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False Claims Act Statistics, News & Analysis

Rare FCA Jury Verdict Finds $92 Million in Damages Caused by "Shadow" Mortgage Offices and Reckless Underwriting Policies

A Houston federal jury in United States v. Allied Home Mortgage Corporation, et al., 4:12-cv-02676-GCH (S.D. Tex.) returned a verdict on November 30 in favor of the government on all counts, finding two mortgage brokers and their CEO liable for over $92 million in damages for violations of the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). The government started off its fiscal year 2017 of FCA recoveries with this huge victory before a jury, at a time when FCA jury trials are becoming increasingly rare. The hefty damages figure here could balloon much further yet: Factoring in potential treble damages and penalties under the FCA, the FCA price tag alone could hover close to $300 million. And adding FIRREA penalties to the mix could potentially push the total to $1 billion or more. The verdict hit the crescendo in a more than five-year litigation battle and five-week trial against defendants Americus Mortgage Corp. (formerly Allied Home Mortgage Capital Corporation or “Allied Capital”) and AllQuest Home Mortgage Corp. (formerly Allied Home Mortgage Corporation or “Allied Corporation”) (collectively “Allied”) and their president and CEO, Jim C. Hodge.

In this intervened qui tam, the government’s allegations detailed Allied’s fraudulent conduct while participating in the Federal Housing Administration’s (“FHA”) mortgage insurance program, under the U.S. Department of Housing and Urban Development (“HUD”).

HUD, through the FHA, offers mortgage insurance programs that insure approved lenders against losses on defaulted home mortgage loans. As we have detailed before on the blog, HUD and FHA impose strict underwriting and quality control requirements on participating lenders and failure to comply with these requirements can give rise to FCA liability. Here, HUD had authorized Allied Corporation to underwrite and fund FHA mortgages originated by Allied Capital on behalf of HUD.

1. "Shadow" Branch Allegations.

HUD required Allied Capital to report and obtain HUD approval for each Allied Capital branch originating FHA loans. Hodge and Allied Capital failed to comply, instead operating 100 or so branch offices (dubbed “shadow” branches”) that originated FHA loans using other approved branches' ID numbers. Based on this conduct, the jury found Allied Capital and Hodge responsible for submission of 103 false claims under the FCA that resulted in $7.3 million in damages when loans originating from the “shadow” branches defaulted.

2. Reckless Underwriting Allegations.

HUD rules required Allied Corporation to certify that it underwrote each of its FHA-insured mortgage loans according to HUD’s guidelines. The jury found that on 1,192 occasions, however, Allied Corporation knowingly represented to HUD that certain FHA-insured loans had been diligently underwritten and were eligible for FHA insurance when, in fact, they were not. The jury found that FHA sustained more than $86.6 million in losses when the fraudulently underwritten loans defaulted.

3. FIRREA Allegations.

The jury also found that Allied and Hodge violated FIRREA by submitting false quality control documents and false certifications to HUD. FIRREA authorizes a penalty of up to $1.1 million for each of the defendants’ violations, and the jury verdict appears to find at least 1,192 unique FIRREA violations. Combined with the FCA penalties of $5,500 to $11,000 for each violation (penalties applicable to FCA violations that occurred prior to November 2, 2015) and mandatory trebling of the $92 million in FCA damages, the total damages award against the defendants could approach (or even exceed) $1 billion.

4. Post-Trial Argument.

The government will likely have to defend the jury’s verdict against the renewed defendants’ motion for judgment as a matter of law that is expected to be filed early in the New Year. Defendants first moved for judgment as a matter of law at the close of trial, attacking the government’s evidence on scienter, materiality, and causation under the FCA, as well as its proof on the FIRREA allegations, and the court took that motion under advisement. The parties recently submitted a joint briefing schedule that contemplates briefing to close in March 2017 on a renewed defendants’ motion for judgment as a matter of law.

In their motion, defendants first argued that the government’s “reckless underwriting” theory fails because the government did not show that defendants knowingly breached a mortgage industry duty of care when they underwrote FHA-insured loans that later defaulted. Second, regarding materiality, defendants argued that the “shadow branch” certifications and underwriting policies were not material to the government’s decision to insure the loans that ultimately defaulted. Defendants’ arguments on this point included pointing to a statutorily authorized range of other remedies HUD could have pursued against Allied, and also to evidence that HUD employees did not review the branch and underwriting policy certifications before insuring loans, as demonstrating that the false statements were not material to HUD’s decision to insure the loans. Third, defendants argued that, even assuming violations of the law, the government failed to show that the defaulted loan losses were caused by the false claims, rather than poor economic conditions. 

The parties will likely file their post-trial pleadings in the coming months. We will monitor the docket for post-trial briefing activity and will report back with any breaking news.

Disclosure: V&E is among the counsel to a former Allied employee who was a defendant in this case and settled prior to trial.



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Authors

Crystal Y'Barbo Stapley

Crystal Y'Barbo Stapley Senior Associate

Daniel T. Wallmuth

Daniel T. Wallmuth Associate