April 18, 2018 Loan Fraud
False Claims Act Liability and Fraudulent Applications for Federally Guaranteed Loans
Is there False Claims Act liability regarding fraudulent applications for federally guaranteed loans where:
- there are no defaults on those loans after the government guarantees them;
- the government is not required to expend any funds in support of those guarantees; or
- the government is otherwise not financially harmed?
The question arises, for example, when mortgage lenders file false applications for loan insurance from the Federal Housing Administration (“FHA”) or the Department of Veterans Affairs (“VA”), or when the U.S. Department of Energy (“DOE”) guarantees loans under false pretenses for certain renewable energy projects under the American Recovery and Reinvestment Act of 2009.
There exists an ample body of case law involving FCA claims arising out of fraudulent applications for federally guaranteed loans. Click here to learn more about the False Claims Act.
U.S. v. McNinch, 356 U.S. 595 (1958): Government Guaranteed Loans & Mortgages Under the False Claims Act
In the Supreme Court’s first look at government guaranteed loans under the FCA, U.S. v. McNinch, 356 U.S. 595 (1958), the government sought to impose liability on a home improvement company that had caused several lenders to file false applications for loan insurance from the FHA.
No default had yet occurred on the loans in question, and the Court concluded that “a lending institution’s application for credit insurance under the FHA program [was] not a ‘claim’ as that term is used in the False Claims Act.” Id. at 598.
The Court expressly left open the question of “whether a lending institution’s demand for reimbursement on a defaulted loan originally procured by a fraudulent application would be a ‘claim’ covered by the [Act].” Id. at 599 n. 6.
United States v. Veneziale, 268 F.2d 504 (3d Cir.1959)
In United States v. Veneziale, 268 F.2d 504 (3d Cir.1959), the Third Circuit took up the question reserved by the Supreme Court in McNinch. The circuit court held that the United States was entitled to relief under the FCA where the defendant caused a couple to make a fraudulent application for an FHA guaranteed loan that later went into default. Id. at 506.
The fraudulent loan application, which “falsely represented that the loan was wanted for home improvements” when in fact it was used to purchase real property from the defendant, “became one of the essential documents which induced the [FHA] to guarantee payment of the bank loan.” Id. at 504.
The circuit court reasoned that “the wrong of the defendant was an important, even an essential factor in subjecting the government to an enforceable demand for money.” Id. at 505. The fact that the guaranty obligated the government to make payment to an innocent third party was no barrier to FCA liability. Id.
The claim was still “grounded in fraud” in that “a fraudulent misrepresentation induced the government to assume the obligation which it has had to perform.” Id. at 506. Thus, the defendant’s fraud in inducing the government to guaranty the loan ripened into a FCA violation when the loan later went into default and the government was required to honor the guaranty. Id.
Other Fraudulent Applications for Federally Guaranteed Loans False Claims Act Cases
Other circuit courts have followed suit, finding a viable FCA claim in situations where the defendant fraudulently submitted the paperwork necessary to obtain a government assurance and a subsequent default on the loan resulted in the government’s expenditure of funds. See:
- United States v. Ekelman & Assocs., Inc., 532 F.2d 545, 550-51 (6th Cir.1976) (where defendants caused veterans to submit false applications for VA and FHA guaranteed mortgages, “no cause of action arose under the [FCA] until the mortgage holder presented a claim to the VA or FHA for payment on the guaranty”);
- United States v. Rivera, 55 F.3d 703, 707 (1st Cir.1995) (a lender’s claim on the falsely obtained guaranty “in effect completes the perpetrator’s violation of the FCA”); and
- United States v. Van Oosterhout, 96 F.3d 1491, 1494 (D.C.Cir.1996) ( “It is generally accepted that the false application for a guaranteed loan by the debtor establishes only an ‘inchoate’ violation of the Act that does not ripen into a claim actionable under the statute until a later event of legal consequence between the lender and the government…. [A]n actual payment to the lender qualifies as the event that effectuates the ‘claim’ for the government has ‘disbursed funds.’ “) (citing United States v. McNinch, 356 U.S. 595, 599 (1958)).
The government creates subsidized or guaranteed lending programs with a particular public purpose – e.g., to encourage lending to first-time homebuyers, reduce borrowing costs for veterans, or promote the development and use of sustainable energy.
Although a fraudulent application or certification used to obtain a government guarantee of a loan in contravention of this public purpose does not result in an immediate financial drain on the federal government, it does result in the government taking on an obligation to expend funds if the loan goes into default.
Thus, the initial fraudulent conduct in obtaining a government guaranty creates an inchoate FCA violation that becomes choate if and when a loan subsequently goes into default and results in a demand for government payment. See Rivera, 55 F.3d at 707; see also U.S. ex rel. Bibby v. Wells Fargo Bank, N.A., 906 F. Supp. 2d 1288, 1295-97 (N.D. Ga. 2012) (in a qui tam action alleging that lenders violated the FCA by engaging in a fraudulent scheme to overcharge veterans on closing costs during origination of loans under Department of Veterans Affairs (VA) loan refinancing program, the court held that Relators properly pled violations of 31 U.S.C. § 3729(a)(2) because “Relators have alleged a specific example loan for Defendant where Defendant’s false certifications resulted in the government’s payment of amounts it did not owe, as each of these loans resulted in foreclosure.”)
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