There are many different ways businesses and individuals seek to defraud the government. In mortgage financing, one of the ways lenders can subject themselves to False Claims Act liability concerns FHA insured loans. The FHA, or Federal Housing Administration, provides mortgage insurance on loans issued by lenders approved by the United States Government. The FHA provides mortgage insurance on loans in case the borrower defaults.
FHA-approved lenders are known as “Direct Endorsement Lenders,” meaning the lenders meet certain FHA criteria and follow FHA guidelines, including lending handbooks issued by the Department of Housing and Urban Development. To qualify as a Direct Endorsement Lender, lenders must insure their loans satisfy stringent underwriting criteria such as income verification, credit analysis and property appraisal.
In March of 2012, the United States Department of Justice, along with the Attorneys General of 49 states, filed suit against Wells Fargo and other banks regarding misconduct in the handling of FHA loans. The government alleged that the lenders violated several federal laws relating to loan servicing, origination and certification. While the litigation was underway, Wells Fargo agreed to pay over $5 billion, without admitting wrongdoing, in exchange for a release of various claims brought under the suit. Significantly, Wells Fargo and the government carved out from the settlement agreement the government’s right to file a civil action against the bank for violation of the False Claims Act. See U.S. v. Bank of America, et al., 922 F.Supp.2d 1 (D.C. 2013).
On September 29, 2016, the Department of Justice issued a press release stating that Branch Banking & Trust Company (BB&T) agreed to pay $83 million to settle allegations that it violated the False Claims Act for originating both HUD and FHA loans that did not meet various requirements. According to the government, “BB&T exposed taxpayers to losses by failing to comply with HUD guidelines, and then took the additional step of falsely certifying that it had complied with the guidelines.”
Like Wells Fargo and the lenders in the U.S. v. Bank of America litigation above, BB&T is a Direct Endorsement Lender in the FHA’s mortgage insurance program. Because BB&T is a direct endorser, the government does not review BB&T’s FHA insured loans before they are endorsed by the FHA, but instead relies on BB&T to verify that the loans comply with FHA’s underwriting requirements. BB&T classifies loans which contain defects and are ineligible for FHA insurance as “serious-marketability.” Between 2007 and 2011, at least 30% of the FHA loans BB&T underwrote were rated as “serious marketability” by the bank’s quality control departments. Despite the poor quality of these loans, the government alleges that BB&T still endorsed many of these higher risk loans and sought payment from the government when the lender defaulted.
Both the BB&T and Wells Fargo settlements reflect the government’s commitment to holding lenders accountable that violate federal law and regulations when underwriting federally insured loans. Lenders must truthfully certify that their loans meet FHA standards. When lenders make false certification, in turn causing the government to insure loans that do not meet its lending criteria, the lenders are subject to liability and damages under the False Claims Act.
Jason Cornell is an attorney who represents whistleblowers with the law firm Clark Fountain LaVista Prather Keen & Littky-Rubin. Clark Fountain represents plaintiffs in various matters throughout the United States. If you have questions regarding the issues addressed in this or other posts, you can reach Jason at firstname.lastname@example.org.