In another case involving costly mortgage fraud, Cincinnati-based Fifth Third Bancorp recently settled False Claims Act allegations for $85 million.[1. United States Attorney’s Office Southern District of New York. “Manhattan U.S. Attorney Announces $85 Million Settlement With Fifth Third Bancorp Over Failures To Self-Report Defective Mortgage Loans To FHA.” Justice.gov. http://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-85-million-settlement-fifth-third-bancorp-over-failures (Retrieved October 13, 2015).] In a press release published by the Department of Justice, prolific U.S. Attorney Preet Bharara announced that the bank had unlawfully certified as many as 1,400 residential home loans as eligible for mortgage insurance through the Federal Housing Administration (“FHA”) when, in fact, the home loans and borrowers did not meet lending criteria for an FHA insured loan. When a large majority of these loans defaulted, the government was left with millions of dollars in mortgage insurance payouts to cover, which in turn triggered an investigation and eventual liability under the False Claims Act.
HUD’s Direct Endorsement Lender program
To better understand the residential mortgage fraud phenomenon, it helps to review the process through which borrowers and lenders secure backing through the FHA, a sub-agency of the Department of Housing and Urban Development (HUD).[2. Stempel, Jonathon. “UPDATE 2-Fifth Third in $85 mln mortgage fraud settlement.” Reuters.com. http://www.reuters.com/article/2015/10/06/fifth-third-banc-settlement-idUSL1N1261VE20151006 (Retrieved October 14, 2015).]In an effort to boost home ownership while still alleviating the administrative burden of reviewing every application, HUD set up a Direct Endorsement Lender program that relies on the due diligence of private sector banks to adequately review applicants’ criteria and ensure creditworthiness. Once a Direct Endorsement Lender “signs off” that a borrower fits the eligibility criteria, HUD will execute an insurance policy to protect the bank from the costs and losses associated with default under the assumption that the borrower presents a low risk of default.
Fifth Third allegedly approved ineligible mortgages
As a certified Direct Endorsement Lender, Fifth Third is alleged to have unlawfully certified 1,400 residential home loans as eligible for FHA insurance coverage despite major problems with the applicants’ income and credit histories. According to the press release, Fifth Third discovered through random compliance reviews that hundreds of files contained “material defects” and should have never been approved for FHA insurance. Following this review, the bank voluntarily disclosed the errors and admitted responsibility for the following:
-Failure to report known deficiencies within 60 days of discovery;
-Failure to reveal on annual compliance certifications the existence of known material deficiencies with mortgages;
-Failure to report 1,423 deficient mortgages that were discovered during the post-closing review process, and;
-Failure to report deficiencies in a timely manner as required by federal law.
A Special Investigator General for the Troubled Asset Relief Program said in a statement, “Before and during the time Fifth Third was bailed out in TARP, its Quality Control employees made false representations to HUD that residential mortgages the bank originated were of the quality required to be insured by HUD. The bank’s false representations cost HUD millions of dollars to pay insurance claims on 519 of the materially defective loans that later defaulted. Fifth Third’s actions to fire those employees, voluntarily disclose its violations of the False Claims Act and FIRREA to law enforcement, and make corporate changes should stand as an example for others who violated the law….”
Contact a whistleblower attorney for more information
If you are aware of mortgage fraud or believe your lender may be engaging in similar misconduct, please do not hesitate to contact Berger Montague today.