In the last several years, an increased number of financial institutions have been the subject of mortgage fraud lawsuits brought by the United State government under the federal False Claims Act. This trend specifically involves Federal Housing Authority (“FHA”) mortgage lenders.
As the world’s largest mortgage insurer, the FHA backs mortgage loans for certain creditors who may not otherwise meet “conventional” underwriting criteria. As these particular mortgage loans are insured by the FHA, financial institutions are more likely to lend money to borrowers since they are protected if the loan ultimately defaults.
FHA Mortgage Lender Requirements
The FHA’s Direct Endorsement Lender program gives qualified private mortgage brokers the ability to endorse mortgage loans that qualify for FHA insurance. While this gives lenders a great deal of authority, they must follow strict guidelines in the process. Lenders are required to complete a thorough review of each application, ensuring each application is in strict compliance with rules and regulations set forth by the Department of Housing and Urban Development (“HUD”).
Under the FHA Direct Endorsement Lender program, each mortgage lender must independently conduct specific “due diligence” for each and every home loan application and follow a meticulous quality control plan. In addition, the lender must submit an obligatory loan certification, stating that the specific home loan is in compliance with all applicable rules and regulations. These requirements are meant to instill a sense of overall compliance among all FHA mortgage lenders.
Mortgage Lenders Charged With False Claims Act Violations
In 2008, the real estate market crashed, causing a massive ripple effect across the nation. The main culprit behind this crash was sub-prime mortgage lenders. In a major effort to increase portfolios and revenue, lenders wrote thousands of home loans that never should have been approved. Loans were handed out to people who were unqualified, with no means of repaying the debt. As the mortgage loans were insured by the federal government’s FHA program, lenders were not responsible for the debts once in default.
HUD released a report in November 2012 stating that FHA loans which were insured between 2007 and 2009 expected to see monetary losses of up to $70 billion. The three largest FHA loan originators, Bank of America, JP Morgan and Wells Fargo Corporation, held approximately $112 billion or 10% of all FHA insured loans. With mortgage fraud running rampant among lenders, the federal government decided it was time to intervene.
Deutsche Bank Mortgage Fraud Lawsuit
One of the first high-profile mortgage fraud cases brought under the False Claims Act was against Deutsche Bank. The False Claims Act lawsuit was filed in 2011, alleging the financial institution was guilty of mortgage fraud as a result of blatant noncompliance and a disturbing pattern of problems related to mortgage loan underwriting. Deutsche Bank failed to comply with vital quality control requirements including false and fraudulent certification that individual loans met HUD rules, fraudulent certification that mortgage loans were eligible for FHA insurance and submission of false annual compliance certifications.
Once the Deutsche Bank mortgage loans went into default, the FHA was forced to pay more than $368 million for insurance claims. In the False Claims Act lawsuit brought against the lender, the United States sought treble damages and civil penalties totaling more than $1 billion, along with seeking damages for potential future claims. Deutsche Bank ultimately elected to settle the mortgage fraud lawsuit, agreeing to pay the government $202 million.
Wells Fargo and Bank of America Mortgage Fraud Lawsuits
Capitalizing on momentum created by the Deutsche Bank settlement, the government decided to bring a similar suit against Wells Fargo in 2012. Again using the False Claims Act as its tool, the government filed a mortgage fraud lawsuit against Wells Fargo for its reckless origination and underwriting of federally insured FHA home loans. The government claimed that Wells Fargo concealed the true condition of 6,320 loans that were insured by FHA, shielding the bank from having to pay HUD approximately $190 million to indemnify some of the FHA insurance coverage on the fraudulent loans.
The government also filed a $1 billion mortgage fraud lawsuit against lending giant Bank of America in 2012, alleging the bank committed fraud by selling bogus mortgages from a program known within the bank as “the Hustle.” These Bank of America mortgages were purchased by government-backed mortgage finance firms Fannie Mae and Freddie Mac, resulting in more than $1 billion of losses for American taxpayers and a countless number of home foreclosures.
The False Claims Act Outlook for Mortgage Lenders
While the first targets were mortgage giants within the industry, the federal government has recently decided to use the False Claims Act to go after smaller financial institutions. The emerging pattern seems to be that, with larger mortgage lenders being found liable, small lenders can be held accountable as well. In fact, some recent False Claims Act suits are being brought not due to unqualified FHA loans, but for allegations of technical and procedural misconduct.
False Claims Act lawsuits previously filed against larger mortgage lenders serve as examples, showing other financial institutions that the government stands prepared to pursue the trend of mortgage fraud litigation. Combined with the financial incentives for whistleblowers who come forward with potential knowledge of mortgage fraud, lenders should now understand that fraudulent activity will not be tolerated.