In a recent case out of California, mortgage lender Reunion Mortgage, Inc. and its former affiliates have agreed to pay $1.04 million to settle allegations of False Claims Act violations.
The case originated pursuant to an investigation by the Department of Housing and Urban Development’s Civil Fraud Division and resulted in the discovery of several acts of misconduct, including violations of the Fair Debt Collection Practices Act.
The settlement represents an ongoing effort by federal and state authorities to curtail careless lending practices – which led to the residential mortgage crisis spurring the 2008 economic crisis.
Case Against Reunion Mortgage, Inc.
For many homebuyers, mortgage insurance is available through the Federal Housing Authority (“FHA”). FHA-backed mortgage insurance policies are issued only to qualified borrowers who meet certain eligibility and credit criteria.
According to federal laws, mortgage lenders are required to thoroughly review borrowers’ creditworthiness, income, and eligibility before certifying to the Department of Housing and Urban Development (“HUD”) that the borrowers should receive a policy.
Lenders who falsely certify a borrower as creditworthy without performing a thorough investigation into their income and assets could face liability under the False Claims Act for submitting a fraudulent claim to a government agency.
In the case against Reunion Mortgage, the complaint alleges that underwriters for the lending company failed to perform even basic due diligence when approving borrows for FHA loans.
Specifically, Reunion’s underwriting department did not verify income information, nor did it review the applicants’ ability to repay the loan balance. As a result, Reunion’s loans contained significant defects and did not comport with the strict underwriting standards required by HUD.
The submission of these loan documents to HUD, along with the certification by Reunion that borrowers met eligibility criteria, exposed the lender to False Claims Act liability for each fraudulent loan submission.
In an unrelated charge against now-defunct Reunion Mortgage, the government has alleged that the company made unlawful dividend payments to two executives, thereby rendering the company insolvent and unable to pay its debts to the U.S. government. The complaint against Reunion alleges this conduct violates the Federal Debt Collections Procedures Act.
Government’s Response & How You Can Help
In the wake of the 2008 residential mortgage crisis, several statutes and programs were set up to avoid a similar disaster in the future. U.S. Attorney Melinda Haag commented, “This Office is committed to holding lenders accountable for fraudulent and reckless underwriting of federally insured FHA home loans. The systematic abuse of the system will not be tolerated….”
Mortgage loan fraud is costly for all parties involved. Homeowners face the possibility of losing their homes, while HUD is forced to pay out on mortgage insurance policies. Ironically, even the lender stands to lose a great deal of value in a property in the event that property enters foreclosure.