A private mortgage bank has agreed to pay the United States $70 million to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that failed to comply with certain FHA origination, underwriting and quality control requirements. Among other things, the bank employed unqualified junior underwriters to perform important underwriting functions; set high quotas for its underwriters and subjected underwriters to discipline if they did not meet their quotas; and sought to incentivize the production of loans by offering bonuses to its FHA underwriters. According to the U.S. government, the bank falsely certified that its loans met HUD’s requirements, resulting in the FHA insuring hundreds of deficient loans and suffering substantial losses when it later paid insurance claims on those loans. The government further alleged that although the bank’s internal audits showed substantial percentages of seriously deficient loans, it failed to report the vast majority of those deficiencies to HUD. 

This case is just the latest in a series of widely-reported FCA cases the Department of Justice (DOJ) has brought as part of its crackdown against lenders it believes contributed to the collapse of the housing and financial markets by originating high-risk mortgage loans that should not have been made, insured or sold. 

The DOJ’s efforts have resulted in significant settlements against a number of these lenders in cases alleging false certifications to HUD in connection with loan origination and underwriting practices. Most recently, a $29.6 million settlement against Walter Investment Management Corp. in September resolving charges that the company’s subsidiaries submitted false reverse mortgage claims to HUD, and a $212.5 million settlement against First Tennessee Bank in June 2015 resolving allegations that it violated the FCA by certifying FHA-insured mortgage loans that did not meet HUD’s underwriting requirements. In April 2015, the DOJ brought suit against Quicken Loans for allegedly improper origination and underwriting of FHA-backed mortgages, but that case has yet to be resolved. 

Although the aftermath of the 2008 financial crisis saw several nine and ten figure FCA payouts from the large financial institutions, regional and midsize banks are increasingly facing federal scrutiny for their role in the burst of the housing bubble as the DOJ continues its aggressive pursuit of lenders, large or small, who knowingly originated substandard home loans in the run-up to the mortgage meltdown.