Mortgage fraud continues to plague the government’s anti-fraud task forces, notwithstanding the widespread 2008 economic downturn caused in part by various residential underwriting antics by big name lenders. Having apparently not learned the lesson, Nashville-based First Tennessee Bank recently settled similar claims of mortgage fraud for a whopping $212 million, making it one of the largest False Claims Act settlements so far this year.
The case was commenced by a joint investigative effort between the Civil Division of the Department of Justice, the U.S. Attorney’s Office for the Northern District of Georgia, HUD, and HUD’s Office of Inspector General. Unlike many of the other cases covered on our blog, this particular mortgage fraud lawsuit did not involve a whistleblower. However, it is not uncommon for cases like this to emerge due to the courageous efforts of a private whistleblower with firsthand knowledge of fraud at their place of employment.
Details of the Allegations Against First Tennessee Bank
Much like the recent mortgage fraud case involving MetLife, Inc., the False Claims Act lawsuit against First Tennessee involves allegations of using improper loan origination and underwriting procedures to falsely certify residential mortgages as fit for mortgage insurance. The Department of Housing and Urban Development (HUD) maintains a program through its Federal Housing Administration in which enrolled lending institutions can hedge their risks by obtaining government-backed insurance policies to protect against homeowner default. In return, FHA depends on the origination and underwriting services of the enrolled banks to weed out those applicants who present a heightened risk for default, and the program maintains strict compliance and eligibility standards for obtaining a policy.
For a period spanning between 2006 and 2008, First Tennessee admitted to falsely certifying loans as eligible for FHA coverage, when in fact the borrowers did not meet credit and income criteria. Beginning in 2007, the company amped up its FHA loan efforts even further, falsely certifying thousands of subprime loans as eligible for coverage. The bank admitted that from 2007-2008, the number of FHA loans closed increased significantly and congruently with the quality of its underwriting services.
In addition, the Bank admitted that as early as 2008, it was aware of serious deficiencies in its underwriting and quality control practices, yet failed to take the initiative to report these finds to the FHA as required under the terms of the partnership. Inevitably, hundreds of loans defaulted, resulting in massive payouts by FHA under loan insurance policies that never should have been issued in the first place.
The U.S. Attorney General’s Office said in a statement:
“First Tennessee’s reckless underwriting has resulted in significant losses of federal funds and was precisely the type of conduct that caused the financial crisis and housing market downturn….We will continue to hold accountable lenders who put profits before both their legal obligations and their customers, and restore wrongfully claimed funds to FHA and the treasury.”
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