The days of the billion dollar mortgage underwriting fraud may be over. That hasn’t stopped lenders from running afoul of the False Claims Act, however. 2016 was the third best year ever for the Justice Department in terms of whistleblower lawsuit recoveries. Much of that success comes from the mortgage industry.
By the numbers, the government collected $4.7 billion in 2016. Total whistleblower awards were $519,000,000.00! A big percentage of those recoveries and awards came from claims involving federally insured residential mortgages ($1.7 billion).
Cases from the 2008 financial meltdown have slowed down but mortgage underwriting fraud continues.
April saw Freedom Mortgage Mortgage Corporation pay $113 million to resolve a False Claims Act case. Prosecutors said Freedom “failed to comply with certain FHA origination, underwriting and quality control requirements.”
Things were so bad at Freedom that quality assurance personnel found defects in as many as 30% of loans written after 2007. That means even after the market collapsed, Freedom was still turning out bad loans. According to the Justice Department,
“[B]etween 2006 and 2011, Freedom Mortgage Corporation did not report a single improperly originated loan to HUD, despite its obligation to do so. Additionally, in 2012, after identifying hundreds of loans that ‘possibly should have been self-reported to HUD,’ it reported only one. “
In May, M&T Bank settled with DOJ for $64 million. Once again, prosecutors said the bank committed mortgage underwriting fraud by issuing FHA-insured mortgage loans that did not meet federal requirements. Like the other settlements, the case was brought under the False Claims Act.
In October, the government settled yet another mortgage underwriting fraud cases against Primary Residential Mortgage (PRMI). The company agreed to pay $5 million to settle the case.
According to the Justice Department,
“PRMI admitted it endorsed loans that were not eligible for FHA mortgage insurance, including loans where:
- PRMI failed to document the assets used to qualify the borrower for FHA mortgage insurance and omitted liabilities owed by the borrower from the underwriting analysis;
- PRMI failed to document income used to qualify the borrower for FHA mortgage insurance;
- PRMI failed to verify the borrower’s earnest money deposit; and
- The borrower was delinquent on a second, pre-existing FHA mortgage.”
In that same month, the Justice Department also settled a case against SecurityNational Mortgage Company. In that case, the company agreed to pay $4.25 million.
According to a Justice Department news release, SecurityNational approved loans even though,
- “The borrower was delinquent on federal debt and had an unpaid court-ordered judgment;
- The borrower was four months delinquent on the underlying mortgage SecurityNational refinanced into an FHA loan;
- The mortgage loan amount exceeded HUD’s loan to value requirements;
- SecurityNational failed to document income used to qualify the borrower for FHA mortgage insurance; and
- SecurityNational failed to analyze the borrower’s delinquent credit history.”
Both the Security National and PRMI cases were brought under the False Claims Act.
What is most astonishing about the 2016 cases is the date of the wrongdoing. Most complaints say the bad underwriting continued long after 2007. Five years after the financial crisis and some of these banks were still allegedly writing junk loans. (We say allegedly because most of the mortgage companies were allowed to settle without an admission of wrongdoing.)
2017 Mortgage Underwriting Fraud Cases
The two most recent cases technically took place in FY 2017. That’s because the government’s fiscal year ended October 31st of last year. This means the government’s big win in Allied Home Mortgage and the settlement with United Shore Financial Services will be in this year’s stats.
On November 29th, a Houston jury found Allied Home Mortgage* and its affiliates violated the False Claims Act. The jury issued a verdict against Allied and in favor of the government. The verdict is for $92 million but that figure should soon be tripled by the court. Under the Act, the jury determines the government’s losses but the court triples the award and assesses penalties.
The Allied case was especially significant because it is the first of the big bank cases where the Justice Department also prosecuted the lender’s CEO. The jury determined that former CEO Jim Hodge should pay $7 million. Once again, the court will likely triple that amount.
(In the Countrywide “HUSL” case two years ago, the jury found a Countrywide Vice President liable for $1 million. Allied Home Mortgage, however, is the first big lender case naming a C-suite holder as a defendant.)
The other big head start on 2017 is the government’s $48 million settlement with United Shores Financial Services (USFS) in December.
Both Allied and USFS involved bad underwriting and quality control practices.
False Claims Act, Whistleblower Awards and Mortgage Underwriting Fraud
The above cases were all brought under the False Claims Act. So what exactly is this law and why is it important for whistleblowers.
Passed during the Civil War, the Act is the Justice Department’s best weapon for fighting fraud. If the fraud involves federal programs or tax dollars, the fraud can be prosecuted under the Act.
Whistleblowers love the law because it can pay huge cash awards. These awards are between 15% and 30% of whatever the government collects from the wrongdoers. Better yet, the awards are payable on the total damages after those damages are tripled and after fines are added.
Whistleblowers also love the Act because it contains powerful anti-retaliation provisions.
Ready for Your Own Whistleblower Award?
To earn an award, you must have inside information about fraud involving government funds or programs. Most residential loans qualify if backed by the FHA or VA. Loans by Fannie Mae and Freddie Mac also qualify.
If you have inside information about wrongdoing, we help you investigate and file a sealed lawsuit in federal court. Ultimately the Justice Department can take over the case or allow us to prosecute.
While being investigated, the case is usually sealed meaning secret.
Need more information? Visit our False Claims Act information or FIRREA bank fraud information pages. Can’t find what you need or you ready to start the process? Contact attorney Brian Mahany at *protected email* or by phone at (414) 704-6731
* [Ed. Note: The Allied case was filed by this law firm. Not including Allied, our mortgage company whistleblower clients have collected over $100 million in awards.]
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