National Mortgage Lender Pays $1.6 Million to Federal Government to Settle False Claims Act Allegations

On September 28, 2017, the United States Attorney’s Office for the Southern District of New York (USAO), along with the U.S. Department of Housing and Urban Development (HUD) and HUD’s Office of the Inspector General (HUD-OIG), announced that they had reached a settlement with a national mortgage lender over alleged misconduct in connection with the lender’s underwriting and endorsement of loans insured by the Federal Housing Administration (FHA).

The government filed suit against the lender bringing claims under the False Claims Act, 31 U.S.C. §§ 3729(a)(1), and several common law claims, including for breach of fiduciary duty and negligence.  According to the complaint, the lender participated in the FHA’s Direct Endorsement Lender (DEL) Program, which permitted it to underwrite and endorse loans without FHA’s prior approval.  In return, the DEL Program required the lender to sign and submit annual certifications certifying that, among other things, it “conform[ed] to all HUD-FHA regulations necessary to maintain its HUD-FHA approval.”  The lender was also required to submit certifications for every mortgage loan endorsed for FHA mortgage insurance, certifying the loan’s eligibility.

However, according to the government, between 2006 and 2012, the mortgage lender failed to comply with basic HUD rules and frequently approved loans that did not satisfy FHA underwriting requirements.  In fact, as part of the settlement, the lender specifically admitted that its annual certifications to HUD were not accurate, given that it failed to maintain a HUD-compliant quality control program by, among other things, not reviewing early payment default loans or reporting findings of possible fraud or serious deficiencies to company management or HUD.  It further acknowledged that it endorsed loans for FHA mortgage insurance that did not meet federal underwriting requirements, resulting in inaccurate loan-level certifications.

U.S. District Judge Jed S. Rakoff approved the settlement, which requires the lender to pay $1.67 million to the federal government in five installments.  It also requires the lender to ensure future compliance with HUD and FHA requirements, including through conducting trainings for employees involved in origination and underwriting, and engaging an independent consultant to review its policies and procedures.

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