has failed to do so for thousands of borrowers, the lawsuit alleges. 

According to the case, HUD’s failures include, but are not limited to:

• failing to identify borrowers entitled to a refund;
• failing to issue refunds automatically;
• requiring borrowers to request a refund application (instead of automatically sending one) and only providing it by mail;
• failing to mail refund applications to borrowers’ current addresses when HUD knows they no longer live at the FHA-insured properties;
• failing to notify borrowers that they are entitled to a refund;
• failing to honor requests from borrowers’ legal representatives and attorneys to have refund applications mailed or emailed to them;
• failing to communicate with borrowers’ legal representatives and attorneys or failing to acknowledge their right to counsel;
• failing to mail or timely mail refund applications when they are requested;
• requiring “burdensome and unnecessary” paperwork from borrowers; and
• refusing to email refund applications when requested, even when a borrower’s legal counsel advises that a mailed application was not received and even though HUD accepts applications via email or fax. 

As of 2020, the filing shares, there were nearly 755,000 borrowers with unclaimed mortgage insurance premium refunds, more than 200,000 of which were for mortgages terminated more than two decades ago. According to HUD data, the suit adds, the total refund amount held by the agency as of 2020 was north of $384 million, for which all earned interest has been retained by HUD. 

The lawsuit looks to cover all FHA-insured mortgage borrowers who are owed an unclaimed refund of mortgage insurance premiums due to the early termination of their loans through and until the date notice is sent to proposed class members. 

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