DOJ Continues to Pursue False Claims Act Cases Against FHA Mortgage Lenders and Auditors

Despite recent comments from Housing and Urban Development Secretary (“HUD”) Ben Carson implying that the government would be less aggressive toward mortgage fraud enforcement, the Department of Justice continues to pursue False Claims Act cases for fraud against the Fair Housing Administration (“FHA”) mortgage insurance programs.

The False Claims Act (FCA) is the government’s primary enforcement tool for prosecuting fraudulent civil claims. For companies that are found liable for illegal activity, damages can total three times the amount lost by the government as a result of the fraud, plus penalties associated with each false claim. The FCA requires that the falsified claims be made “knowingly” and be “material” to the payment made by the government. These criteria preclude a company from liability for an inadvertent or inconsequential administrative error, or a violation that would not be relevant in the government’s decision to make payments.

FHA Traditional Mortgages

The FHA insures loans to assist lower and moderate-income Americans in purchasing homes. The loans insured by the FHA are originated through private lenders approved by the FHA. In 2016, settlements and verdicts against the mortgage industry under the FCA totaled $1.7 billion. The majority of these cases involved FHA lenders who were charged with improper conduct in originating forward mortgages. The government has collected more than $7 billion since 2009 from settlements for fraud associated with these loans, and the federal government has continued to aggressively pursue these claims. In the past, these fraudulent activities have included non-conforming underwriting and origination practices, failure to adhere to quality control measures, and deficient reporting of defective loans to HUD.

• The Justice Department obtained a settlement for $65 million with PHH Mortgage as a result of its certification that residential mortgages were entitled to FHA insurance even though they did not satisfy the applicable requirements to decrease the risk of default. PHH skirted reporting obligations as mandated under the FHA program. The endorsement of unqualified loans for federal insurance resulted in inflated mortgage profits and exposed borrows to unreasonable risks.

• Allied Home Mortgage Capital Corporation and Allied Home Mortgage Corporation paid the federal government over $296 million for violations of the FCA and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The claims were based on falsified assertions by Allied that certain loans qualified for FHA insurance. Allied then filed insurance claims with FHA upon default of those loans. Allied’s quality control department also produced falsified reports to auditors that endorsed that Allied fully conformed to quality control guidelines established by the US Department of Housing and Urban Development (HUD). In addition, these loans originated from over one hundred bogus offices that were established to avoid scrutiny by the FHA.

• IBERIABANK Corporation, IBERIABANK and IBERIABANK Mortgage settled allegations that the companies falsely verified that the loans it originated qualified for FHA insurance protection. As a “direct endorsement lender” under the FHA program, IBERIABANK is authorized to underwrite and endorse mortgages without pre-approval from the FHA. For these types of lenders, the FHA does not confirm compliance with its regulations before the loan is endorsed. FHA insurance claims were paid on certain loans that contained discrepancies regarding the borrower’s income, inadequate data about appraisal values, and faulty information about the borrower’s down payment. In addition, IBERIABANK Corporation improperly issued incentive payments to underwriters for originating these loans.

Reverse FHA mortgages

Increased scrutiny by the Justice Department of FHA-insured reverse mortgages comes in the wake of signs that the reverse mortgage industry may be experiencing a resurgence. The industry has seen some growth in application filings as reverse mortgages are being presented as viable options for financial planning for retirees. A reverse mortgage is a tool that allows older homeowners to convert some part of their equity into cash without mortgage payments. Mortgage insurance is provided by the FHA in order to protect lenders in these mortgage commitments. FHA insured reverse mortgages are referred to as Home Equity Conversion Mortgages (HECM). Servicers of HECM loans must strictly adhere to the servicing requirements for reverse mortgages in order to obtain payments from the government. When servicers of HECM loans engage in activity that exploits federal programs and violates the law, the FCA enables the government to pursue claims for compensation.

• Financial Freedom, a reverse mortgage servicer, resolved claims that it improperly requested payments from an FHA insured reverse mortgage program. Financial Freedom paid $89 million to the government to settle charges that it received interest payments from FHA for unqualified HECMs between 2011 and 2016. The company’s failure to adhere to program guidelines negatively affected borrowers. Financial Freedom foreclosed on over 35,000 homes during this time. The whistleblower in the case received $1.6 million for her participation in the case.

• Walter Investment Management Corporation agreed to pay over $29 million in 2015 to settle charges that it committed violations concerning HECMs, including submitting fraudulent claims for debenture interest on HECM loans. This case was brought subject to the qui tam provisions of the FCA and the whistleblower earned $5.15 million for his role in the case.

• United Shore Financial Services, one of the leading wholesale mortgage lenders in the country, entered into a settlement with the federal government over allegations that the company knowingly originated and underwrote mortgages that were not in compliance with FHA standards. As a “direct endorsement lender,” United Shore failed to adhere to FHS standards when underwriting its loans. United Shore agreed to pay $48 million in the settlement.

Liability for FHA Mortgage Auditors

In addition to cases against FHA mortgage lenders and servicers, independent auditors tasked with signing off on FHA lenders’ compliance may also be liable for turning a blind eye to violations and fraud. In February 2018, the Department of Justice announced that “Big Four” auditor Deloitte and Touche had agreed to pay $149.5 million to settle allegations that it failed to perform its FHA mortgage audit obligations for defunct FHA lender Taylor, Bean, and Whitaker Mortgage Corp. All FHA Direct Endorsement Lenders are required to engage an independent auditor to ensure compliance with FHA and HUD regulations. By failing to detect the lender’s violations, Deloitte and Touche allowed the lender to submit materially false and misleading financial statements.

If you have knowledge and proof that a company or individual is defrauding a government program, including the FHA Mortgage Insurance Programs, call us today for a free consultation and case review with an experienced whistleblower attorney. To review your eligibility, contact the whistleblower attorneys at Levy Konigsberg, LLP for a free confidential consultation at (800) 315-3806.

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