Federal Court Considers Bank of America’s Motion to Dismiss in Mortgage Insurance Fraud

Bank of America is facing yet another potential whistleblower lawsuit, and recently motioned the federal district court in California to dismiss the case. Many of Bank of America’s struggles stem from the 2008 economic crisis caused by the housing bubble burst. At the center of it all, along with a handful of other ne’er-do-wells, was residential mortgage loan behemoth Bank of America, who accepted generous bailouts and government support as it was “too big to fail.” In the wake of this situation came several ten- and eleven-figure settlements with taxpayers resulting from years’ of residential lending fraud and the purposeful inducement of buyers to engage in FHA-backed mortgages who would otherwise have been ineligible under traditional rules.

Recent Whistleblower Litigation

As a bit of background, Bank of America remitted $25 billion in 2012 as a result of a settlement with the U.S. government and attorneys general of 49 states. This settlement was purportedly to settle claims that Bank of America made part of its fortune by signing off on loans for unqualified buyers who intended to use FHA insurance for their mortgage. Under the guidelines in place at the time, certain creditworthiness criteria was necessary in order for a loan to qualify for FHA-backing – and after the housing bubble burst, the FHA was left severely strapped after millions of homeowners had to refinance or lose their homes. As part of the settlement, BofA remitted an addition $1 billion to be released from further claims and litigation related to the scam against FHA and any subsequent filings involving these same facts should be dismissed.

Presently, Bank of America is facing a new whistleblower lawsuit, filed by a relator heavily involved in the mortgage industry and apparently relying on first-hand information of fraud involving inflated home appraisals. According to his recently-unsealed petition, plaintiff Brian Hastings alleges that Bank of America fraudulently procured federally-backed mortgage insurance by submitting mortgages to the FHA based on inflated home appraisals. The relator alleges that this fact pattern, while related to the issues addressed by the 2012 settlement, represents a separate and distinct pattern of fraud that should not have been released by the agreement. The petition also alleges a fraudulent fee scheme involving down payment gifts, which are offered by the federal government for homebuyers who are unable to come up with down payments for their residential real estate purchase. The U.S. government decided to intervene in this case and recently stated that, “Despite their cognizance of the ineligibility, the defendants proceeded to originate [Federal Housing Administration] mortgage loans for transactions involving fraudulent down payment gift programs which generate gift funds through sales price manipulation….”

Bank of America has taken quite a different approach, arguing in its motion to dismiss that the 2012 release freed it and all its subsidiaries or affiliates from any and all liability arising out of any transaction between Bank of America and the FHA involving mortgage insurance. It further argues that any fee agreement involving down payment assistance is similarly covered by the release in the event it exposes the bank to liability.

Conclusion

It will be interesting to see how these newly-unsealed allegations against Bank of America pan out, as a refusal by the judge to grant the motion to dismiss could potentially expose Bank of America to additional claims presumably not covered by the 2012 settlement and release. As well, this case should signify to anyone considering a whistleblower lawsuit that a release does not necessary absolve a company from any and all fraudulent conduct and a lawsuit could bring new allegations to light against which the company must defend.

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