After being charged with fraudulent mortgage origination activities, a Georgia-based home builder and mortgage lender have agreed to settle a False Claims Act lawsuit. Beazer Homes USA Inc. and Beazer Mortgage Corporation have agreed to pay the government $5 million, plus contingent payments of up to $48 million.
Headquartered in Atlanta, Beazer designs, sells and builds single-family homes in at least 21 states around the country. They also provide mortgage origination and title insurance services to homebuyers. The charges and resulting settlement relate to a mortgage fraud scheme that Beazer hoped would net increased revenues for the company. In addition to the settlement, Beazer also entered into a Deferred Prosecution Agreement (DPA) with the United States Attorney’s Office for the Western District of North Carolina. The DPA provides restitution for the private homeowners and the Federal Housing Authority (FHA), who were both victimized in the mortgage fraud scheme. Per the terms of the agreement, Beazer took responsibility for and admitted to multiple incidents of mortgage fraud origination and accounting practices.
Charges of Mortgage Fraud
The False Claims Act lawsuit filed against Beazer alleged that the company, along with some of its officers and directors, violated the Securities Exchange Act of 1934. Beazer issued false and fraudulent statements about its business and prospects. It also failed to disclose vital information to investors, such as the fact that the company did not follow the proper FHA mortgage loan origination practices.
Beazer approved hundreds of federally insured mortgage loans to low-income borrowers, all the while knowing that applicants did not meet the qualifications to obtain a loan. This lead to numerous foreclosures and other financial problems. Unqualified home buyers entered into FHA mortgages and, as a result, many of them defaulted. In fact, most borrowers were unable to pay back their mortgage loans after the first two years. When the loans went into default status, the FHA was forced to pay mortgage insurance claims. In addition, the FHA was wrongfully forced to pay on inflated insurance claims and pay for the management, maintenance, rehabilitation and marketing of defaulted properties.
Even as the company began to see a shocking increase in loan defaults and home foreclosures, Beazer’s business was growing by leaps and bounds. The growth was, in large part, due to its improper lending practices to low-income borrowers. Despite the obvious red flags surrounding Beazer’s lending practices, they still provided investors with fraudulent projections for 2007 revenue and sales. As a result, Beazer stock traded at false and inflated prices, reaching an astounding $48 per share as of December 2006. Due to the mortgage fraud scheme and fraudulent company projections, Beazer, its CEO and CFO were able to sell more than $9.7 million of company stock.
Mortgage Fraud Exposé
On March 18, 2007, Beazer’s lending practices were the subject of a four-part expose’ in The Charlotte Observer newspaper. The report stated that federal housing officials were in the process of investigating whether Beazer had followed the rules when obtaining federally backed mortgage loans for buyers in its subdivisions.
When Beazer Mortgage Corporation agreed to originate FHA insured mortgage loans for the purchase of homes built by Beazer Homes USA, the companies fraudulently and improperly:
- Forced applicants to pay “interest discount points” at closing, but ultimately kept the money and refused to reduce interest rates
- Gave borrowers cash “gifts” through charities, ensuring applicants could come up with the required minimum down payments
- Assured applicants that the cash “gift” would not have to be repaid, then increased the total home purchase price to offset the cash amount of the gift
- Went to great lengths in hiding which branches originated the defaulting mortgage loans in an attempt to avoid garnering attention from the FHA for excessive default rates
As a result of the settlement, Beazer admitted to participating in several fraudulent mortgage fraud schemes. Beazer immediately agreed to pay $10 million toward restitution for victimized home-buyers. They will pay additional money, up to $48 million, into the national restitution fund. Any money left unclaimed by victims in the national restitution fund (after the expiration of the agreement) will go to the FHA.
Mortgage Fraud and the False Claims Act
The federal False Claims Act protects money that is used to support affordable housing or cover defaults on federally insured mortgage loans. Cases can originate in two ways: The Justice Department can initiate its own investigation of a company’s fraudulent activity, or, more often, the government is tipped off by a whistleblower. After consulting with an experienced False Claims Act attorney, private citizens can sue a company on the government’s behalf under the “qui tam” provisions. Citizens must be represented by a False Claims Act attorney in order to bring a qui tam action. If successful, a whistleblower is eligible to receive up to 30 percent of the government’s recovery.
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