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  • U.S. government, national bank parties enter $5 million False Claims Act settlement

    Courts

    On January 5, the U.S. Government reached a $5 million settlement with a national bank and its affiliates (together, the bank parties) to resolve a lawsuit concerning allegations that the bank parties violated the False Claims Act (FCA) by engaging in improper foreclosure-related practices. The settlement is not an admission of liability by the bank parties. Specifically, as previously covered in InfoBytes, the lawsuit primarily alleged that the bank parties knowingly used rubber-stamped surrogate signed endorsements and false mortgage assignments to support false claims for mortgage insurance from the Federal Housing Administration. The lawsuit also asserted a reverse FCA claim alleging that the bank parties made false statements when entering into the 2012 National Mortgage Settlement. The U.S. Government, the bank parties, and the relator who initially brought the suit stipulated to the dismissal with prejudice concerning 39 “Implied Certification and False Statement Claims,” along with all claims brought or that could have been brought by the relator, but without prejudice as to any other claims that could be brought by the U.S. Government. Under the terms of the settlement agreement, the bank parties are required to pay $3.4 million to the U.S. Government—$891,000 of which will be paid to the relator who originally brought the suit. In addition, the bank parties will pay the relator an additional $1.6 million in attorneys’ fees and litigation costs and expenses.

    Courts Foreclosure Mortgage Servicing Mortgages Settlement False Claims Act / FIRREA FHA

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  • District Court Allows Government to Intervene in False Claims Act Litigation

    Courts

    On January 3, the District Court for the Southern District of Florida granted the U.S. Government’s motion to intervene in a False Claims Act (FCA) lawsuit against a national bank. The lawsuit, filed by a foreclosure attorney and relator, alleges that the national bank submitted false claims in violation of the FCA in two ways. First, the lawsuit alleges that the national bank knowingly used rubber-stamped surrogate signed endorsements and false mortgage assignments to support false claims for mortgage insurance from FHA. Second, the lawsuit asserts a reverse FCA claim alleging that the national bank made false statements when entering into the 2012 National Mortgage Settlement. On December 21, the U.S. Government requested to intervene to assist in “effectuating and formalizing” a proposed settlement between the relator and the national bank that would resolve the matter.

    Courts False Claims Act / FIRREA Mortgage Servicing Mortgages Foreclosure National Mortgage Servicing Settlement

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  • DOJ Announces Settlement With Mortgage Lender to Resolve Alleged False Claims Act Violations

    Lending

    The DOJ announced a $11.6 million settlement on December 8 with a Louisiana-based direct endorsement mortgage lender and certain affiliates to resolve allegations that the lender violated the False Claims Act by falsely certifying compliance with federal requirements in order to obtain insurance on mortgage loans from the Federal Housing Administration (FHA). According to the DOJ’s press release, between January 2005 and December 2014, the lender (i) certified loans that failed to meet HUD’s underwriting and origination requirements for FHA insurance; (ii) paid incentives to underwriters in violation of the “underwriter commission prohibition,” and continued to make incentive payments even after HUD notified the lender of commission prohibition noncompliance in 2010; and (iii) failed to, in a timely manner, “self-report material violations of HUD requirements” or perform quality reviews. The settlement also fully resolves a False Claims Act qui tam lawsuit that had been pending in the United States District Court for the Eastern District of Arkansas.

    Lending DOJ False Claims Act / FIRREA FHA Settlement HUD Courts

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  • Jury Verdict Clears Student Loan Servicer in FCA Suit

    Courts

    On December 5, after a five-day trial, a jury in the U.S. District Court for the Eastern District of Virginia entered a unanimous verdict clearing a Pennsylvania-based student loan servicing agency (defendant) accused of improper billing practices under the False Claims Act (FCA) and bilking the federal government of millions of dollars. The plaintiff—a former Department of Education employee whistleblower—sought treble damages and forfeitures under the FCA. The case stems from a qui tam suit originally filed in 2007, in which the plaintiff alleged that multiple state-run student loan financing agencies overcharged the U.S. government through fraudulent claims to the Federal Family Education Loan Program in order to unlawfully obtain 9.5 percent special allowance interest payments. Although the district court dismissed four of the agencies from the suit in 2009, ruling that they were state agencies and therefore immune from lawsuits brought by a qui tam relator, a Fourth Circuit Panel eventually reversed the ruling with respect to the Pennsylvania-based state agency defendant, holding that the entity “is an independent political subdivision, not an arm of the commonwealth,” and “therefore a 'person' subject to liability under the False Claims Act.” The panel held that the defendant failed to qualify as a state entity because the defendant’s board is responsible for decision-making and its revenue derives from commercial activities, notwithstanding the fact that the defendant is operated by state employees and is required to deposit its funds in the state’s treasury.

    Upon remand, the district court cleared the way for the jury trial by denying the defendant’s motion for judgment on the pleadings, which argued that the plaintiff cannot establish the materiality requirement set under Universal Health Services, Inc. v. U.S. ex rel. Escobar. In a memorandum opinion, the court concluded that the Department of Education continuing to pay claims even after becoming aware of the loan servicer’s billing practices did not, in fact, change the definition of materiality under the FCA, and therefore, did not “merit reconsideration of this court’s ruling that plaintiff stated a plausible claim.”

    The case then went to jury trial in November, leading to the jury’s verdict in favor of the defendant. 

    Courts False Claims Act / FIRREA Student Lending Appellate

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  • HUD Secretary Carson Testifies at House Financial Services Committee Hearing, Discusses Use of FCA Against FHA Lenders

    Federal Issues

    On October 12, Secretary of HUD, Ben Carson, testified at a hearing before the House Financial Services Committee. The hearing entitled “The Future of Housing in America: Oversight of the Department of Housing and Urban Development,” provided an update on HUD’s vision for federal housing policy and touched upon topics such as the conservatorship of Fannie Mae and Freddie Mac, the agency’s role in hurricane disaster relief, and regulatory reform efforts. In his written testimony, Carson reaffirmed his personal interest, and that of the President Trump’s Administration, in working with the Committee on housing finance reform, specifically referencing the FHA mortgage insurance program and Ginnie Mae mortgage-backed security guaranty as “vital components” of the housing finance system. Towards the end of the three-hour-long hearing, Carson was asked by Representative Dave Trott (R-MI) about the federal government’s “unprecedented” use of the False Claims Act (FCA) as a means to “impose outrageous penalties against lenders for immaterial defects” in HFA loan originations, which, according to Rep. Trott, is turning lenders away from FHA lending and is resulting in increased costs to borrowers. Carson stated that his staff is already engaged in discussions with the DOJ staff and is “committed to getting that resolved, because it’s ridiculous, quite frankly.” Carson added, “I’m not exactly sure why there had been such an escalation previously, but the long-term effects of that escalation is obviously providing fewer appropriate choices for consumers, and that’s exactly the opposite of what we should be doing.”

    Federal Issues HUD House Financial Services Committee DOJ False Claims Act / FIRREA Mortgages FHA

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  • District Court Fines Mortgage Brokers More Than $298 Million for Alleged FCA/FIRREA Violations

    Courts

    On September 14, a federal judge in the U.S. District Court for the Southern District of Texas ruled after a five-week jury trial that defendants, who allegedly submitted fraudulent insurance claims after acquiring risky loans, were liable for treble damages and the maximum civil penalties allowed under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). According to the court, the evidence presented at trial demonstrated that the damages suffered by the U.S. were a “foreseeable consequence” of the defendants’ misconduct and that such misconduct was part of an “prolonged, consistent enterprise of defrauding the [U.S.],” warranting a higher level of penalties. The jury found that one of the defendants along with its CEO “submitted or caused to be submitted 103 insurance claims” while misrepresenting that its branches were registered by HUD, causing the Federal Housing Administration (FHA) to sustain damages in excess of $7 million. A separate mortgage broker defendant was found to have submitted or caused to be submitted 1,192 insurance claims causing over $256 million in damages to the FHA due to the “reckless” underwriting of loan applications, in violation of FCA. The court rejected the defendants’ request for lenient civil penalties, finding the defendants’ behavior to be “custom-designed to flout the very program that relied upon [defendants’] diligence and compliance” and demonstrating “a patent unwillingness to accept responsibility for their actions.” The FIRREA penalties resulted from defendants submitting false annual certifications to HUD that were intended “to serve as a separate and independent quality check on the [defendant’s] branches,” but instead led to injury in the form of borrowers entering into default or foreclosures, as well as elevated mortgage insurance premiums.

    The judge imposed over $291 million in FCA treble damages and penalties against the three defendants. Additionally, each defendant was fined $2.2 million in FIRREA penalties for actions that “were neither isolated or relatively benign . . . [but] were reckless, egregious, and widely injurious.”

    Courts Lending Mortgages False Claims Act / FIRREA Litigation Insurance FHA HUD

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  • Second Circuit Cites Escobar, Vacates and Remands FCA Suit

    Courts

    On September 7, the Second Circuit Court of Appeals issued an order concerning a False Claims Act (FCA) case on remand from the United States Supreme Court. In its order, the three-judge panel determined that the FCA complaint should be reviewed under the higher court’s Escobar standard, which “set out a materiality standard for FCA claims that has not been applied in the present case.” See Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). As previously discussed in InfoBytes, Escobar holds that a misrepresentation must be material to the government’s payment decision to be actionable under the FCA and that the implied false certification theory can be a basis for liability under the FCA.

    In issuing the order, the appellate court vacated the district court’s dismissal of the relators’ complaint (which it had affirmed the first time around) and remanded for further proceedings to determine whether the bank’s certification was materially false. At issue is a qui tam suit filed against a national bank, in which plaintiffs claimed the bank violated the FCA when it certified to the Federal Reserve that the bank and its predecessors were obeying the law in order to “borrow money at favorable rates” during the financial crisis. The decision originally relied upon two requirements cited in a case overturned by Escobar—“the express-designation requirement for implied false certification claims and the particularity requirement for express false certification claims.”

    Courts False Claims Act / FIRREA Second Circuit Federal Reserve U.S. Supreme Court

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  • DOJ Announces Settlements with Non-Bank Mortgage Lender to Resolve Alleged False Claims Act Violations

    Lending

    On August 8, the DOJ announced a $74.5 million settlement with a non-bank mortgage lender and certain affiliates to resolve potential claims that they violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development and the Veterans Administration (VA), and by selling certain loans to Fannie Mae and Freddie Mac that did not meet applicable requirements. According to the terms of the two settlement agreements, $65 million of the settlement will be paid to resolve allegations relating to FHA loans, and $9.45 million will be paid to resolve potential civil claims relating to certain specified VA, Fannie Mae, and Freddie Mac loans. The settlements also fully resolved a False Claims Act qui tam lawsuit that had been pending in the United States District Court for the Eastern District of New York.

    The settlement included no admission of liability by the lender. The lender issued a statement responding to the settlements: “We have agreed to resolve these matters, which cover certain legacy origination and underwriting activities, without admitting liability, in order to avoid the distraction and expense of potential litigation. While we cooperated fully in these investigations since receiving subpoenas in 2013, we concluded that settling these matters is in the best interest of [the company] and its constituents.”

    Lending Mortgages False Claims Act / FIRREA Mortgage Origination HUD Fannie Mae Freddie Mac FHA Settlement DOJ Nonbank Supervision

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  • D.C. Circuit Court Affirms Dismissal of Suit, FCA First-to-File Bar Applies

    Courts

    In an opinion handed down on July 25, the Court of Appeals for the D.C. Circuit affirmed a district court’s dismissal of a False Claims Act (FCA) suit because it violated the first-to-file bar, ruling that a relator must re-file a qui tam action and cannot merely amend a complaint where the relator’s complaint was filed when a related qui tam case was still pending. The first-to-file bar provides that if an individual brings an action under the FCA, “no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.”

    The case concerned a qui tam relator who claimed that a telecommunications company overbilled on government contracts, thereby violating the FCA, which “penalizes the knowing submission of a false or fraudulent claim for payment to the federal government.” While the first suit was still pending, the relator filed a second suit alleging that the fraud was more widespread. The related suit was then resolved, but a district court dismissed the second suit based on the FCA’s first-to-file bar, which the D.C. Circuit affirmed. In 2015, the U.S. Supreme Court granted the relator’s petition for certiorari, and vacated the D.C. Circuit’s decision, citing a holding in Kellogg Brown & Root Services, Inc., et al v. Carter, 135 S. Ct. 1970 (2015), in which the Court claimed that the first-to-file bar only applies when a previous suit is pending—not once it has been resolved. Therefore, once the first-filed suit has been resolved, the first-to-file bar “no longer prohibits bringing a new action.” Because the statute of limitations period had run while the case was being appealed to the Supreme Court, the relator sought to amend his complaint rather than file a new action. The defendant moved to dismiss, and the district court granted the defendant’s motion. The relator appealed the ruling back to the D.C. Circuit, but the appellate court sided with the defendants and dismissed the relator’s action without prejudice. However, the appellate court expressly declined to opine on whether the statute of limitations would be equitably tolled if the relator were to re-file his complaint.

    Courts Litigation Appellate D.C. Circuit False Claims Act / FIRREA

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  • DOJ Intervenes in False Claims Act Litigation Against City of Los Angeles for Alleged Misuse of HUD Funds

    Courts

    On June 7, the Department of Justice (DOJ) announced that the United States has intervened (see proposed order here) in a lawsuit against the city of Los Angeles (City) alleging that the City misused Department of Housing and Urban Development (HUD) funds intended for affordable housing that is accessible to people with disabilities. See U.S. ex rel Ling et al v. City of Los Angeles et al, No. 11-00974 (D.C. Cal. 2017).

    The DOJ joins in the lawsuit originally instituted by a disabled Los Angeles resident, who filed the False Claims Act (FCA) suit as a whistleblower. The FCA whistleblower provision allows private citizens to file suit on behalf of the government and likewise permits the government to intervene in the suit. Together, the DOJ and the whistleblower allege that the City and a city agency called the CRA/LA falsely certified compliance with federal accessibility laws, including the Fair Housing Act and Section 504 of the Rehabilitation Act as well as the duty to further fair housing in the City, in order to receive millions of dollars in HUD housing grants.

    As recipients of the HUD funds, the City and the CRA/LA were obligated to ensure that (i) “five percent of all units in certain federally-assisted multifamily housing be accessible for people with mobility impairments”; (ii) “an additional two percent be accessible for people with visual and auditory impairments”; (iii) “the City and the CRA/LA maintain a publicly available list of accessible units and their accessibility features”; (iv) “the City and the CRA/LA have a monitoring program in place to ensure people with disabilities are not excluded from participation in, denied the benefits of, or otherwise subjected to discrimination in, federally-assisted housing programs and activities solely on the basis of a disability.” The false certifications resulted in too few accessible housing units, the suit claims.

    The City denies the allegations.

    Courts HUD Litigation Fraud False Claims Act / FIRREA Whistleblower Fair Housing DOJ

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