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

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
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751

Mobile: (312) 493-0874
Email: rwutscher@MauriceWutscher.com

Admitted to practice law in Illinois

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

Financial Services Law Updates

and

The Consumer Financial Services Blog™

and

Webinars

and

California Finance Law Developments

PLEASE NOTE:

The editor and sponsoring law firm of this blog represent and serve banks, lenders, loan buyers, loan servicers, debt collectors, and other financial services companies. We do not represent consumers.

Any communications or information obtained may be provided to our clients, including for the purpose of debt collection.

The information in this blog and related updates is general in nature, and should not be considered legal advice.

Legal advice requires a full and complete understanding of a particular situation. Your situation may involve material facts that prevent the direct application of the information in this blog and related updates.

You will not become a client of the editor or sponsoring law firm simply by reading this blog.

In order to become a client of the editor or sponsoring law firm, the editor or sponsoring law firm must agree to represent you in writing.

Until we agree to represent you in writing, we are not prevented from representing any other party.

Until you are a client of the editor or sponsoring law firm, any communications with us will not be confidential.

The Editor's Bio

Ralph T. Wutscher
Maurice Wutscher LLP
20 N. Clark Street, 33rd Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
RWutscher@MauriceWutscher.com
https://www.MauriceWutscher.com/

Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.