Consumer Finance Insights
December 12, 2018

DOJ Announces $14.5 Million Settlement in False Claims Act Suit Against FHA Lender

On December 12, 2018, the U.S. Department of Justice announced a $14.5 million settlement of a whistleblower suit alleging False Claims Act violations against a lender who endorsed loans for insurance by the Federal Housing Administration (“FHA”).  The settlement resolves an investigation triggered by a qui tam lawsuit filed by a former employee of the lender alleging that between January 1, 2007 and December 31, 2014, the lender falsely certified, through the FHA’s Direct Endorsement program, that certain loans were underwritten in compliance with Department of Housing and Urban Development (“HUD”) underwriting guidelines; failed to maintain a quality control  program that complied with the quality control requirements established by HUD, including by failing to audit all early payment default loans; and failed to self-report loans identified by auditors as violating HUD underwriting guidelines.  The lender has admitted to the “covered conduct” described in the settlement agreement, but has not admitted to liability.

According to the complaint, the relator alleged that the lender improperly underwrote loans for FHA insurance by intentionally miscalculating or misrepresenting borrowers’ income or debt obligations; manipulating the automated underwriting system to obtain an “Accept/Approve” rating; ignoring warning signs of fraud; and failing to provide underwriters training and feedback on underwriting errors.  As part of the settlement agreement, the lender admitted that it certified for FHA mortgage insurance certain loans that did not meet HUD requirements and were therefore not eligible for insurance.

Under the terms of the settlement agreement, the lender will furnish to the United States complete copies of all documents regarding the covered conduct, and has agreed to cooperate fully with any investigation by the United States of its underwriting and origination of FHA loans during the relevant time period.  The United States will receive from the lender $12,107,500 ($7.23 million of which is restitution), and the whistleblower will receive $2,392,500.  The lender has also agreed to pay reasonable expenses and attorney’s fees.