On June 1, 2015, the Department of Justice (DOJ) announced that First Tennessee Bank NA, headquartered in in Memphis, TN, has agreed to pay the U.S. Government $212.5 million to resolve allegations that it violated the False Claims Act (FCA) by certifying mortgage loans insured by the U.S. Department of Housing and Urban Development (HUD) Federal Housing Administration (FHA) – mortgages that allegedly did not meet HUD’s underwriting requirements.

FHA’s program gives qualifying lenders, such as Tennessee Bank, the incentive to loan low income creditworthy borrowers money to purchase a home – loans that are then insured by FHA in case of unforeseen circumstances that may cause the loan to go into default.  Since 1934, the FHA has insured over 34 million loans through HUD, allowing lenders to insure loans for borrowers that have less than perfect credit. Loan guidelines, including debt-to-income ratios, specific credit requirements, and maximum loan amounts, were created by the FHA to protect the borrower and the lender.  However, the government claims that Tennessee Bank repeatedly neglected to adhere to these guidelines.

According to the lawsuit filed by the government, between January 2006 and October 2008, First Tennessee, through its subsidiary First Horizon Home Loans Corporation (First Horizon), allegedly claimed that mortgage loans it had approved qualified for FHA insurance coverage, when in fact these loans did not meet FHA’s guidelines.  Because First Horizon is a Direct Endorsement Lender (DEL), it has the authority to originate, underwrite and endorse mortgages for FHA insurance and these loans are not reviewed by either FHA or HUD.  Consequently, First Horizon created mortgages that it knew were high risk, submitted claims for reimbursement when these loans failed, and received insurance payments from HUD for these defaulted loans.  This alleged practice by First Horizon is a violation of the FCA and continues to cause negative repercussions on the borrowers, the government, and the tax payers.

This type of fraud has permeated the banking industry and to date, the U.S. Government has recovered billions of dollars from lenders that knowingly approve high risk loans and then looked to the government to recover from high risk debt.  For example, last year SunTrust agreed to a $968 million settlement of charges brought by federal and state regulators for unqualified mortgage loans — $500 million which went towards consumer relief to homeowners who were affected by these abusive mortgage practices.  Additionally, in February 2014, JPMorgan agreed to a settlement of $614 million and in December 2014, Bank of America agreed to pay the government $16.65 billion after it acquired Countrywide Financial for similar loan violations.