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May 16, 2014 Mortgage Fraud

DOJ Unseals False Claims Act Complaint Alleging Mortgage Loan Fraud by OneWest Bank

The Department of Justice recently unsealed a False Claims Act lawsuit filed in the Southern District of New York alleging nine-figure fraud against the federal government pursuant to its Home Affordable Modification Program (HAMP). The program, which was implemented in 2009 to help struggling borrowers keep their homes, requires certain disclosures to borrowers by a lender prior to entering into the modification transaction. According to the complaint, OneWest Bank reportedly failed to make required disclosures, resulting in a staggering $200 million loss by the federal government.

The government declined its opportunity to intervene in this case. The whistleblower is a former employee of a law firm having worked with several of OneWest’s clients as they pursued loan modifications. If successful, the whistleblower could stand to earn up to 30 percent of the eventual recovery.  

Details of United States ex rel Fisher v. OneWest Bank FSB

The HAMP program allows certain eligible borrowers to enter into a loan modification agreement to obtain more favorable terms and, ultimately, avoid losing their home to foreclosure. As with any real estate transaction involving a government-backed loan, the lender is required to disclose certain terms of the loan in order to ensure the borrower is fully informed as to his risk before entering into the transaction.

According to allegations, OneWest routinely failed to advise borrowers as to certain basic but pivotal terms of the loan modification agreement. Specifically, OneWest omitted the finance charge, annual percentage rate, or total cost of the loan including interest. OneWest is also alleged to have “almost always” added new debt to the borrower’s loan – often in excess of $17,000. These charges and fees were allegedly added to the total balance without any itemization or HUD-1 statement as required by federal law.

This conduct triggers the False Claims Act by virtue of the fact each failed disclosure amounted to a violation of the Truth in Lending Act (TILA) – a piece of federal legislation designed to prohibit lenders from unfairly tying borrowers to high-cost loans without full disclosure of all underlying terms and conditions.

As a result of these faulty loan modifications, the government paid OneWest nearly $56 million in incentives. The complaint further estimates that the total paid out under the illegal HAMP modification agreements totals $206 million.

OneWest acquired mega-failure IndyMac bank in 2010 following a $38 billion breakdown – all spurred by a portfolio replete with underperforming home loans. As a result of the acquisition, OneWest agreed to work as a servicer for HAMP loans

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