Massive Mortgage Fraud Scheme Ends in FCA Action Against Lender

The United States Department of Justice previously announced it was filing a False Claims Act lawsuit against one of the nation’s largest privately held mortgage brokers after more than a decade of fraudulent lending practices. Allied Home Mortgage Corporation, along with two of its officers, are facing allegations they cost the government hundreds of millions of dollars and caused thousands of American homeowners to lose their homes. The government alleged that Allied made massive profits via mortgage loans, all the while violating the very rules meant to protect the U.S. Department of Housing and Urban Development (HUD) insurance fund.

Allied Home Mortgage Corporation allegedly deceived HUD for years by originating mortgage loans out of hundreds of “shadow” branches that were never approved. According to the government, as a result of Allied’s fraudulent lending scheme, over 30 percent of the 112,324 federally insured mortgages it originated in the last ten years are in default, leaving more than $834 million in insurance claims to be paid by the U.S. Department of Housing and Urban Development (HUD). The lawsuit went on to allege that Allied’s default rate climbed to a massive 55 percent during 2006 and 2007, which cost HUD another $170 million in failed loans. It is estimated that an additional 2,509 loans are now in default and HUD could face an astounding $363 million in additional claims.

The Allegations of Mortgage Fraud

The government’s official compliant contains nine counts. It claims that Allied, its CEO Jim Hodge and executive vice president and compliance director Jeanne Stell knowingly participated in a massive mortgage fraud scheme. The three defendants are accused of defrauding both the government and the United States taxpayers by intentionally submitting false and fraudulent loan certifications to HUD by originating Federal Housing Authority (FHA) mortgage loans from unapproved company branches. In addition to these accusations, the three are charged with:

• Making false statements to HUD
• Submitting false and fraudulent annual certifications to HUD
• Sending false branch certifications to HUD
• Violating the federal False Claims Act
• Making false and fraudulent loan certifications to HUD

The complaint states that, under the express direction of CEO Jim Hodge, Allied knowingly and willingly engaged in over a decade of deceptive lending practices. It goes on to say that Allied made every attempt to “evade regulatory scrutiny, and, when confronted, lying to protect its profitable position in the FHA mortgage market.”

The government contends that Allied was able to continue with the mortgage fraud scheme for over a decade due, in part, to the way Hodge ran the company. He allegedly monitored and intimidated senior managers and other Allied employees, pushing them to comply with the mortgage fraud scheme and approve egregious numbers of bogus HUD loans. For example, Hodge, who owns 99 percent of Allied, forced his employees to sign extremely broad confidentiality agreements in an act of intimidation. He even sued several former Allied employees for what he perceived as a slight breach of information. One of the lawsuits included a former Allied tax manager who was sued for simply speaking to the IRS.

Allied is also accused of running hundreds of “shadow” branches around the country. These unapproved branch offices were able to originate FHA loans, then deceive HUD into approving mortgage loan applications. This was done by using the ID number of a real HUD-approved branch office on each mortgage loan application.  As a result, the shadow branches could not be audited by HUD, which means the fraudulent branch’s default rate was disguised by the default rate of the real HUD-approved branch whose ID number they were using.

The government also alleged that Allied’s quality control within over 600 branches was either “dysfunctional or entirely nonexistent.” Allied allegedly provided false certification that it was in compliance with HUD requirements and maintaining financial and supervisory control over each branch. However, in reality, the branch offices were not being overseen by Allied, as the mortgage lender stood to lose very little in the mortgage fraud scheme.

The mortgage fraud within Allied was originally revealed thanks to a qui tam whistleblower complaint. Peter Belli, a former Allied branch manager, consulted with a False Claims Act attorney and chose to file his own qui tam action. The government later joined Belli and several other mortgage fraud whistleblowers in claiming that Allied lied about its compliance with HUD regulations.

The government is asking for at least 2.5 billion in its lawsuit, stating that Allied fraudulently misled the government to believe its loans had been through a quality control process and qualified for federal insurance. The civil mortgage fraud suit also seeks treble damages under the federal False Claims Act, civil fines and a permanent ban against making any FHA loans from shadow branches.

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