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False Claims Act Statistics, News & Analysis

Home Sweet Home: FHA Mortgage Insurance Carries Heavy False Claims Act Risks for Mortgage Originators

Banks are no strangers to complex regulatory schemes and close government scrutiny. That is especially true for banks originating and underwriting mortgages insured by the Federal Housing Administration (FHA), a sub-agency of the Department of Housing and Urban Development (HUD). FHA issues mortgage default insurance to lenders for more than a third of mortgages issued each year, but imposes very specific underwriting and quality control measures upon loan originators seeking FHA insurance. The scrutiny is even greater for mortgage originators authorized to issue the insurance without FHA approval. What might surprise these mortgage lenders, however, is that even seemingly small deviations from those FHA insurance underwriting rules can lead to substantial FCA liability—liability potentially larger than the value of the mortgage defaults the lender seeks to cover through FHA insurance.

Regions Bank recently agreed to settle FCA claims with the government for $52 million. Regions, a large Alabama-based bank, was permitted by FHA to directly originate, underwrite, and endorse mortgages for FHA insurance without FHA review (direct endorsement or DE). The government alleged Regions' underwriting program was deficient. Allegations include:

  1. Regions’ mortgage underwriting quality control team reviewed too few mortgages to detect deficient mortgage underwriting with the statistical precision mandated by the agency’s handbook; 
  2. When Regions’ quality control department detected missing documentation in a mortgage’s underwriting package, Regions would improperly “cure” the defect by obtaining the missing paperwork and then report a deceptively low post-“cure” defective underwriting rate to senior management;
  3. Regions did not review all mortgages under six months old that became more than 60 days past-due on payments, as it was required to do, but rather only those that were 90 days past due and had not been sold to another mortgage servicer; and
  4. Regions did not self-report deficient mortgage underwriting it detected to FHA.

The government’s theory of damages was that because of Regions’ conduct and omissions, FHA insured loans it would not have insured, and for some of those improperly insured loans, FHA had to pay claims for defaulted mortgages. Thus, the government sought to recover the value of the insurance claims it had paid on those defaulted mortgages.

To fit the government’s factual allegation into the FCA requires some imagination. For instance, it is unclear how the government planned to show that Regions acted knowingly, since at least one of its factual allegations contends that Regions’ senior management received inaccurate information about rates of defective mortgage underwriting. There is also the question of whether a court would have found some of the alleged conduct material to FHA’s decision to issue the insurance and pay the claim. After all, FHA’s program itself recognizes that there is an error rate greater than zero even in an ideal quality control program, and that FHA will pay insurance claims for defectively underwritten mortgages.

Defendant   Recovery Amount  Recovery Date  Alleged FCA Conduct
Franklin American Mortgage Company $70,000,000 12/2/2015 Non-compliance with FHA and Home Affordable Modification Program (HAMP) rules
       
Freedom Mortgage $113,000,000 4/15/2016 Non-compliance with FHA direct endorsement rules
       
M&T Bank Corp. $64,000,000 5/13/2016 Non-compliance with FHA direct endorsement rules
       
Ocwen Financial Corp. $15,000,000 6/22/2016 Non-compliance with FHA direct endorsement rules
       
Regions Bank $52,000,000 9/13/2016  Non-compliance with FHA direct endorsement rules
       
Total $314,000,000     

 

That mortgage originators issuing FHA insured loans, and particularly those with the ability to directly endorse FHA insurance, face real risk under the FCA is made even clearer by the fact that four other mortgage lenders have settled FCA cases this year alone. Those lenders, including Regions, have paid out a combined total of $314 million. Confronting complicated regulatory requirements that invite missteps by even sophisticated lenders, and with DOJ laser focused on the mortgage industry and FHA lenders, compliance and quality control employees at mortgage originators should be on high alert. In a world where even minor deviations from FHA procedures risks damages potentially equal to more than the cost of absorbing the risk of a mortgage default without FHA insurance, caution is the word.



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Author

Amy Lamoureux Riella

Amy Lamoureux Riella Partner