On November 30, 2016, the U.S. Attorney for the Southern District of Texas announced that a federal jury in the Southern District of Texas issued a verdict finding several related mortgage companies and their CEO liable in connection with their participation in the Federal Housing Administration (FHA) mortgage insurance program. The verdicts were the result of a five-week trial in which the government alleged that the defendants violated the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
The jury’s verdict awarded $92,982,775 in damages, including $7,370,132 against the CEO individually. Pursuant to the FCA, those damages are subject to trebling. The court will also impose a mandatory penalty of $5,500 to $11,000 per violation, in addition to FIRREA statutory penalties. U.S. District Judge George C. Hanks, Jr. will determine the total penalties and damages at a later date.
The Government alleged, and the jury concluded, that defendants violated various FHA guidelines and requirements in originating FHA loans (reckless underwriting) and in certifying compliance with the FHA program (annual certifications).
As to the annual certification claims, the Government argued that defendants originated FHA loans from “shadow branches” that were not approved by the Department of Housing and Urban Development (HUD), and deliberately concealed the use of FHA IDs for other branches. The Government further alleged that defendants failed to pay operating expenses for FHA branch offices, understaffed and used unqualified individuals for the QC of its 600 branches, and concealed prior sanctions and convictions of employees. The jury determined that these actions resulted in $7,370,132 losses to HUD, affecting 103 loans.
As to the reckless underwriting claims, the Government argued that defendants failed to engage in due diligence and manipulated borrower data, resulting in false certifications of underwriting compliance and subsequent defaults on those loans. The jury found that this conduct resulted in $85,612,643 in losses to HUD.
The case, which began as a qui tam whistleblower suit in the U.S. District for the Southern District of New York (SDNY), was transferred to the Southern District of Texas in 2012. The investigation and trial was part of a joint effort between U.S. attorneys for the Southern District of Texas and the SDNY. HUD and HUD’s Office of Inspector General also participated in the investigation.