Sunday, December 4, 2016

FYI: Jury Finds Mortgage Lender and Its CEO Liable for Almost $93 Million in FHA Fraud Case in Texas

A federal jury in the U.S. District Court for the Southern District of Texas found a mortgage lender and its president and CEO liable for almost $93 Million in connection with alleged violations of the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), before application of the trebling and per violation penalties afforded under the statutes.


The alleged violations occurred in connection with the lender's participation in the Federal Housing Administration (FHA) mortgage insurance program.


A copy of the U.S. Department of Justice's (DOJ) press release is available at:  Link to Press Release


The jury award in favor of the United States totaled $92,982,775 in damages, including $7,370,132 against the mortgage lender's president and CEO specifically.


In addition, the FCA subjects the damages to trebling, and to mandatory penalties of $5,500 to $11,000 for each violation, whereas FIRREA also allows penalties for each statutory violation.  The federal judge who presided over the trial will determine the total penalties and damages at a later date.


The mortgage lender was a participant in HUD's Direct Endorsement Lender program, and underwrote FHA-insured mortgage loans.  As you may recall, for FHA-insured mortgage loans, the lender must "certify to HUD that the loan was underwritten according to HUD's guidelines."  Mortgage lenders must obtain HUD approval for each branch office from which they originate HUD-insured mortgage loans.  In addition, "HUD requires lenders participating in its programs to timely perform quality control audits of their FHA loans to identify and correct systemic problems, including underwriting problems."


The DOJ claimed that the mortgage lender "recklessly underwrote and certified at least 1,192 loans for FHA insurance under HUD's guidelines" and that "[t]his fraudulent misconduct resulted in losses to HUD of $85,612,643 when those loans defaulted."


The DOJ's press release states that the mortgage lender failed to obtain HUD approval for each branch office from which it originated FHA loans.  Instead, the DOJ claimed, the mortgage lender "operated more than 100 'shadow' branch offices that originated FHA loans without HUD authorization," and "submitted loans originated by those branches to HUD using the ID numbers of approved branches." 


The Government claimed that the mortgage lender's "undisclosed shadow branches were not subject to HUD oversight and their default rates were disguised by the default rates of branches whose IDs they were using. This fraudulent misconduct resulted in $7,370,132 in losses to HUD when some of those loans defaulted."


In addition, the DOJ claimed that the mortgage lender "operated a dysfunctional quality control program and lied to HUD about it,"  instead employing only "a handful of quality control employees to review loans from as many as 600 branch offices."  According to the DOJ, "many of those employees were unqualified to audit FHA-insured loans."


In addition, the DOJ claimed that the president and CEO "personally directed his employees to falsify quality control reports to give the impression that required reviews had been performed, when in fact they had not. When HUD auditors later asked for those quality control reports, [the mortgage lender] provided the falsified reports," and "also falsely certified to HUD on an annual basis that [the mortgage lender] was in compliance with HUD's quality control requirements."


The lawsuit was originally filed as a qui tam whistleblower lawsuit in the U.S. District Court for the Southern District of New York into which the United States intervened.  The action was later transferred to the U.S. District Court for the Southern District of Texas, where it went to trial. 




Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct:  (312) 551-9320
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